10-K 1 v144247_10k.htm Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2008
Commission file number:  0-19771

ACORN ENERGY, INC.
(Exact name of registrant as specified in charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
22-2786081
(I.R.S. Employer Identification No.)
   
4 West Rockland Road, Montchanin, Delaware
(Address of principal executive offices)
19710
(Zip Code)
   
(302-656-1707)
Registrant’s telephone number, including area code
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Class
Name of Each Exchange on Which Registered
   
Common Stock, par value $.01 per share
The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yes ¨  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨  No x
 
As of last day of the second fiscal quarter of 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $60.5 million based on the closing sale price on that date as reported on the NASDAQ Global Market. As of March 26, 2009 there were 11,467,589 shares of Common Stock, $0.01 par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
None.





TABLE OF CONTENTS
 
   
PAGE
PART I
   
     
Item 1.
 BUSINESS
1
     
Item 1A.
 RISK FACTORS
17
     
Item 1B.
UNRESOLVED STAFF COMMENTS
 36
     
Item 2.
PROPERTIES
36
     
Item 3.
LEGAL PROCEEDINGS
37
     
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
39
     
PART II
   
     
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
40
     
Item 6.
SELECTED FINANCIAL DATA
41
     
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
43
     
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
60
     
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
61
     
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
61
     
Item 9A.
CONTROLS AND PROCEDURES
61
     
Item 9B.
OTHER INFORMATION
61
     
PART III
   
     
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
62
     
Item 11.
EXECUTIVE COMPENSATION
65
     
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
74
     
Item 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
75
     
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 76
     
PART IV
   
     
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 77

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


 
AquaShield™ and OncoPro™ are trademarks of our DSIT Solutions Ltd. subsidiary.  CoaLogix™ and MetalliFix™ are trademarks of our CoaLogix subsidiary. Coreworx™ is a trademark of our Coreworx subsidiary.
 

 
PART I
 
ITEM 1.  
BUSINESS
 
OVERVIEW
 
Acorn Energy is a holding company focused on improving the efficiency and environmental impact of the energy infrastructure, fossil fuel and nuclear industries. Our operating companies leverage advanced technologies to transform the existing energy infrastructure. We aim to acquire primarily controlling positions in companies led by promising entrepreneurs and we add value by supporting those companies with financing, branding, positioning, and strategy and business development.

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

·     SCR Catalyst and Management Services. We provide selective catalytic reduction (“SCR”), catalyst and management services removal for coal-fired power plants.  These services include SCR catalyst management, cleaning and regeneration as well as consulting services to help power plant operators to optimize efficiency and reduce overall nitrogen oxide (“NOx”) compliance costs through CoaLogix’s SCR-Tech LLC subsidiary.  In addition, commencing later in 2009, we plan to offer an innovative technology (MetalliFix™) for the removal of heavy metals, such as mercury, from coal-fired power plants under CoaLogix’s MetalliFix LLC subsidiary.
 
·     Naval and RT Solutions.  We provide sonar and acoustic related solutions for energy, defense and commercial markets with a focus on underwater site security for strategic energy installations and other real-time and embedded hardware and software development and production through our DSIT subsidiary.
 
·     Energy Infrastructure Software (EIS) Services. We provide energy infrastructure software services through our recently acquired Coreworx Inc. (“Coreworx”) subsidiary. Coreworx is a leading provider of integrated project collaboration and advanced document management solutions for the architecture, engineering and construction markets, particularly for large capital projects in the energy industry.
 
Entities in which we own significant equity interests are engaged in the following activities:

·     Comverge Inc. A leading provider of clean energy solutions and supply electric capacity.
 
·     GridSense Systems Inc. Provides remote monitoring and control systems to electric utilities and industrial facilities worldwide.
 
During 2008, we had operations in three reportable segments: providing catalyst regeneration technologies and management services for SCR systems through our CoaLogix subsidiary (our SCR segment), providing sonar and acoustic related solutions and other real-time and embedded hardware and software development and production for energy, defense and commercial markets which is conducted through our DSIT subsidiary (our Naval & RT Solutions segment) and providing integrated project collaboration and advanced document management solutions for the architecture, engineering and construction markets through our Coreworx subsidiary (our EIS segment).

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

 
   
2006
   
2007
   
2008
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
CoaLogix
  $       %   $ 797       14 %   $ 10,099       49 %
Naval & RT Solutions
    2,797       68       3,472       61       7,032       34  
EIS
                            2,330       11  
Other
    1,320       32       1,391       25       1,235       6  
Total
  $ 4,117       100 %   $ 5,660       100 %   $ 20,696       100 %
 
COALOGIX
 
Overview
 
Through SCR-Tech, which is 100% owned by our 85% owned CoaLogix subsidiary, we offer a variety of services for coal-fired power plants that use SCR systems to reduce Nitrous Oxide (“NOx”) emissions.  NOx emissions are contributors to ground-level ozone (smog), particulate matter and acid rain. These services include SCR catalyst management, cleaning and regeneration, as well as consulting services to help power plant operators optimize efficiency and reduce overall NOx compliance costs.

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

We believe the future of coal as a primary fuel source for U.S. power production is reasonably assured, driven by growing energy demand, volatile world oil and natural gas prices, limited oil and natural gas supplies, and increased focus on energy independence.  Coal is the least expensive fossil fuel on an energy-per-BTU basis, and remains one of the most abundantly available fossil fuels in the U.S. Coal-fired power plants, in particular, continue to be a primary target for NOx reduction, and selective catalytic reduction  remains the most widely used technology by plant operators to control NOx.  With NOx removal efficiencies of up to 95%, SCR systems (also referred to as SCR reactors) are considered to be the most effective NOx reduction solution, and we expect it to remain the dominant technology choice for coal-fired power plants to meet increasingly stringent U.S. air quality regulations.  Furthermore, since U.S. air quality regulations allow power plant operators to pool their emissions reductions (e.g., remove more NOx than required at one unit and settle for lower than otherwise required NOx removal at another), utilities favor the highly efficient SCR technology for their largest NOx generating assets.

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

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

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

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

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

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

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

·     NOx SIP Call - The original regulatory driver of SCR-Tech’s business is the EPA’s NOx SIP Call.  This program was designed to mitigate the regional transport of NOx, which is contributing to the poor air quality of downwind states.  The NOx SIP Call required energy producers and other industries operating large power plants in the Eastern half of the U.S. to reduce their NOx emissions substantially and to maintain them at reduced levels.  Implementation of the NOx SIP Call required major NOx reductions during the five-month “ozone season” (May 1-September 30) in 19 Midwestern and Eastern states and the District of Columbia and has resulted in a dramatic increase in the number of SCR system installations at coal-fired power plants for the removal of NOx.
 
·     Clean Air Interstate Rule (CAIR) - Under CAIR, Phase I caps on NOx emissions took effect January 1, 2009, and are designed to permanently cap and achieve substantial reductions in emissions of NOx across 28 Eastern states and the District of Columbia that we believe will further increase the size of our addressable market.
 
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By 2015,CAIR is expected to significantly reduce NOx emissions in these states from 2003 levels by plants utilizing a cap-and-trade approach.  This rule builds on the NOx SIP Call with the objective of further mitigating air pollution moving across state boundaries, and will cut NOx emissions from power plants significantly with the 2009 Phase I caps and by the implementation of Phase II caps in 2015.  CAIR’s cap and trade program involves NOx emission allowance being assigned to these states with each state having authority to allocate emission allowances to power plants within each state.  The power plants can buy excess allowances (i.e. trade) from each other.  Over the next decade we expect the implementation of CAIR to increase NOx trading (resulting in an increase in the amount of SCR catalyst used to control NOx with the objective of generating NOx credits), further increase the number of SCR systems installed today, and also require beginning in 2009 year-round SCR system operation for many power plants (with increased NOx reduction required during ozone season) to meet the more stringent requirements.  With year-round operation of SCRs needed by many power plants to comply with CAIR, coal plant operators will be required to replenish the catalyst used in SCR systems with new or regenerated catalyst on a much more frequent basis.
 
 
On July 11, 2008, the D.C. Court of Appeals issued an opinion in the State of North Carolina v. Environmental Protection Agency (EPA) in which the court vacated CAIR and the associated Federal Implementation Plan.  On December 23, 2008, the court subsequently re-instated CAIR to give the EPA an opportunity to fix flaws found by the court in its previous decision.   The court did not provide a time limit for the EPA to complete the changes.  The changes required by the court do not affect SCR usage or required emission caps or limits.
 
·     Clean Air Mercury Rule (CAMR) - The EPA issued CAMR as the first program ever designed to permanently cap and reduce mercury emissions from coal-fired power plants.  CAMR was expected to reduce utility emissions of mercury significantly between 2010 and 2018 and impact SCR catalyst choices in the future.  The D.C. Court of Appeals invalidated CAMR in February, 2008, and the Supreme Court on February 23, 2009, refused to hear an appeal of such invalidation.  Therefore, CAMR stands invalidated.  The opponents of CAMR opposed it because they generally believed that the cap and trade approach to regulating mercury emissions would not yield sufficient reductions in emissions.  We anticipate that the EPA will promulgate regulations replacing CAMR which will provide for an alternative regulatory scheme to force all coal-fired power plants to substantially reduce mercury emissions; however, the EPA has not indicated a timetable for issuance of such alternative regulatory scheme.
 
·     State Mercury Regulations – Many states have issued regulations which regulate emissions of mercury from coal-fired power plants.  With the invalidation of CAMR, the regulations issued by the various states serve as the regulatory driver for coal-fired power plants having to restrict mercury emissions until such time as the EPA issues the federal alternative regulatory scheme.
 
Market for SCR Catalyst and Management Services
 
The recent growth in SCR system installations driven by the NOx SIP Call and CAIR has resulted in a large and growing market for SCR catalyst and management services.  Based upon the substantial number of SCR systems that commenced operation between 2000 and 2006, combined with the CAIR Phase I caps which began on January 1, 2009, we expect the market for catalyst replenishment to increase dramatically and result in a total addressable market for catalyst cleaning and regeneration estimated in excess of $100 million by 2011.

By offering customers more economical ways to operate and maintain their SCR units, along with a lower cost regeneration alternative to purchasing new catalyst, we believe SCR-Tech has the potential to play a significant role in the growing U.S. market for SCR catalyst and management services.
 
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SCR-Tech’s Service Offerings
 
Catalyst Cleaning, Rejuvenation and Regeneration
 
We offer proprietary and patented processes based on highly sophisticated and advanced technologies that can improve the NOx removal efficiency and restore the useful life of installed SCR catalyst, providing a compelling economic alternative to catalyst replacement.  SCR-Tech’s processes are capable of not only physically cleaning and rejuvenating the most severely plugged, blinded or poisoned catalyst, but of also chemically reactivating deactivated catalyst.  Depending upon the state of the installed catalyst, SCR-Tech offers several alternatives for restoring its NOx removal efficiency and extending its life.
 
SCR and Catalyst Management
 
We believe the most effective way to operate an SCR system is through a comprehensive catalyst management program.
 
We provide a broad array of customized SCR and catalyst management services, including guidance on effective SCR and catalyst management strategies, with the objective of assisting plant operators in optimizing the operation and performance of their SCR systems while reducing their operation and maintenance costs and achieving cost-effective NOx compliance.  All SCR and catalyst management services are offered as either a complete package or “a la carte,” allowing the flexibility to select and combine various services on an as-needed basis tailored to the individual SCR system.
 
SCR-Tech’s regeneration process has several advantages over purchasing new catalyst by (i) offering cost savings, (ii) eliminating or reducing environmental related disposal issues, (iii) enhancing catalyst activity and (iv) reducing sulfur dioxide conversion.
 
Quality Control
 
We maintain a comprehensive quality assurance/quality control program for each step in our SCR catalyst and management process including SCR reactor inspection, catalyst sampling, testing, chemical analysis, development of a custom cleaning, rejuvenation and regeneration process, and catalyst treatment, packing and shipping.
 
Our testing, inspection, and laboratory services all complement each other and allow us to provide our customers with a complete picture of their SCR reactor and its operating effects on the balance of the plant.
 
Customers and Markets
 
Our SCR Catalyst and Management Services business currently primarily serves the U.S. coal-fired power generation market.  In 2008, SCR-Tech began serving the U.S. natural gas-fired power generation market. Our customer base ranges from large investor-owned utilities and independent power producers to smaller municipal power generators.

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

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

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Two of CoaLogix’s customers, The Detroit Edison Company and Allegheny Energy Service Corporation represented 18% and 14%, respectively, of our consolidated sales for 2008.
 
Competition
 
We are aware of one company, Evonik Energy Services LLC (“Evonik LLC”), which entered the U.S. catalyst regeneration market beginning in 2008, and has a regeneration facility in North Carolina.  Evonik LLC, based in Charlotte, North Carolina, is a subsidiary of a large German company, Evonik SteagGmbH. We are currently involved in litigation with Evonik LLC.  See Item 3, Legal Proceedings. Another company, Enerfab Inc. provides catalyst management, and also cleans and rejuvenates catalyst but does not regenerate catalyst (which involves reactivating catalyst with chemicals to restore the catalyst to its maximum efficiency).

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

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

With respect to mercury removal for coal-fired power generation, we are aware of other technologies that will compete with MetalliFix.  These include other FGD or scrubber additives that enhance the capture of mercury, sorbent injection technologies, and oxidizer technologies. Most mercury removal technologies are in the development and test stages for commercialization.  Although the MetalliFix process is also being further tested, developed and enhanced for the market, our research leads us to believe that it will have competitive advantages over many other technologies, including scrubber additives, for its ability to capture elemental mercury and reduce total mercury emissions.
 
Production Facilities
 
SCR-Tech’s business operations are located in Charlotte, North Carolina in a 117,000 square foot production facility for the cleaning and regeneration of SCR catalyst.

During 2008, we expanded our plant capacity through an investment in equipment and technologies that enhanced workflow throughput and mitigated processing bottlenecks.  Along with the expansion, we implemented additional shifts to meet the increasing regeneration demand.  Although the capacity of our existing production facility is sufficient to meet market demand through 2009, we believe that further production capacity expansion will be necessary beyond 2009 to meet growing demands.  We expect to make substantial additional capital investments over the next two years to accommodate anticipated market growth. To accommodate further expansion, we anticipate building a second production facility at our existing site or a new facility at a different location.  The timing of such a facility expansion will be a function of market growth, and could commence as early as later this year.
 
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Intellectual Property
 
We rigorously protect our proprietary technologies and processes and other intellectual property.  We seek to maintain our position and reputation as a market leader, and recognize the need to remain technologically advanced relative to competitors and potential competitors, and to distinguish ourselves based on continuous technological innovations.  Our strategy is to rapidly identify key intellectual property developed or acquired by us in order to protect it in a timely and effective manner, and to continually use such intellectual property to our competitive advantage in the SCR services marketplace.

We use a combination of patents, trade secrets, contracts, copyrights and trademarks to protect the proprietary aspects of our core technologies, technological advances and innovations, including our cleaning and regeneration processes and other know-how, and we work to actively maintain protection of our proprietary technologies and processes over time through follow-on patent filings associated with technology and process improvements that we continually develop. A significant portion of our know-how is protected as trade secrets and supported through contractual agreements with our employees, suppliers, partners and customers.
 
We either own (exclusively or jointly) or hold exclusive license rights from third parties for four U.S. patents and three pending U.S. applications and one patent continuation. We also strongly rely on trade secrets and other know-how to protect the foundation technology and processes. We anticipate that when our early patents expire, we will rely on subsequently filed and additional patents along with trade secrets and other know-how to protect the foundation technology and cleaning and regeneration processes. We have adopted a proactive approach to identifying patentable innovations and securing patent protection through the timely filing and aggressive prosecution of patent applications. Accordingly, we plan to continue to file new patent applications as we gain knowledge and experience with our various processes and service offerings. We will continue to vigorously defend our intellectual property.

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

NAVAL & RT SOLUTIONS – DSIT SOLUTIONS LTD.
 
DSIT Solutions is a globally-oriented high tech company with top-tier expertise in sonar and acoustics and development capabilities in the areas of real-time and embedded systems.  Based on these capabilities, we offer a full range of sonar and acoustic-related solutions to strategic energy installations as well as defense and homeland security markets. In addition, based on expertise in fields such as signal acquisition and processing applications, communication technologies, computerized vision for the semiconductor industry and command, control and communication management (“C3”) we provide wide ranging solutions to both governmental and commercial customers.
 
Products and Services
 
DSIT’s Naval and RT Solutions activities are focused on two areas – sonar and acoustic solutions for naval and security markets and other real-time and embedded hardware and software development and production.
 
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Naval Solutions.  Our naval solutions include a full range of sonar and acoustic-related solutions to the strategic energy installation, defense and homeland security markets.  These solutions include:
 
·      AquaShield™ Diver Detection Sonar (“DDS”). – The ongoing threat of terror attacks since 9/11 has produced an awareness of the need to protect critical marine and coastal infrastructures that has become a growing priority for governments and the private sector alike.  Current marine surveillance solutions often ignore the areas of underwater surveillance and underwater site security, tracking above-water activity only, and leaving the area under water vulnerable to intrusion by divers and swimmer delivery vehicles (“SDVs”). Building on our technical and operational experience in sonar and underwater acoustic systems for naval applications, we have developed an innovative, cost-effective Diver Detection Sonar (“DDS”) system, the AquaShield™, that provides critical coastal and offshore protection of sites through detecting, tracking, and warning of unauthorized divers and SDVs for effective response.  Our AquaShield™ DDS system is fully automatic and requires intervention of a security person only for decision and response to the threat. Underwater sonar units or “nodes” are strategically placed to provide maximum security with up to 360º coverage.  The number and configuration of nodes are customized to meet each site’s unique requirements and topology.  AquaShield™ DDS systems operate in all weather and water conditions.  The system’s flexibility enables rapid deployment and adjustment to specific site conditions.  The DDS sensors can be integrated with other sensors into a comprehensive command and control (“C&C”) system to provide a complete tactical picture both above and below the water for more intelligent evaluation of and effective response to threats.
 
·      Harbor Surveillance System (“HSS”). – We have developed an integrated HSS that incorporates DDS sensors with above-water surveillance sensors to create a comprehensive above and below water security system.  The system protects coastal and offshore sites such as energy terminals, offshore rigs, nuclear power plants and ports.  The system reliably detects, intercepts, and warns of intruders such as divers, swimmers, SDVs, submersibles, small surface vessels and mines.  The HSS can include sonar, radar, electro-optical devices, and other surveillance sensors.  The system is fully operable in shallow or deep water, daytime or nighttime and in all weather conditions.  The system features a high probability of detection, a low false alarm rate and ease of operation and control.
 
·      Enerview and Portview - In our effort to expand our offerings in the area of site security, DSIT has initiated discussions towards strategic alliances for marketing additional elements of site surveillance systems. These include above water sensors such as day and night optical sensors and a three dimensional Command & Control software application that integrates all sensors into one comprehensive solution used to monitor and control on-site security and safety.
 
·      Mobile Acoustic Range (“MAR”). - Based on their radiated noise, submarines and surface vessels can be detected by passive sonar systems.  The MAR accurately measures a vessel’s radiated noise; thus enabling navies and shipyards to monitor and control the radiated noise and to silence their ships and submarines.  By continuously tracking the measured vessel and transmitting the data to a measurement ship, the MAR system enables real time radiated noise processing, analysis and display.  The system also includes a platform database for measurement results management and provides playback and post analysis capability.  The MAR’s flexibility enables rapid deployment and saves the maintenance costs involved in operating a fixed acoustic range.  The MAR is a cost-effective solution for measuring the radiated noise of any naval platform.  The system has previously been sold to leading navies and shipyards around the world.
 
·      Generic Sonar Simulator (“GSS”). –We have developed a GSS for the rapid and comprehensive training of anti-submarine warfare (“ASW”), submarine, and mine detection sonar operators.  This advanced, low cost, PC-based training simulator is designed for all levels of sonar operators from beginners to the most experienced, including ship ASW/attack teams.  The simulator includes all aspects of sonar operation, with emphasis on training in weak target detection in the presence of noise and reverberation, torpedo detection, audio listening and classification.
 
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The GSS operating principles are designed for ease-of-use, simulation accuracy, and simplified instruction.  The system offers a range of sophisticated features.  The GSS can be easily adapted to simulate any sonar system.
 
·      Underwater Acoustic Signal Analysis system. – DSIT’s Underwater Acoustic Signal Analysis system processes and analyzes all types of acoustic signals radiated by various sources and received by naval sonar systems (submarine, surface and air platforms, fixed bottom moored sonar systems, etc.).
 
·      Sonar Upgrade Program (“SUP”). – With DSIT's SUP, many types of outmoded sonar systems, on board both surface ships and submarines, can be easily and inexpensively updated. DSIT’s system upgrade process can modernize a ship’s sonar system - delivering the capability of a new system at less than half the cost. Many navies around the world use obsolete sonar systems – often in service for over 25 years – due to budget limitations that prevent them from purchasing urgently needed modern equipment. DSIT’s comprehensive upgrade program is based on expertise in acoustic technologies, digital signal processing, Human-Machine Interface, and extensive ongoing feedback from client navies. Our SUP optimizes existing sonar platforms by replacing old back-end elements with state-of-the-art sub-systems (e.g., receivers, processors, computers, and operator consoles) and overhauling front-end elements (e.g., transducers and transmitter power amplifiers).
 
Other Real-Time and Embedded Solutions
 
Additional areas of development and production in real-time and embedded hardware and software include:
 
·      Applications. - DSIT specializes in Weapon/ C&C Operating Consoles for unique air and naval applications, designed through synergistic interaction with the end-user.  Weapon/C&C Consoles utilize Human-Machine Interface (“HMI”) prototyping supported on a variety of platforms as an integral part of the HMI definition and refinement process.  Weapon/C&C Console specific applications driven by HMI include signal processing and data fusion and tracking.
 
·      Computerized Vision for the Semiconductor Industry. - The semiconductor industry employs optical inspection systems in order to detect defects that occur during wafer manufacture.  These optical systems are based on a wide range of sophisticated algorithms that utilize image and signal processing techniques in order to detect defects of different types.  DSIT has been cooperating with global leaders of state-of-the-art wafer inspection systems in developing cutting edge technologies for almost a decade.  We develop and manufacture hardware and embedded software for computerized vision systems and we supply this multi-disciplinary field in the integration of digital and analog technologies, image processing and intricate logic development.
 
·      Modems and data links. - DSIT’s PCMCIA Soft Modem card is a state of the art modem and an example of the advanced technology we have achieved in performance and miniaturization of complex technologies.  The design simplicity and flexibility allows customers to easily define and create a range of applications, and to design the card into a variety of OEM products, using the same, or slightly modified, hardware.  The on-board processor enables and manages transfer of data over radio networks using different radio systems.
 
·      Bluetooth solutions. - Bluetooth is a powerful, low cost, wireless technology that is revolutionizing the personal connectivity market.  It enables short-range wireless links that seamlessly connect all types of mobile and other devices offering anywhere/anytime connectivity between devices, and with the Internet.  We offer Bluetooth wireless data and voice solutions for OEMs, including hardware and software development, integration and production.
 
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·      Sonar Building Blocks. – based on our sonar capabilities and development of the DDS, DSIT has a number of generic building blocks of sonar systems such as Signal Processing Systems and Sonar Power Amplifiers (SPA). Some customers designing and building their own sonar systems have purchased from us these building blocks. We can leverage our investment in our internal R&D to sell these building blocks with relatively high margins
 
·      IntervalZero. - DSIT is the exclusive representative of IntervalZero (formerly, Ardence, Inc.) in Israel. IntervalZero is a global leader in designing and developing software solutions that enhance the control, dependability and management of Windows® operating systems.
 
Customers and Markets
 
All of this segment’s operations in 2006, 2007 and 2008 and most of its sales took place in Israel.  We expect to generate significant revenues from naval solutions outside of Israel in 2009.  We have created significant relationships with some of Israel’s largest companies in its defense and electronics industries.  DSIT is continuing to invest considerable effort to penetrate European, Asian and other markets in order to broaden its geographic sales base with respect to our sonar technology solutions. In 2007, we had our first sale of our AquaShield™ DDS. The system was successfully installed in a European oil terminal in the spring of 2008. This sale is believed to be the first in the world of a system designed and operated to protect a strategic coastal energy facility.  In December 2008, we sold another AquaShield™ DDS to an EMEA (Europe, Middle East, Africa) government. In early 2009, we received additional orders for our AquaShield underwater security system. The system will be used for the protection of a large energy site at an undisclosed location in Asia. The system will include multiple AquaShield Diver Detection sonar (DDS) units, which will be combined and integrated into a comprehensive surveillance system. The system will guard and protect the customer’s infrastructure from underwater intrusion and sabotage.

We believe that in 2009, increased awareness as to the susceptibility of strategic coastal energy installations worldwide will result in increased sales of our AquaShield™ DDS.
 
Two customers accounted for 60% of segment sales in 2008 (49% and 11%, respectively) while in 2007, three customers accounted for 74% (39%, 19% and 16%, respectively) of segment sales.
 
One of DSIT’s customers, the Israeli Ministry of Defense, represented 17% of our consolidated sales for 2008.
 
Competition
 
Our Naval & RT Solutions segment faces competition from numerous competitors, large and small, operating in the Israeli and worldwide markets, some with substantially greater financial and marketing resources.  We believe that our wide range of experience and long-term relationships with large businesses as well as the strategic partnerships that we are developing will enable us to compete successfully and obtain future business.
 
DSIT’s staff includes some of the top authorities in the field of sonar and acoustics.  We believe that their knowledge, expertise and experience as well as our long track record of cooperation and delivery of high quality sonar solutions to navies and commercial customers world-wide combined with our agility and flexibility as a small company to tailor solutions to the unique requirements of the customer provides us with an advantage over our competitors
 
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Facilities
 
DSIT’s activities are conducted in approximately 18,000 square feet of office space in the Tel Aviv metropolitan area under a lease that expires in August 2009. We are currently examining our options to either remain in our current facility or to move to a new facility. We believe that DSIT’s current premises are sufficient to handle the anticipated increase in sales for the near future.
 
ENERGY INFRASTRUCTURE SOFTWARE SERVICES – COREWORX INC.
 
We acquired Coreworx Inc. (“Coreworx”) based in Kitchener, Ontario, Canada on August 13, 2008, and we currently own 100% of Coreworx.  Coreworx is an Ontario, Canada corporation, and was incorporated on December 5, 2004.  Coreworx software is used today on more than 400 of the world's major capital projects (“MCPs”) with aggregate capital values exceeding $500 billion.  Coreworx provides software that manages project information and work processes on an international scale to increase efficiency and reduce risks for owners and engineering and construction contractors involved with MCPs.

Industry Background

Coreworx considers MCPs to be those that are more than $500 million in cost with a high level of complexity due to sophisticated engineering and design, international collaboration and often a higher level of regulation than is required for general building, such as projects involving offshore oil and gas, nuclear, hydroelectric and biochemical.  MCPs can have large numbers of stakeholders, such as owner/operators (“O/O”) who will ultimately own and operate the facility or plant under design and construction, engineering and construction firms (“E&C”) which design and construct the MCPs, and suppliers and subcontractors which provide actual materials and labor for most MCPs.  Due to the scale, large number of stakeholders involved, and the complexity of MCPs, project information control is critical.

Customers and Markets

Market Drivers and Trends

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

MCP activity is usually found within the following broad sectors: industrial and manufacturing; mining; oil and gas; power and utilities (generation and transmission); commercial and retail; and public infrastructure.  Coreworx is focused on sales to large E&Cs and O/Os that work on MCPs in the oil and gas, mining and power generation sectors primarily in North America and Australia.

Information Technology Use in Major Capital Projects

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

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Coreworx Market Focus

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

Oil and Gas

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

Mining

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

Power Generation

Continuing demand for electricity and growth of developing economies have lead to global increases in capital spending on new power generation and transmission projects.  Increases in global electric power demand, and environmental concerns have increased development of renewable and alternative energy sources, such as nuclear, wind, solar and hydro-electric.  The International Energy Agency estimates that world nuclear capacity must grow 80% beyond current capacity by 2030, not only to meet growing electricity demand but also climate change regulations, and that $13.6 trillion must be spent on power generation projects between 2008 and 2030.

Total Addressable Market

There are presently approximately 3,500 MCPs in the oil and gas, mining and power generation sectors either under construction or in the front-end engineering design stage with an estimated approximate value of $3.8 trillion.  Of such MCPs we believe that the total addressable market for software such as Coreworx is approximately $850 million.

Customers

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

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

Marketing and Sales

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

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Strategic Partners

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

Research and Development

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

Products & Benefits

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

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

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

Competition

Coreworx focuses on providing web-based engineering work process software to help MCPs mitigate the many information management risks associated with MCPs. Coreworx knows of no other vendor that offers the depth of engineering document management capability and engineering process workflows in a collaborative web-based application for MCPs.  Many other vendors are attempting to address the MCP needs that are addressed by Coreworx from a variety of functional backgrounds such as plant design or project management. The competition is categorized as follows:

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

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

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

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

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

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

Locations

Coreworx’s corporate office is located at 22 Frederick Street, in Kitchener, Ontario, Canada in approximately 8,600 square feet of office space under a lease that expires in December 2010.  We believe that our current premises are sufficient to handle our activities for the near future.

Intellectual Property

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

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

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

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

Comverge’s clean energy solutions enable its electric utility industry customers to address issues they confront on a daily basis, such as rising demand, decreasing supply, higher commodity prices, greater emphasis on the reduction of green house gases and emerging mandates to use energy efficiency solutions to address these issues.  Comverge’s solutions provide its customers with benefits beyond those relating to environmental and pricing concerns.  Comverge’s energy efficiency offerings allow utilities to reduce base load capacity which helps to improve system reliability.  Comverge’s demand response solutions enable its customers to reduce demand for electricity during peak hours, when strain on the system is greatest.
 
We currently remain one of Comverge’s largest stockholders, even after our recent sales of Comverge shares in 2007, 2008 and 2009.  At December 31, 2008, we owned 502,500 shares of Comverge’s common stock with a market value at December 31, 2008 of approximately $2.5 million.  In the period through March 26, 2009, we sold 175,000 of our Comverge shares and received proceeds of approximately $1.2 million. As of March 26, 2009, the market value of our remaining 327,500 shares in Comverge was approximately $2.4 million.
 
GRID MONITORING SOLUTIONS - GRIDSENSE SYSTEMS INC.
 
We currently own approximately 23.4% of GridSense Systems Inc. (GridSense) and account for our investment under the equity method. GridSense develops and markets remote monitoring systems to electric utilities and industrial facilities worldwide.  These systems, used in a myriad of utility applications including outage management, power quality monitoring, trouble shooting and proactive maintenance, system planning and condition monitoring, and provide network operators with the intelligence to better and more efficiently operate grid operations.

Due to increasing stresses on the system, an old and aging infrastructure and greater demands for power quality and reliability of supply, utilities are striving to modernize their electrical infrastructures with "SmartGrid" initiatives.  Cost-effective and easily deployable, GridSense solutions provide critical components of the future grid.
 
GridSense Systems™ patented solutions allow end-users to cost effectively monitor the power quality & reliability parameters of electric transmission and distribution systems in applications where competitive offerings are non-existent or cost-prohibitive.  The company has developed a range of offerings that addresses all the critical points of the electricity delivery system, including distribution and transmission lines, substations and transformers, and the point of electricity consumption.
 
GridSense operates from offices in the US and Australia and has utility customers throughout the world, including the Americas, Asia, Australia, Africa, and the UK.

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GridSense Offerings & Solutions

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

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

·      PowerMonic Systems. - The PowerMonic range of rugged, outdoor power analyzers and analytical software were originally designed with and for electric utilities to monitor and investigate power quality problems.  With over 70% market share in Australia and New Zealand, the self-powered three phase analyzers are used to log, measure, investigate, and solve power quality problems in homes, offices, factories, and key points on the electricity distribution infrastructure.

·      Transformer IQ. – The Transformer IQ is a comprehensive monitoring system that consolidates all transformer monitoring functions onto a single platform using industry-proven hardware.  The compact design integrates easily with new transformers but can also be easiliy retrofitted to older transformers.  With the comprehensive diagnostics and real time performance data accumulated by the Transformer IQ, utilities can effectively predict nearly all the failure modes known to occur to transformers.

A Comprehensive System Spanning The Grid

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



 
Collaboration and Future Products

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

·      In 2008, GridSense completed a project with DOE-sponsored GridApps. Enhancements to the LineTracker were introduced including improvements to the communication module enabling two-way communications and the format structure of the data.
·      Most recently, GridSense completed a joint project with the California Energy Commission (CEC) and Southern California Edison where power factor measurement was added to the LineTracker.
·      The company is currently developing an underground monitoring system known as CableTracker with grant funding from the Australian government.

On October 18, 2008, GridSense and certain of its significant shareholders (including Acorn Energy) entered into agreements to take GridSense private (GridSense is currently traded on the TSX Venture Exchange under the symbol “GSN”) through the sale by GridSense of its grid monitoring solutions business to a newly formed Australian corporation which will be owned by certain of GridSense’s significant shareholders, including Acorn Energy. This transaction is pending, and if such transaction is consummated, Acorn Energy would own approximately 31.2% of such newly-formed Australian corporation as compared to the 23.4% interest Acorn Energy owns in the publicly-held GridSense. Under the plan, the debt of C$750,000 ($616,000) owed by GridSense will be continue to be owed by GridSense’s Australian operating subsidiary. Such transaction was approved by a majority of GridSense’s disinterested public shareholders at a meeting held on February 19, 2009, and is expected to close in the second quarter of 2009.
 
BACKLOG
 
As of December 31, 2008, our backlog of work to be completed and the amounts projected to be completed in 2009 was as follows (amounts in millions of U.S. dollars):
 
   
Backlog at
December
31, 2008
   
Amount
expected
to be
performed
in 2009
 
CoaLogix
  $ 10.0     $ 9.2  
DSIT Solutions
    4.8       3.3  
Coreworx
    1.3       1.2  
Total
  $ 16.1     $ 13.7  
 
EMPLOYEES
 
At December 31, 2008, we employed a total of 156 people.  We consider our relationship with our employees to be satisfactory.
 
A breakdown of our employees by geographic location can be seen below:
 
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Employee count at December 31, 2008
 
   
U.S
   
Canada
   
Israel
   
Total
 
CoaLogix
    43                   43  
DSIT Solutions
                64       64  
Coreworx
    3       43             46  
Acorn
    3                   3  
Total
    49       43       64       156  
 
A breakdown of our employees by activity can be seen below:
 
   
Employee count at December 31, 2008
 
   
Production,
Engineering
and
Technical
Support
   
Marketing
and Sales
   
Management,
Administrative
and Finance
   
Total
 
CoaLogix
    34       2       7       43  
DSIT Solutions
    46       2       16       64  
Coreworx
    32       8       6       46  
Acorn
                3       3  
Total
    112       12       32       156  
 
We have no collective bargaining agreements with any of our employees.  However, with regard to our Israeli activities, certain provisions of the collective bargaining agreements between the Israeli Histadrut (General Federation of Labor in Israel) and the Israeli Coordination Bureau of Economic Organizations (including the Industrialists Association) are applicable by order of the Israeli Ministry of Labor.  These provisions mainly concern the length of the workday, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment.  We generally provide our Israeli employees with benefits and working conditions beyond the required minimums.  Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause.  Furthermore, Israeli employees and employers are required to pay specified amounts to the National Insurance Institute, which administers Israel’s social security programs.  The payments to the National Insurance Institute include health tax and are approximately 5% of wages (up to a specified amount), of which the employee contributes approximately 70% and the employer approximately 30%.
 
ADDITIONAL FINANCIAL INFORMATION
 
For additional financial information regarding our operating segments, foreign and domestic operations and sales, see “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 24 to our Consolidated Financial Statements included in this Annual Report.
 
ITEM 1A - RISK FACTORS
 
We may from time to time make written or oral statements that contain forward-looking information.  However, our actual results may differ materially from our expectations, statements or projections.  The following risks and uncertainties could cause actual results to differ from our expectations, statements or projections.
 
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GENERAL FACTORS
 
The current crisis in global credit and financial markets could materially and adversely affect our business and results of operations.

As widely reported, global credit and financial markets have been experiencing extreme disruptions in recent months, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. We can provide no assurance that there will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The current tightening of credit in financial markets have lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. The continuing disruption in the credit markets has severely restricted access to capital. As a result, the ability to incur additional indebtedness to fund operations or refinance maturing obligations as they become due is significantly constrained. We are unable to predict the likely duration and severity of the current disruptions in the credit and financial markets and adverse global economic conditions, and if the current uncertain economic conditions continue or further deteriorate, our business and results of operations could be materially and adversely affected.
 
We have a history of operating losses and have used increasing amounts of cash for operations and to fund our acquisitions and investments..
 
We have a history of operating losses, and have used significant amounts of cash to fund our operating activities over the years.  In 2006, 2007 and 2008, we had operating losses of $3.6 million, $4.4 million and $12.4 million, respectively.  Cash used in operations in 2006, 2007 and 2008 was $1.6 million, $2.6 million and $3.2 million, respectively.
 
Despite selling a significant portion of our Comverge investment during the period from December 2007 through September 2008 and receiving proceeds (net of transaction costs) of approximately $43.7 million and raising approximately $6.9 million (approximately $6.0 million net of transaction costs) in 2007 from the private placement of our Convertible Debentures, we have utilized a significant portion of those funds in our recent acquisitions and investment activity.
 
In addition, we continue to pursue additional investments and may need to support the financing needs of our subsidiaries.  While we currently have enough cash on hand to fund our operations for the next 12 months, we may need additional funds to finance the investment and acquisition activity we wish to undertake.  We do not know if such funds will be available if needed on terms that we consider acceptable.  We may have to limit or adjust our investment/acquisition strategy or sell some of our assets in order to continue to pursue our corporate goals.
 
We depend on key management for the success of our business.
 
Our success is largely dependent on the skills, experience and efforts of our senior management team and other key personnel.  In particular, our success depends on the continued efforts of John A. Moore, our CEO, William J. McMahon, CEO of CoaLogix/SCR-Tech, Benny Sela, CEO of DSIT, Ray Simonson, CEO of Coreworx and other key employees.  The loss of the services of any key employee could materially harm our business, financial condition, future results and cash flow.  Although to date we have been successful in retaining the services of senior management and have entered into employment agreements with them, members of our senior management may terminate their employment agreements without cause and with notice periods ranging up to 90 days.  We may also not be able to locate or employ on acceptable terms qualified replacements for our senior management or key employees if their services were no longer available.
 
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Loss of the services of a few key employees could harm our operations.
 
We depend on our key management, technical employees and sales personnel.  The loss of certain managers could diminish our ability to develop and maintain relationships with customers and potential customers.  The loss of certain technical personnel could harm our ability to meet development and implementation schedules.  The loss of key sales personnel could have a negative effect on sales to certain current customers.  Most of our significant employees are bound by confidentiality and non-competition agreements.  Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel.  If we fail to attract or retain highly qualified technical and managerial personnel in the future, our business could be disrupted.
 
A failure to integrate our new management may adversely affect us.
 
In August 2008, we acquired Coreworx and its entire management team.  Any failure to effectively integrate Coreworx’s new management into our controls, systems and procedures could materially adversely affect our business, results of operations and financial condition.
 
Compliance with changing regulation of corporate governance, public disclosure and financial accounting standards may result in additional expenses and affect our reported results of operations.
 
Keeping informed of, and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act, as well as new and proposed SEC regulations and accounting standards, has required an increased amount of management attention and external resources.  Compliance with such requirements may result in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.
 
Businesses we acquire may have disclosure controls and procedures and internal controls over financial reporting that are weaker than or otherwise not in conformity with ours.
 
We have a history of acquiring businesses with varying levels of organizational size and complexity. Upon consummating an acquisition, we seek to implement our disclosure controls and procedures as well as our internal controls over financial reporting at the acquired company as promptly as possible. Depending upon the size and complexity of the business acquired, the implementation of our disclosure controls and procedures as well as the implementation of our internal controls over financial reporting at an acquired company may be a lengthy process. Typically, we conduct due diligence prior to consummating an acquisition; however, our integration efforts may periodically expose deficiencies in the disclosure controls and procedures as well as in internal controls over financial reporting of an acquired company. We expect that the process involved in completing the integration of our own disclosure controls and procedures as well as our own internal controls over financial reporting at an acquired business will sufficiently correct any identified deficiencies. However, if such deficiencies exist, we may not be in a position to comply with our periodic reporting requirements and, as a result, our business and financial condition may be materially harmed.
 
Our awards of stock options to employees may not have their intended effect.
 
A portion of our total compensation program for our executive officers and key personnel has historically included the award of options to buy our common shares or the common stock of our subsidiaries. If the price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract critical personnel. In addition, any changes made to our stock option policies, or to any other of our compensation practices, which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and motivate existing personnel and recruit new personnel.
 
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We may not be able to successfully integrate companies which we may invest in or acquire in the future, which could materially and adversely affect our business, financial condition, future results and cash flow.
 
Our strategy is to continue to expand in the future, including through acquisitions.  Integrating acquisitions is often costly, and we may not be able to successfully integrate our acquired companies with our existing operations without substantial costs, delays or other adverse operational or financial consequences.  Integrating our acquired companies involves a number of risks that could materially and adversely affect our business, including:
 
·  
failure of the acquired companies to achieve the results we expect;
 
·  
inability to retain key personnel of the acquired companies;
 
·  
dilution of existing stockholders;
 
·  
potential disruption of our ongoing business activities and distraction of our management;
 
·  
difficulties in retaining business relationships with suppliers and customers of the acquired companies;
 
·  
difficulties in coordinating and integrating overall business strategies, sales and marketing, and research and development efforts; and
 
·  
the difficulty of establishing and maintaining uniform standards, controls, procedures and policies, including accounting controls and procedures.
 
If any of our acquired companies suffers customer dissatisfaction or performance problems, the same could adversely affect the reputation of our group of companies and could materially and adversely affect our business, financial condition, future results and cash flow.
 
Moreover, any significant acquisition could require substantial use of our capital and may require significant debt or equity financing.  We cannot provide any assurance as to the availability or terms of any such financing or its effect on our liquidity and capital resources.
 
We incur substantial costs as a result of being a public company.
 
As a public company, we incur significant legal, accounting, and other expenses in connection with our reporting requirements.  Both the Sarbanes-Oxley Act of 2002 and the rules subsequently implemented by the Securities and Exchange Commission and NASDAQ, have required changes in corporate governance practices of public companies.  These rules and regulations have already increased our legal and financial compliance costs and the amount of time and effort we devote to compliance activities.  We expect these rules and regulations to further increase our legal and financial compliance costs and to make compliance and other activities more time-consuming and costly.  We continue to regularly monitor and evaluate developments with respect to these new rules with our legal counsel, but we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
We are currently involved in litigation and may in the future may become involved in litigation that may materially adversely affect us
 
We are currently parties to two pending litigation matters which are described under “Item 3. Legal Proceedings.” Also, from time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operations or financial condition.
 
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Goodwill recorded in connection with our acquisitions is subject to mandatory annual impairment evaluations and as a result, we could be required to write off some or all of this goodwill, which may adversely affect our financial condition and results of operations.
 
In accordance with the Financial Accounting Standards Board, or FASB, Accounting Standard Number 142, Goodwill and Other Intangible Assets, or SFAS 142, goodwill is not amortized but is reviewed annually or more frequently for impairment and other intangibles are also reviewed at least annually or more frequently, if certain conditions exist. Any reduction in or impairment of the value of goodwill will result in a charge against earnings which could materially adversely affect our reported results of operations and financial position in future periods.
 
The financial soundness of our customers could affect our business and operating results.
 
As a result of the disruptions in the financial markets and other macro-economic challenges currently affecting the economy of the United States and other parts of the world, our customers may experience cash flow concerns. As a result, if customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to us. Any inability of current and/or potential customers to pay us for services may adversely affect our financial condition, results of operations and cash flows.
 
While we have not reported any material weaknesses in internal controls over financial reporting in the past, we cannot assure you that material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.
 
 Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information.
 
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If we are unable to protect our intellectual property, or our intellectual property protection efforts are unsuccessful, others may duplicate our technology.
 
Our operating companies rely on a combination of patents, trademarks, copyrights, trade secret laws and restrictions on disclosure to protect our intellectual property rights.  Our ability to compete effectively will depend, in part, on our ability to protect our proprietary technology, systems designs and manufacturing processes.  The ability of others to use our intellectual property could allow them to duplicate the benefits of our products and reduce our competitive advantage.  We do not know whether any of our pending patent applications will issue or, in the case of patents issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes.  Further, a patent issued covering one use of our technology may not be broad enough to cover uses of that technology in other business areas.   Even if all our patent applications are issued and are sufficiently broad, they may be challenged or invalidated or our competitors may independently develop or patent technologies or processes that are equivalent or superior to ours. We could incur substantial costs in prosecuting patent and other intellectual property infringement suits and defending the validity of our patents and other intellectual property.  While we have attempted to safeguard and maintain our property rights, we do not know whether we have been or will be completely successful in doing so.  These actions could place our patents, trademarks and other intellectual property rights at risk and could result in the loss of patent, trademark or other intellectual property rights protection for the products, systems and services on which our business strategy partly depends.
 
We rely, to a significant degree, on contractual provisions to protect our trade secrets and proprietary knowledge.  These trade secrets cannot be protected by patent protection.  These agreements may be breached, and we may not have adequate remedies for any breach.  Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors.
 
Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products and services if these claims are successful.  We also may incur significant expenses in affirmatively protecting our intellectual property rights.
 
.  In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries and we believe our industry has a significant amount of patent activity.  Third parties may claim that the technology or intellectual property that we incorporate into or use to develop, manufacture or provide our current and future products, systems or services infringe, induce or contribute to the infringement of their intellectual property rights, and we may be found to infringe, induce or contribute to the infringement of those intellectual property rights and may be required to obtain a license to use those rights.  We may also be required to engage in costly efforts to design our products, systems and services around the intellectual property rights of others.  The intellectual property rights of others may cover some of our technology, products, systems and services.  In addition, the scope and validity of any particular third party patent may be subject to significant uncertainty.
 
Litigation regarding patents or other intellectual property rights is costly and time consuming, and could divert the attention of our management and key personnel from our business operations.  The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks.  Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or to indemnify our customers.  However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all.  Any inability on our part to obtain needed licenses could delay or prevent the development, manufacture and sale of our products, systems or services.  We may also be subject to significant damages or injunctions against development, manufacture and sale of our products, systems or services.
 
We also may be required to incur significant time and expense in pursuing claims against companies we believe are infringing our intellectual property rights. We are currently pursuing one such claim as described  under “Item 3 – Legal Proceedings”. The complexity of our technology and the nature of intellectual property litigation would make it expensive and potentially difficult to prove that a competitor is in fact infringing on our intellectual property rights, but we have commenced such litigation as described under “Item 3. Litigation” and may find it necessary to commence such litigation in the future to protect our rights and future business opportunities.  We can offer no assurance as to the outcome of any such litigation.
 
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RISKS RELATED TO COALOGIX
 
SCR-Tech has incurred significant net losses since inception and may never achieve sustained profitability.
 
SCR-Tech has incurred net losses of $1.5 million, $2.4 million and $0.8 million for the years ended December 31, 2008, 2007, and 2006, respectively.    We believe that SCR-Tech will significantly improve its operating results in 2009; however, we can provide no assurance that SCR-Tech will generate sufficient revenues to allow it to become profitable or to sustain profitability.
 
SCR-Tech has a limited operating history
 
SCR-Tech commenced commercial operations in March 2003.  Thus SCR-Tech does not have a long-term operational history sufficient to allow us to determine whether it can successfully operate its business under differing environments and conditions or at any level of sustained profitability.
 
The size of the market for SCR-Tech’s business is uncertain.
 
SCR-Tech offers SCR catalyst cleaning, rejuvenation and regeneration, as well as SCR system management and consulting services.  The size and growth rate for this market will ultimately be determined by a number of factors, including environmental regulations, the growth in the use of SCR systems to reduce NOx and other pollutants, the length of operation of SCR systems, the adoption of regeneration versus replacement, the expansion of warranty coverage from SCR catalyst OEMs, the cost of new SCR catalyst, and other factors, most of which are beyond the control of SCR-Tech.  There is limited historical evidence in the United States as to the cycle of replacement, cleaning and regeneration of SCR catalyst so as to accurately estimate the potential growth of the business.  In addition, the number of times a catalyst can be regenerated is unknown, which also may affect the demand for regeneration in lieu of purchasing new catalyst.  Any delay in the development of the market could significantly and adversely affect our results of operations and financial condition.
 
SCR-Tech will be subject to vigorous competition with very large competitors that have substantially greater resources and operating histories.
 
We are aware of one company, Evonik Energy Services, LLC, formerly known as Steag (“Evonik LLC”), which entered the U.S. catalyst regeneration market in 2008.  Evonik LLC has currently built a regeneration facility in North Carolina.  Evonik LLC, based in Kings Mountain, North Carolina, is a subsidiary of a German power producer, Evonik Steag GmbH (“Evonik GmbH”).  Evonik GmbH is very large and has substantially greater resources than SCR-Tech or us.  Competition from Evonik may have a material adverse effect on our operations, including a potential reduction in operating margins and a loss of potential business.
 
We are also aware of at least one other company, Enerfab, Inc. that provides SCR catalyst management, rejuvenation and cleaning services.  We are aware of certain companies, including Cormetech and Babcock-Hitachi, who have indicated an interest in offering catalyst cleaning and regeneration.  There also are a number of SCR catalyst manufacturers with substantial parent companies that may seek to maintain market share by significantly reducing prices which will put pressure on our operating margins.  These companies include Cormetech Inc. (owned by Mitsubishi Heavy Industries and Corning, Inc.), Argillon Group (owned by Johnson Matthey), CERAM, Haldor-Topsoe, Inc. and Babcock-Hitachi.  Further, if the SCR catalyst regeneration market expands as we expect, additional competitors could emerge.  In addition, if our intellectual property protection is weakened, competition could more easily develop.
 
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SCR-Tech’s lawsuit against Evonik Energy Services LLC, et al. may not be successful, and the counterclaims of Evonik Energy Services LLC against SCR-Tech may be successful.  We will incur significant expenses in pursuing our lawsuit against Evonik and in defending against Evonik’s counterclaims.
 
SCR-Tech’s lawsuit against Evonik Energy Services, LLC and other defendants as described in Item 3, Legal Proceedings, is associated with certain significant risks.  The lawsuit will require the time and attention of senior management of SCR-Tech, and could divert attention from other business matters.  Expenses of the lawsuit may cause a diversion of significant funds needed by SCR-Tech to fund operations for other aspects of the business.
 
Due to the nature of litigation, it is not possible to predict the outcome of the lawsuit.  We anticipate that the Evonik LLC defendants will vigorously defend themselves, and that Evonik LLC will vigorously pursue its counterclaims against SCR-Tech.  In the event SCR-Tech is unsuccessful in the lawsuit and Evonik LLC prevails in its counterclaims, Evonik LLC may be awarded substantial damages against SCR-Tech. SCR-Tech has not reserved funds for any loss contingency or legal fees associated with this litigation. In addition, if SCR-Tech is unsuccessful, Evonik LLC will remain a competitor of SCR-Tech.
 
CoaLogix may not prevail in the lawsuit filed against it by Environmental Energy Systems, Inc.
 
The lawsuit brought by Environmental Energy Services, Inc. (“EES”) against CoaLogix is associated with certain significant risks.
 
 The lawsuit will require the time and attention of senior management of CoaLogix, and could divert attention from other business matters.  Expenses of the lawsuit may cause a diversion of significant funds needed by CoaLogix to fund operations for other aspects of the business.
 
Due to the nature of litigation, it is not possible to predict the outcome of the lawsuit.  In the event CoaLogix is unsuccessful in defending the lawsuit and EES prevails in its claims, EES may be awarded substantial damages against CoaLogix including costs, interest and attorneys’ fees. CoaLogix has not reserved funds for any loss contingency or legal fees associated with this litigation.  In addition, if EES prevails and obtains rights to IFS-2C, EES will be a competitor in the mercury reduction business.
 
SCR-Tech’s business is subject to customer concentration.
 
SCR-Tech offers SCR catalyst cleaning, rejuvenation and regeneration, as well as SCR system management and consulting services to coal-fired power plants.  Some of the utilities operating these plants are exceptionally large and operate a number of such power plants.  Thus, one or more large utilities could provide a very large order or orders to SCR-Tech which likely would result in one or two  such utilities providing most of the orders and revenues for SCR-Tech for a particular quarterly or annual period.  During fiscal 2008, three customers represented about 75% of our revenue. During 2007, four customers represented more than 90% of our revenue.    Although such large orders is beneficial to SCR-Tech by providing a large and consistent source of orders and revenues without the additional cost associated with marketing to a larger number of smaller customers, SCR-Tech is dependent on a small number of large utilities for its business.  The loss of one of these customers would have a much greater adverse effect on SCR-Tech than the loss of a smaller customer.  This may also result in significant swings in orders and revenues on a quarterly basis as well as impacting on our cash flows.
 
SCR-Tech’s business may be impacted by changes in government regulation.
 
Our business is significantly dependent on the nature and level of government regulation of emissions.  For instance, the Environmental Protection Agency’s (EPA) Clean Air Interstate Rule (CAIR) was vacated by the District of Columbia Court of Appeals in July 2008, and was subsequently re-instated in December 2008 by the same court just days before the vacature became effective. We expect the EPA to revise CAIR or replace it with other clean air regulations, but we cannot at this time to predict the nature of such revisions or replacement regulations. Without government regulation of coal-fired power generation, SCR catalyst would not be used by utilities, there would be no need for utilities to acquire, clean or regenerate SCR catalyst, and SCR-Tech would have no business purpose.  Further, changes in or adverse interpretations of governmental accounting or rate-based emissions regulations also could have a material adverse effect on our business.  Although government regulation of emissions has become increasingly stringent in recent years, the growing costs associated with such regulations and the economic downturn in the U.S. may limit the level of increase and scope of emissions requirements, which could limit the potential growth of our target markets.  Any easing, delay or deferral of governmental emissions requirements or the growth rate of such requirements could have a material adverse effect on our business.
 
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SCR-Tech’s business is subject to potential seasonality.
 
Prior to the January 1, 2009 effective date of Phase I of CAIR, some utilities and IPPs operated their SCR units only during the “ozone season” (May 1 — September 30). Because of this, SCR-Tech’s business was more limited than if SCR units were required to operate on a continual basis.  During non-ozone season periods, most operators had limited (if any) requirements to run their SCR systems.  Given that Phase I of CAIR effectively requires operators run their SCR systems on a continual basis beginning January 1, 2009, we expect less concentration of SCR-Tech’s business during the ozone season each year. However, utilities and IPPs may continue to schedule outages and down time for maintenance during periods beyond our control, resulting in seasonality of SCR-Tech’s business. These potential fluctuations in revenues and cash flow during a year may be significant and could materially impact our quarterly earnings and cash flow.  This may have a material adverse effect on the perception of our business and the market price for our common stock.
 
SCR-Tech does not own its regeneration facilities and it is subject to risks inherent in leasing the site of its operations.
 
 SCR-Tech does not own its regeneration site; instead it leases it from Clariant Corporation, the U.S. subsidiary of a Switzerland-based public company (“Clariant”).  Although we believe the lease terms are favorable, the dependence on Clariant and the site could subject SCR-Tech to increased risk in the event Clariant experiences financial setbacks or loses its right to operate the site.  This risk is heightened because the site is a Federal Superfund site (under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), which increases the risks that the site ultimately could be shut down or that Clariant will be financially unable to continue its ownership of the site.  It may be difficult to relocate to another site on a timely or cost-effective basis, and SCR-Tech’s business could be negatively impacted by any problems with continuing to conduct its operations at its current site.
 
SCR-Tech could be subject to environmental risks as a result of the operation of its business and the location of its facilities.
 
The operation of SCR-Tech’s business and the nature of its assets create various environmental risks.  SCR-Tech leases its site for operations at a property listed on the National Priority List as a Federal Superfund site.  Five CERCLA Areas (those areas of concern identified under the CERCLA program) are identified on the property, and while SCR-Tech does not lease any property identified as a CERCLA Area, one such CERCLA Area has resulted in contamination of groundwater flowing underneath one of the buildings leased by SCR-Tech.  Although SCR-Tech has indemnification from Clariant for any environmental liability arising prior to the operation of SCR-Tech’s business at the site, we can provide no assurance that such indemnification will be sufficient or that SCR-Tech would be protected from an environmental claim from the nature of the site.  In addition, the operation of SCR-Tech’s business involves removal of hazardous wastes from catalyst and the use of significant chemical materials.  As a result, SCR-Tech could be subject to potential liability resulting from such operations.  To date, neither Acorn nor SCR-Tech has been identified as a potential responsible party to such environmental risks, nor have any amounts been recorded to accrue for these potential exposures.
 
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We likely will be required to make significant capital expenditures to expand SCR-Tech’s production facilities or for other purposes; we may require additional capital for such purposes.
 
We believe this site is sufficient to meet SCR-Tech’s anticipated production requirements through 2009.  However, in order to meet anticipated demand for increased orders for SCR regeneration services in 2010 and beyond, we expect to incur substantial capital expenditure costs over the next two years to construct a second SCR regeneration plant.  Because of necessary permitting, site search, time for construction and equipment purchases, we can provide no assurance that SCR-Tech could meet the demands from a rapid increase in orders in a timely manner.  Any failure to timely fulfill such orders could have an adverse impact on SCR-Tech’s business.
 
In addition there is no assurance that CoaLogix will be able to raise the necessary funds from its current shareholders or outside sources to construct a new regeneration facility. Moreover, if we incur the expected capital expenditures to expand the capacity of SCR-Tech, but the market does not develop as we expect or increased competition results in loss of significant business, we may not generate enough additional revenue from such expenses.  This could adversely impact our results of operations and financial position.  Moreover, other unanticipated expenses for SCR-Tech, such as litigation or other costs for protecting intellectual property rights or as a result of a significant corporate transaction could result in the need for additional capital.  These additional funding requirements may be significant, and funds may not be available when required or may be available only on terms unsatisfactory to us.
 
Beyond December 31, 2009, our cash requirements will depend on many factors, including but not limited to the market acceptance of our product and service offerings, the ability of SCR-Tech to generate significant cash flow, the rate of expansion of our sales and marketing activities, the rate of expansion of our production capacity, our ability to manage selling, general and administrative expenditures and the timing and extent of SCR-Tech related research and development projects.
 
In addition, we continue to actively pursue business opportunities, including but not limited to, mergers, acquisitions or other strategic arrangements.  Such strategic opportunities could require the use of additional cash, reducing our available capital prior to December 31, 2009, or could require additional equity or debt financing.  The nature and amount of any such financing or the use of any capital in any such transaction cannot be predicted and will depend on the terms and conditions of the particular transaction.
 
Certain of SCR-Tech’s capital equipment is unique to our business and would be difficult and expensive to repair or replace.
 
Certain of the capital equipment used in the services performed by SCR-Tech has been developed and made specifically for us and would be difficult to repair or replace if it were to become damaged or stop working.  In addition, certain of our equipment is not readily available from multiple vendors.  Consequently, any damage to or breakdown of our equipment at a time when we are regenerating large amounts of SCR catalyst at SCR-Tech may have a material adverse impact on our business.
 
SCR-Tech may be subject to warranty claims from its customers.
 
SCR-Tech typically provides limited warranties to its customers relating to the level of success of its catalyst cleaning and regeneration services.  In the event SCR-Tech is unable to perform a complete regeneration of an SCR catalyst, SCR-Tech may be required to re-perform a regeneration or repay a portion of the fees earned for the regeneration efforts.  SCR-Tech also may be required to provide warranties with respect to its other SCR catalyst services provided to its customers.  Since SCR-Tech has only a limited operating history, it is not possible to determine the amount or extent of any potential warranty claims that SCR-Tech may incur.  There is a risk that any such claims could be substantial and could affect the profitability of SCR-Tech and the financial condition of the Company.  The Company does maintain a limited warranty claim liability; however, should the amount of any potential warranty claims be incurred at levels higher than the warranty liability, the profitability and financial condition of the Company could be impacted.
 
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SCR-Tech is dependent on third parties to perform certain testing required to confirm successful regeneration.
 
In connection with the regeneration of SCR catalyst, SCR-Tech generally must have an independent company provide testing services to determine the level of success of regeneration.  Currently there are a limited number of companies providing this service.  If SCR-Tech is unable to obtain this service on a cost-effective basis, SCR-Tech may not be able to perform its regeneration services. In addition, if the testing cannot be completed in a timely manner, there may be a slowdown of operations which can negatively impact the profitability and financial condition of the Company.
 
Significant price increases in key materials may reduce SCR-Tech’s gross margins and profitability of  regeneration of SCR Catalyst.
 
The prices of various chemicals used to regenerate SCR Catalyst can be volatile.  If the long-term costs of these materials were to increase significantly, we would attempt to reduce material usage or find substitute materials.  If these efforts were not successful or if these cost increases could not be reflected in our price to customers, then our gross margins and profitability of regenerating SCR Catalyst would be reduced and our ability to operate SCR-Tech profitably could be compromised.
 
There are risks associated with our purchase of used SCR catalyst.
 
SCR-Tech’s primary business involves the cleaning and regenerating of customer-owned SCR catalyst.  In certain instances, however, SCR-Tech may purchase used or “spent” catalyst from utilities for regeneration, as when, for example, a utility wishes to avoid the costs and potential hazardous waste issues associated with the disposal of used or “spent” catalyst.  SCR-Tech may purchase SCR catalyst for a nominal sum and then regenerate such catalyst for immediate sale, or may purchase spent SCR catalyst on an opportunistic basis for future regeneration and sale.  The purchase of spent SCR catalyst involves potential risks to SCR-Tech.  For example, spent SCR catalyst includes significant hazardous waste, and unlike the regeneration of customer-owned SCR catalyst, the purchase of spent SCR catalyst requires SCR-Tech to take ownership or “title” to the SCR catalyst, which may potentially increase SCR-Tech’s environmental risk exposure.  Furthermore, if SCR-Tech cannot find a customer to purchase the regenerated catalyst, then SCR-Tech must either store the spent catalyst, subject to the inherent risk of holding catalyst which has not been regenerated and contains hazardous waste, or incur significant costs to dispose of the spent catalyst in a manner which complies with the strict requirements of applicable environmental laws.  In addition, the sale of SCR catalyst may expose SCR-Tech to risks not inherent in the cleaning and regeneration of SCR catalyst, including product liability claims.  It is unclear as to the amount of SCR catalyst which SCR-Tech may purchase, but it is possible such purchases ultimately may be substantial, and may significantly increase the risk profile of SCR-Tech’s business.
 
Many of the risks of our business have only limited insurance coverage and many of our business risks are uninsurable.
 
Our business operations are subject to potential environmental, product liability, employee and other risks.  Although we have insurance to cover some of these risks, the amount of this insurance is limited and includes numerous exceptions and limitations to coverage.  Further, no insurance is available to cover certain types of risks, such as acts of God, war, terrorism, major economic and business disruptions and similar events.  In the event we were to suffer a significant environmental, product liability, employee or other claim in excess of our insurance or a loss or damages relating to an uninsurable risk, our financial condition could be negatively impacted.  In addition, the cost of our insurance has increased substantially in recent years and may prove to be prohibitively expensive, thus making it impractical to obtain insurance.  This may result in the need to abandon certain business activities or subject ourselves to the risks of uninsured operations.
 
New technologies could be developed which make SCR catalyst obsolete.
 
SCR-Tech’s business is dependent upon the needs of coal-fired power plants to replace or regenerate SCR catalyst.  It is possible that at some point in the future new technology may be developed which replaces SCR catalyst as the preferred solution for removing NOx from the power plant exhaust.  In such event, SCR-Tech’s business would be materially and adversely affected.
 
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New competitors could enter the regeneration business.
 
Currently, we are aware of only one competitor in the SCR regeneration business in the United States.  It is possible that at some time in the future new competitors will enter into the SCR regeneration business.  Manufacturers of SCR catalyst may have an advantage if they chose to enter the SCR regeneration business since they are familiar with the manufacture and properties of SCR catalyst.  In addition original catalyst manufacturers may have greater financial resources available to them than does SCR-Tech.
 
Our business could be impacted by challenges to and developments in environmental legislation and regulations.
 
SCR-Tech’s business is in large part dependent upon federal and state legislation and regulations which require reductions in emissions from coal-fired power plants.  We can provide no assurance that such legislation and regulations will not be challenged in the courts and possibly altered to the detriment of SCR-Tech.  In addition, legislation and regulations could be changed in the future to be less stringent and relax or delay requirements on emissions from coal-fired power plants.
 
Our business may be impacted by the world-wide financial crisis.
 
The current economic conditions and limited availability of credit may affect the ability of CoaLogix’s customers to purchase services from CoaLogix.  This may result in deferral of projects by CoaLogix’s customers, which would have an adverse impact on our ability to achieve planned sales. The limited availability of credit may also affect CoaLogix’s ability to fund its need to expand its production capabilities in 2009 in order to accommodate its anticipated growth. CoaLogix anticipates that it will need to increase production capacity by constructing a new plant in 2009 in order to satisfy expected increased orders from customers, and CoaLogix current financial resources are not sufficient to provide the anticipated substantial cost to build a new plant.  CoaLogix is currently exploring options to provide funds for construction of a new plant. However, we have no assurance that we will be able to raise the necessary funds for the expansion at agreeable terms.
 
MetalliFix is a new technology and has no operating history.
 
The MetalliFix technology has been tested only in a limited number times at a bench scale, and not yet tested at the commercial scale.   Although we believe the tests have been successful, a commercial test or full scale installation has not yet been achieved.  Thus the MetalliFix technology has no operating history sufficient to allow us to determine whether it can be successful under the current or differing environments and conditions or at any level of profitability.
 
The size of the market for mercury removal and remediation is uncertain.
 
The EPA’s Clean Air and Mercury Rule (CAMR) was vacated by the D.C. Circuit Court of Appeals in February 2008, and there is uncertainty whether more stringent legislation will be implemented when CAMR will be reinstated and the timing of such.   The mercury removal regulations promulgated by individual states dictate current removal guidelines until CAMR takes effect, and the rate and timing of new state regulations is uncertain for the long term.  Therefore, the overall market for mercury removal and remediation is difficult to predict.   Any delay in the development of the mercury market could significantly and adversely affect the value of our MetalliFix offering.

There is currently only one  supplier of key materials in the MetalliFix process.
 
The chemicals used in the MetalliFix process are currently obtained under license from Solucorp Industries’ IFS-2C technology.   One of the key chemicals in the IFS-2C technology is produced by Solucorp in a foreign country.  We are not aware of any other producers of this chemical and are currently relying on solely on Solucorp for our supply of this chemical.  This dependence on one supplier of a key chemical used in the MetalliFix process could have adverse impacts on our introduction of MetalliFix and on our ability to adequately satisfy agreements which we hope to enter into to remove mercury for customers and exploit this market.
 
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MetalliFix will be subject to vigorous competition
 
 We are aware of other technologies that will compete with MetalliFix.  These include other FGD or scrubber additives that enhance the capture of mercury, sorbent injection technologies, and oxidizer technologies. Most mercury removal technologies are in the development and test stages for commercialization.  Although the MetalliFix process is also being further tested, it may not prove to have a competitive advantage compared to other mercury removal technologies.  MetalliFix may not meet expected mercury removal levels, cost hurdles, safety standards, or another competitive characteristic that will become evident after further testing.

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

Extensive and evolving environmental and health and safety laws and regulations may restrict our operations and growth and increase our costs.
 
            Existing environmental laws and regulations have become more stringently enforced in recent years because of greater public interest in protecting the environment. In addition, the coal industry is subject to regular enactment of new or amended federal, state and local environmental and health and safety statutes, regulations and ballot initiatives, as well as judicial decisions interpreting these requirements. These requirements may impose substantial capital and operating costs and operational limitations on us and may adversely affect our business. The requirements may also effect our customers’ decisions to utilize our services which may materially adversely affect our business.
 
RISKS RELATED TO DSIT SOLUTIONS
 
Failure to accurately forecast costs of fixed-priced contracts could reduce our margins.
 
When working on a fixed-price basis, we undertake to deliver software or integrated hardware/software solutions to a customer’s specifications or requirements for a particular project.  The profits from these projects are primarily determined by our success in correctly estimating and thereafter controlling project costs.  Costs may in fact vary substantially as a result of various factors, including underestimating costs, difficulties with new technologies and economic and other changes that may occur during the term of the contract.  If, for any reason, our costs are substantially higher than expected, we may incur losses on fixed-price contracts.
 
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Hostilities in the Middle East region may slow down the Israeli hi-tech market and may harm our Israeli operations; our Israeli operations may be negatively affected by the obligations of our personnel to perform military service.
 
Our software consulting and development services segment is currently conducted in Israel.  Accordingly, political, economic and military conditions in Israel may directly affect DSIT.  Any increase in hostilities in the Middle East involving Israel could weaken the Israeli hi-tech market, which may result in a significant deterioration of the results of our Israeli operations.  In addition, an increase in hostilities in Israel could cause serious disruption to our Israeli operations if acts associated with such hostilities result in any serious damage to our offices or those of our customers or harm to our personnel.
 
Some of our employees in Israel are obligated to perform military reserve duty.  In the event of severe unrest or other conflict, one or more of our key employees could be required to serve in the military for extended periods of time.  In the past, there have been numerous call-ups of military reservists to active duty, and it is possible that there will be additional call-ups in the future.  Our Israeli operations could be disrupted as a result of such call-ups for military service.
 
Exchange rate fluctuations could increase the cost of our Israeli operations.
 
A majority of DSIT’s sales are based on contracts or orders which are in U.S dollars or Euros or are in New Israeli Shekels (“NIS”) linked to the U.S. dollar.  At the same time, most of DSIT’s expenses are denominated in NIS (primarily labor costs) and are not linked to any foreign currency.  While the dollar value of the revenues of our operations in Israel will increase if the dollar is devalued in relation to the NIS, the net effect of such devaluation is that DSIT’s costs in dollar terms increase more than our revenues.  The weakening of the dollar relative to the NIS had a net negative impact on DSIT’s operations in 2008.  During the period from January 1, 2008 to June 1, 2008, the dollar lost 16.0% of its value relative to the NIS before recovering and finishing 2008 just 1.1% below the value at December 31, 2007.  DSIT is currently considering ways to control is exposures to exchange rate fluctuations, however, we can provide no assurance that such controls will be implemented successfully.
 
 We are substantially dependent on a small number of customers and the loss of one or more of these customers may cause revenues and cash flow to decline.
 
In 2008, 41% of DSIT’s sales (28% in 2007) were concentrated in one customer (Israel Defense Ministry). In addition, in 2009, DSIT has received $4.0 million of orders from a new customer. Both of these customers are expected to make up a significant portion of DSIT’s revenues and cash flow for 2009. A significant reduction of future orders or delay in milestone payments from any of these customers could have a material adverse effect on the performance of DSIT.
 
We are dependent on meeting milestones to provide cash flow for operations.
 
In August 2005, we sold our outsourcing business, which in the past provided our Israeli operations with a steady cash flow stream, and, in conjunction with bank lines of credit, helped to finance our Israeli operations.  Our present operations, as we are currently structured, place a greater reliance on our meeting project milestones in order to generate cash flow to finance our operations.  Should we encounter difficulties in meeting significant project milestones, resulting cash flow difficulties could have a material adverse effect on our operations.
 
If we are unable to keep pace with rapid technological change, our results of operations, financial condition and cash flows may suffer.
 
Some of our solutions are characterized by rapidly changing technologies and industry standards and technological obsolescence.  Our competitiveness and future success depends on our ability to keep pace with changing technologies and industry standards on a timely and cost-effective basis.  A fundamental shift in technologies could have a material adverse effect on our competitive position.  Our failure to react to changes in existing technologies could materially delay our development of new products, which could result in technological obsolescence, decreased revenues, and/or a loss of market share to competitors.  To the extent that we fail to keep pace with technological change, our revenues and financial condition could be materially adversely affected.
 
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We must at times provide significant guarantees in order to secure projects.
 
Some of the projects we perform require significant performance and/or bank guarantees. In DSIT’s current state, it may not always be able to supply such guarantees without financial assistance from Acorn.  If Acorn needs to provide financial guarantees for DSIT, Acorn may not have sufficient funds available to it to invest in other emerging ventures or take advantage of opportunities available to us in a timely manner.
 
We are technologically dependent on several key employees.
 
Our sonar and acoustic-related solutions and products are dependent on the knowledge and know-how of several persons. The loss of any or a combination of these persons could harm our ability to meet project deadlines and our ability to market certain products.  As our sonar and acoustic-related solutions is a significant portion of our growth strategy, this would ultimately negatively impact on our business, results of operations and financial condition. While we are attempting to mitigate this risk by hiring and training additional personnel, we can provide no assurance that we will be successful in doing so in a cost effective and timely manner.
 
We are dependent on a number of suppliers who provide us with components for some of our products.
 
A number of our suppliers provide us with major components for some of our products for our Naval & RT solutions. Some of these components are long-lead items. If for some reason, the suppliers cannot provide us with the component when we need it and we cannot easily find substitute suppliers on similar terms, we may have increased costs and/or delays in delivering a product to a customer and incur penalties and lose customer confidence. In addition, project delays can also slow down revenue recognition and our financial condition could be materially adversely affected. While we are constantly attempting to develop secondary and tertiary suppliers for these components, we can provide no assurance that we will be successful in doing so on terms acceptable to us.
 
DSIT incurred significant net losses in recent years and may never achieve sustained profitability.
 
DSIT has incurred net losses of $1.3 million and $0.5 million for the years ended December 31, 2007, and 2006, respectively.    Although DSIT recorded net income of $0.5 million for the year ended December 31, 2008, and we believe that DSIT will improve its operating results in 2009, we can provide no assurance that DSIT will continue to generate sufficient revenues to allow it to sustain profitability.
 
We are dependent on one bank for most of our financing needs and we may not be able to obtain necessary financing to continue growing the Company.
 
While DSIT has increased its lines-of-credit during 2008 from NIS 940,000 (approximately $235,000) to NIS 2,000,000 (approximately$526,000), DSIT needs additional financing from time to time due to the timing of large milestone payments. Due to historical losses, DSIT has found it difficult to find a suitable secondary bank to support its financing needs. If we cannot increase our sources of financing, we may not be able to sustain our recent growth and invest in expanding our portfolio of products.
 
We are a relatively small company with limited resources compared to some of our current and potential competitors, which may hinder our ability to compete effectively.
 
Some of our current and potential competitors have longer operating histories, significantly greater resources and broader name recognition than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours, which would allow them to respond more quickly than us to new or emerging technologies or changes in customer requirements.
 
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RISKS RELATED TO COREWORX

Coreworx has incurred significant net losses since inception and may never achieve sustained profitability.
 
Coreworx has incurred net losses of CDN$5.3 million and CDN$8.7 million for the years ended December 31, 2008 and 2007, respectively.  As of December 31, 2008, it had an accumulated deficit of approximately CDN$29.4 million.  We believe that Coreworx will reduce its losses in 2009; however, we can provide no assurance that Coreworx will generate sufficient revenues to allow it to become profitable or to sustain profitability.
 
Coreworx may need additional financing
 
Cash used in operations in 2007 and 2008 was CDN$3.4 million and CDN$5.7 million, respectively. Coreworx has recently begun to restructure its operations in order to become cash-flow neutral. We expect that Coreworx may continue to require additional working capital support in order to effectuate its revised plan and finance its operations in 2009.  This support may be in the form of a bank line, new investment by others, additional investment by Acorn, or a combination of the above. We have no assurance that additional working such support will be available such sources in sufficient amounts, in a timely manner and on acceptable terms.  The availability and amount of any additional investment from us may be limited by the working capital needs of our corporate activities and other operating companies.
 
The current economic conditions and Credit Crisis May Result in Deferral of Projects by Our Customers.
 
The current economic conditions and limited availability of credit may affect capital projects and budgets of Coreworx customers. This may result in deferral of projects, which would have an adverse impact on our ability to achieve planned sales. Specifically, oil and gas and mining MCPs are sensitive to the market prices of oil and minerals, and decreases in the prices of oil and mineral commodities have caused some MCPs in these sectors to be delayed indefinitely.
 
If we are not able to attract and retain top employees, our ability to compete may be harmed.
 
Our performance is substantially dependent on the performance of our executive officers and key employees. The loss of the services of any of our executive officers or other key employees could significantly harm our business. We do not maintain “key person” life insurance policies on any of our employees. Our success is also highly dependent on our continuing ability to identify, hire, train, retain and motivate highly qualified management, technical, sales and marketing personnel. In particular, the recruitment of top research developers and experienced salespeople is critical to our success. Competition for such people is intense, substantial and continuous, and we may not be able to attract, integrate or retain highly qualified technical, sales or managerial personnel in the future. In addition, in our effort to attract and retain critical personnel, we may experience increased compensation costs that are not offset by either improved productivity or higher prices for our products or services.
 
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Current and future competitors could have a significant impact on our ability to generate future revenue and profits
 
The market for project management collaboration software is highly competitive. Coreworx competes with products such as Open Text’s Open Text, EMC’s Documentum, Autodesk’s Buzzsaw, IBM’s FileNet and Microsoft’s Sharepoint. We expect competition to increase and intensify in the future as the pace of technological change and adaptation quickens and as additional companies enter into each of our markets. Numerous releases of competitive products have occurred recently and may be expected to continue in the near future. We may not be able to compete effectively with current competitors and potential entrants into our marketplace. We could lose market share if our current or prospective competitors introduce new competitive products, add new functionality to existing products, acquire competitive products, reduce prices or form strategic alliances with other companies. If other businesses were to engage in aggressive pricing policies with respect to competing products, or if the dynamics in our marketplace resulted in increasing bargaining power by the consumers of our products and services, we would need to lower the prices we charge for the products we offer. This could result in lower revenues or reduced margins, either of which may materially and adversely affect our business and operating results.
 
Our products and services may not gain market acceptance or competitors may introduce offerings that surpass those of Coreworx.

Coreworx has assembled what it believes to be a unique suite of products along with an aggressive product marketing strategy that will be the basis of driving future revenue growth. We intend to pursue our strategy of growing the capabilities of our software offerings through our proprietary research and the development of new product offerings. The primary market for our software and services is rapidly evolving which means that the level of acceptance of products and services that have been released recently or that are planned for future release by the marketplace is not certain. If the markets for our products and services fail to develop, develop more slowly than expected or become subject to intense competition, our business will suffer. As a result, we may be unable to: (i) successfully market our current products and services, (ii) develop new software products, services and enhancements to current products and services, (iii) complete customer installations on a timely basis, or (iv) complete products and services currently under development. If our products and services are not accepted by our customers or by other businesses in the marketplace, our business and operating results will be materially affected. In addition, we can provide no assurance that Coreworx will be successful in deriving significant revenue growth through its current strategy and marketing initiatives.
 
Our investment in our current research and development efforts may not be effective.
 
The development of software products is a costly, complex and time-consuming process, and the investment in software product development often involves a long gestation period until a “return” is achieved on such an investment. We make and will continue to make significant investments in software research and development and related product opportunities. Investments in new technology and processes are inherently speculative. Commercial success depends on many factors including the degree of innovation of the products developed through our research and development efforts, sufficient support from our strategic partners, and effective distribution and marketing. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development. These expenditures may adversely affect our operating results if they are not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts in order to maintain our competitive position. However, significant revenue from new product and service investments may not be achieved for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced for our current or historical products and services.
 
The demand for our products depends in large part on continued growth in the industries into which they are sold. A market decline in any of these industries could have a material negative impact on our results of operations.
 
Our growth is dependent, in part, on capital projects initiated by our customers and potential customers. Any industry downturns that adversely affect our customers or their customers, including increases in bankruptcies in relevant industries, could adversely affect end-user demand for our customers’ products, which would adversely affect demand for our products.
 
Growth in demand in the markets we serve has in the past and may in the future fluctuate significantly based on numerous factors, including:

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

If the Canadian dollar significantly strengthens relative to the US dollar, future operating results will be negatively affected.
 
Coreworx currently derives approximately 75% of its revenue in U.S. dollars and a significant portion in Australian dollars.  At the same time, most of Coreworx’s expenses are denominated in Canadian dollars.  A decline in the value of the U.S. dollar will have a major impact on Coreworx’s profitability as it increases Coreworx’s costs in U.S. dollars. While Coreworx has in the past been successful in reducing the impact of fluctuations in the exchange rate through currency management, there is no assurance that Coreworx will be able to successfully manage these exposures in the future. Any significant change in foreign exchange rates may adversely affect our revenue, earnings and other financial measures.

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

Coreworx has historically enjoyed a high retention rate across its various product lines. As Coreworx’s products age, these retention rates may not be sustained unless Coreworx is successful in providing its customers with more advanced functionality and the levels of support that they require.
 
The loss of licenses to use or sell third party software or the lack of support or enhancement of such software could adversely affect Coreworx’s business.

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

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

In 2008, 90% of Coreworx’s revenue was the result of sales to four customers. In addition, in any given quarter, license sales from individual transactions can be material and in some cases the related sales cycles can be long. As a result, Coreworx’s revenue, cash flows and earnings can fluctuate materially from quarter to quarter due to the timing of significant license agreements. The loss or a decline in demand from one or more of these customers could have a material negative impact on Coreworx’s results of operations and revenues, cash flows and earnings.

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

Coreworx needs to continue to upgrade the Coreworx suite to add features demanded by the market. Coreworx is in the process of completing and enhancing the integration of the Coreworx suite with Microsoft SharePoint, a widely used collaboration tool and expects to complete the integration by the end of 2009. A failure to complete integration on a timely basis would have a negative impact on Coreworx’s sales, particularly to potential new customers.
 
Coreworx’s future success will depend upon its ability to enhance its current products, to keep pace with technological developments and respond to end-user requirements. We can provide no assurance that we will be successful in developing or marketing new products or product enhancements, or that we can avoid significant delays in development in the future, any of which could have a material adverse effect on the our business, results of operations and financial condition. Our ability to continue to compete successfully will depend in large measure on our ability to maintain a technically competent research and development staff and adapt to technological changes and advances in the industry, including providing for the continued compatibility of our software products with evolving computer hardware and software platforms and operating environments. We can provide no assurance that we will be successful in these efforts.
 
Our products may contain defects that could harm our reputation, be costly to correct, delay revenues, and expose us to warranty claims and litigation.
 
Our products are highly complex and sophisticated and, from time to time, may contain design defects or software errors that are difficult to detect and correct. Errors may be found in new software products or improvements to existing products after commencement of shipments to our customers. If these defects are discovered, we may not be able to successfully correct such errors in a timely manner. In addition, despite the extensive tests we conduct on all our products, we may not be able to fully simulate the environment in which our products will operate and, as a result, we may be unable to adequately detect the design defects or software errors which may become apparent only after the products are installed in an end-user’s network. The occurrence of errors and failures in our products could result in the delay or the denial of market acceptance of our products; alleviating such errors and failures may require us to make significant expenditure of our resources. The harm to our reputation resulting from product errors and failures may be materially damaging. Since we regularly provide a warranty with our products, the financial impact of fulfilling warranty obligations may be significant in the future. Our agreements with our strategic partners and end-users typically contain provisions designed to limit our exposure to claims. These agreements usually contain terms such as the exclusion of all implied warranties and the limitation of the availability of consequential or incidental damages. However, such provisions may not effectively protect us against claims and the attendant liabilities and costs associated with such claims. Although we maintain errors and omissions insurance coverage and comprehensive liability insurance coverage, such coverage may not be adequate to cover all such claims. Accordingly, any such claim could negatively affect our financial condition.
 
The sales cycle for our products is long which may result in significant fluctuations in license revenue being recognized from quarter to quarter.
 
The decision by a customer to purchase our products often involves a comprehensive implementation process across our customers’ network or networks. As a result, licenses of these products may entail a significant commitment of resources by prospective customers, accompanied by the attendant risks and delays frequently associated with significant expenditures and lengthy sales cycle and implementation procedures. Given the significant investment and commitment of resources required by an organization to implement our software, our sales cycle may be longer compared to companies in other industries. It may in some cases take several months, or even several quarters, for marketing opportunities to materialize into sales. If a customer’s decision to license our software is delayed or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenue from these licenses would be delayed. Such delays could cause volatility in our reported revenues from period to period.
 
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RISKS RELATED TO OUR SECURITIES
 
Our stock price is highly volatile.
 
The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. During 2008 our common stock has traded at prices as low as $1.35 and as high as $6.56 per share. Fluctuations in our stock price may continue to occur in response to various factors, many of which we cannot control, including:
 
·  
general economic and political conditions and specific conditions in the markets we address, including the continued volatility in the energy industry and the general economy;
·  
quarter-to-quarter variations in our operating results;
·  
announcements of changes in our senior management;
·  
the gain or loss of one or more significant customers or suppliers;
·  
announcements of technological innovations or new products by our competitors, customers or us;
·  
the gain or loss of market share in any of our markets;
·  
changes in accounting rules;
·  
changes in investor perceptions; or
·  
changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

In addition, the market prices of securities of energy related companies have been and remain volatile. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies.
 
Our share price may decline due to the large number of shares of our Common Stock eligible for future sale in the public market including shares underlying warrants and options.
 
A substantial number of shares of our Common Stock are, or could upon exercise of options or warrants, become eligible for sale in the public market as described below.  Sales of a substantial number of shares of our Common Stock in the public market, or the possibility of these sales, may adversely affect our stock price.
 
As of December 31, 2008, 12,454,528 shares of our Common Stock were issued and outstanding.  As of December 31, 2008 we had 784,023 warrants outstanding and exercisable with a weighted average exercise price of $4.06 and 1,517,330 options outstanding and exercisable with a weighted average exercise price of $3.10 per share, which if exercised for cash would result in the issuance of an additional 2,301,353 shares of Common Stock.  Of the options and warrants noted above, none of the warrants and 245,000 options are in-the-money at December 31, 2008. In addition to the options noted above, at December 31, 2008, 359,170 options are outstanding, but haven not yet vested and are not yet exercisable.
 
ITEM 1A.  
UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.  
PROPERTIES
 
Our corporate activities are conducted in office space in Wilmington, Delaware.  The annual rent is approximately $18,000 under a lease that expires in June 2010.
 
SCR-Tech leases approximately 117,000 square feet of office, production, laboratory and warehouse space in Charlotte, North Carolina.  The annual rent is approximately $627,000.  This lease expires on December 31, 2012, with two options to renew for five years each.
 
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Our DSIT subsidiary’s activities are conducted in approximately 18,000 square feet of office space in the Tel Aviv, Israel metropolitan area under a lease that expires in August 2009.  The annual rent is approximately $322,000.
 
Our Coreworx subsidiary’s activities are conducted in approximately 8,600 square feet of office space in Kitchener, Ontario, Canada under a lease that expires in December 2010.  The annual rent is approximately $180,000. In addition, Coreworx maintains sales offices for operations in Calgary, Alberta, and Houston, Texas.
 
ITEM 3.  
LEGAL PROCEEDINGS
 
Lawsuit filed by SCR-Tech Against Evonik Energy Services, LLC and Others

In August, 2008 SCR-Tech filed suit (the “Evonik Lawsuit”) in Superior Court, Mecklenburg County, North Carolina against Evonik LLC, Evonik Energy Services GmbH, Evonik Steag GmbH, Evonik Industries AG, Hans-Ulrich Hartenstein and Brigitte Hartenstein (collectively, the “Evonik Defendants”).  Evonik Energy Services GmbH is the immediate parent of Evonik LLC and is a subsidiary of Evonik Steag GmbH.  Evonik Steag GmbH is a subsidiary of Evonik AG.  Evonik Energy Services GmbH, Evonik Steag GmbH, and Evonik Industries AG are collectively hereinafter sometimes referred to as the “Evonik German Entities”.
 
Hans-Ulrich Hartenstein (“H.Hartenstein”) is the president of Evonik LLC, and Brigitte Hartenstein (“B.Hartenstein”) is the chief financial officer of Evonik LLC.  Prior to joining Evonik LLC H.Hartenstein served as  president of SCR-Tech and B.Hartenstein served as chief financial officer of SCR-Tech.  In connection with settlement of a dispute unrelated to the current lawsuit, H.Hartenstein and B.Hartenstein entered into a Confidentiality and Invention Assignment Agreement with SCR-Tech (the “Confidentiality Agreement”) effective December 15, 2005.  Under the Confidentiality Agreement,   H.Hartenstein and B.Hartenstein agreed to keep confidential, not to use and not to disclose any confidential information of SCR-Tech.
 
Once employed by Evonik LLC, H.Hartenstein and B.Hartenstein were directly involved with Evonik LLC’s construction of an SCR regeneration facility at Evonik LLC’s Kings Mountain location.
 
SCR-Tech has information and belief that the Evonik German Entities were aware of H.Hartenstein’s and B.Hartenstein’s involvement in construction of Evonik’s SCR regeneration facility.
 
In the lawsuit, SCR-Tech has alleged that H.Hartenstein and B.Hartenstein materially breached the Confidentiality Agreement, Evonik LLC tortiously  interfered with the contractual obligations of H.Hartenstein and B.Hartenstein under the Confidentiality Agreement, the Evonik Defendants misappropriated SCR-Tech’s catalyst regeneration trade secrets,  H.Hartenstein and B.Hartenstein impermissibly disclosed SCR-Tech’s trade secrets and Evonik LLC impermissibly acquired, disclosed or used SCR-Tech’s catalyst regeneration trade secrets. The suit also alleges that H.Hartenstein and B.Hartenstein as former officers of SCR-Tech breached their fiduciary duties to SCR-Tech by misappropriating and using SCR-Tech’s proprietary information and other confidential assets to the detriment of SCR-Tech, that H.Hartenstein and B.Hartenstein while officers of SCR-Tech took steps to exploit their knowledge of SCR-Tech’s trade secrets and usurped SCR-Tech’s opportunity – vis-à-vis Evonik LLC – for their own benefit, and that the Evonik Defendants engaged in unfair and deceptive acts or practices in violation of North Carolina’s deceptive trade laws.
 
SCR-Tech has requested damages against each of the Evonik Defendants in an amount in excess of $10,000 to be determined at the time of trial plus interest, costs and attorney’ fees.
 
Evonik LLC filed an answer and counterclaim against SCR-Tech in October, 2008.  As of March 26, 2009, no answer has been filed by the other Evonik Defendants.
 
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In its answer, Evonik LLC denies any liability to SCR-Tech and has denied wrong doing.  Evonik LLC has alleged in its answer that SCR-Tech’s claims are barred because of the doctrines of estoppel and waiver, equitable doctrine of unclean hands, equitable doctrine of laches, and the relevant statutes of limitation.  Further, Evonik LLC has alleged that SCR-Tech lacks standing to bring any claim for misappropriation of trade secrets because SCR-Tech did not own any trade secrets or other intellectual property with regard to SCR regeneration process, and Evonik LLC further alleges that SCR-Tech cannot establish any trade secret under North Carolina law and SCR-Tech has failed to identify the existence of any trade secret with sufficient particularity.
 
Evonik LLC’s answer contains counterclaims against SCR-Tech to the effect that SCR-Tech defamed Evonik LLC, and as a result of such defamation Evonik LLC’s standing, business goodwill and reputation have been damaged.  Evonik LLC has further counterclaimed that SCR-Tech’s lawsuit was filed to gain an unfair competitive advantage over Evonik LLC and SCR-Tech’s actions relative to the lawsuit constitute unfair and deceptive trade practices in violation of North Carolina law.  In connection with such counterclaims, Evonik LLC alleges that it has been damaged in each case in an amount in excess of $10,000 and that in the case of unfair and deceptive conduct and actions it is entitled to treble damages in addition to its costs, interest and reasonable attorney’ fees.  Further, Evonik LLC has requested that it be awarded punitive damages to be determined at trial. We believe the counter-claims to be without merit.
 
The Evonik German Entities have objected to being named parties in the lawsuit, and have filed a motion to be dismissed from the lawsuit based upon their argument that the North Carolina court lacks jurisdiction and they are not proper parties to the lawsuit.
 
The Evonik lawsuit is in the early stages of litigation, and discovery has not yet commenced.  The issues involved in the lawsuit are complex, and we anticipate that the expenses relating to the lawsuit (e.g. legal fees, expert witness fees, discovery costs, travel expenses, etc.) will be costly.
 
Due to the complexity of the matters involved in the lawsuit and the fact that some of the defendants are located in Germany, it is not possible to predict the length of time it will take for the lawsuit to be resolved either by settlement or trial.  As of March 26, 2009, no meaningful settlement talks have occurred nor have any been scheduled.
 
The lawsuit will involve time and attention of senior management of SCR-Tech, and could divert the attention of senior management from other business matters.  Expenses of the lawsuit may cause a diversion of significant funds needed by SCR-Tech to fund operations for other aspects of the business.
 
Due to the nature of litigation, it is not possible to predict the outcome of the lawsuit.  We anticipate that the Evonik Defendants will vigorously defend themselves, and that Evonik LLC will vigorously pursue its counterclaims against SCR-Tech.  In the event SCR-Tech is unsuccessful in the lawsuit and Evonik LLC prevails in its counterclaims, Evonik LLC may be awarded substantial damages against SCR-Tech, and SCR-Tech has not reserved funds for such contingency or legal fees associated with this litigation. In addition, if SCR-Tech is unsuccessful, Evonik LLC will remain a competitor of SCR-Tech.
 
Lawsuit filed by Environmental Energy Services, Inc. Against CoaLogix
 
In August, 2008, CoaLogix was sued in U.S. District Court, District of Connecticut, by Environmental Energy Systems, Inc. (“EES”).  In January, 2008, CoaLogix and EES signed a letter of intent involving CoaLogix’s possible purchase of certain assets of EES.  EES had entered into an agreement with Solucorp to introduce Solucorp’s mercury containment product, IFS-2C, to certain power plants.  In the spring of 2008, CoaLogix decided not to pursue an acquisition of assets of EES.  In May, 2008, CoaLogix and Solucorp entered into a license agreement pursuant to which Solucorp licensed the exclusive, worldwide rights to IFS-2C to CoaLogix.  CoaLogix is marketing IFS-2C under the trademark MetalliFix.
 
In its complaint, EES has alleged that CoaLogix improperly acquired knowledge of IFS-2C through its dealings with EES in connection with the letter of intent, CoaLogix tortiously interfered with EES’s business relationship with Solucorp, CoaLogix engaged in unfair and deceptive trade practices, and Solucorp’s license of IFS-2C to CoaLogix is invalid.  EES’s complaint requests that all of CoaLogix’s revenues relating to IFS-2C (ie. MetalliFix) be awarded to EES, and EES has also requested unspecified damages together with attorney fees, court costs and interest be assessed against CoaLogix and awarded to EES.
 
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CoaLogix filed its answer to EES’ complaint.  CoaLogix denies liability to EES and contends that EES’ allegations are without merit. The matter is in the initial discovery stage.   CoaLogix intends to vigorously defend the lawsuit by EES.
 
No settlement discussions or mediation have yet occurred.
 
Although CoaLogix believes that EES’ allegations are without merit, there is no way to predict the outcome of this lawsuit.  In the event EES is successful, CoaLogix could be liable to EES for substantial damages, interest and EES costs and attorneys’ fees.
 
CoaLogix’s license agreement with Solucorp provides that Solucorp will indemnify CoaLogix for any loss, cost or expense incurred by CoaLogix in connection with Solucorp’s agreement with EES relating to IFS-2C.  CoaLogix expects Solucorp to reimburse CoaLogix for its expenses, including attorneys’ fees relating to the EES case.  In addition, should EES prevail, CoaLogix expects Solucorp to indemnify it for any loss, cost or expense sustained in the lawsuit.  Solucorp is a small company with limited revenues, and there can be no assurance that Solucorp will have the financial ability to indemnify CoaLogix for any loss, cost or expense which may be ultimately incurred by CoaLogix including, but not limited to, reimbursement of attorneys’ fees.
 
ITEM 4.  
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 At our Annual Meeting of Stockholders on November 3, 2008, John A. Moore, George Morgenstern, Richard J. Giacco, Joseph Musanti, Richard S. Rimer, Scott B. Ungerer and Samuel M. Zentman were elected as directors, each for a term of one year to serve until the next annual meeting of stockholders and until their successors have been elected and qualified.  The results of the voting were as follows:
 
Nominee
 
For
   
Withheld
 
                 
John A. Moore
    7,996,396       935,091  
George Morgenstern
    7,982,523       948,964  
Richard J. Giacco
    8,491,596       439,891  
Joseph Musanti
    8,491,596       439,891  
Richard S. Rimer
    8,491,596       439,891  
Scott B. Ungerer
    8,491,596       439,891  
Samuel M. Zentman
    8,491,596       439,891  

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

In addition, at our Annual Meeting, our stockholders approved our Amended 2006 Stock Option Plan for Non-Employee Directors, with 1,958,782 shares voting in favor, 785,419 shares voting against approval, 74,251 shares abstaining and 6,113,035 broker non-votes.
 
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PART II
 
ITEM 5.  
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock is currently traded on the NASDAQ Global Market under the symbol “ACFN”.  Prior to December 17, 2007, our Common Stock traded on OTC Bulletin Board (“OTCBB”).  The following table sets forth, for the periods indicated, the high and low reported sales prices per share of our Common Stock on NASDAQ and the OTCBB (as applicable).
 
   
High
   
Low
 
             
2007:
           
First Quarter
  $ 4.97     $ 3.40  
Second Quarter
    5.28       3.65  
Third Quarter
    5.59       3.80  
Fourth Quarter
  $ 5.99     $ 4.10  
2008:
               
First Quarter
  $ 5.80     $ 4.20  
Second Quarter
    6.56       4.25  
Third Quarter
    5.41       3.48  
Fourth Quarter
  $ 3.50     $ 1.35  
 
As of March 26, 2009, the last reported sales price of our Common Stock on the Nasdaq Global Market was $2.47, there were 93 record holders of our Common Stock and we estimate that there were approximately 1,980 beneficial owners of our Common Stock.
 
We paid no dividends in 2007 or 2008, and do not intend to pay any dividends in 2009.
 
Issuer Purchases of Equity Securities
 
The following table summarizes our purchases of our Common Stock during the year ended December 31, 2008.
 
Period
 
Total Number
of Shares
Purchased
   
Average
Price Paid
per Share
   
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
   
Maximum
Number of 
Shares that
May Yet Be
Purchased
Under the
Program (1)
 
October 1, 2008 – October 31, 2008
    34,000     $ 2.42       34,000       966,000  
November 1, 2008 – November 30, 2008
    29,915     $ 1.51       63,915       936,085  
December 1, 2008 – December 31, 2008
                63,915       936,085  
Total
    63,915     $ 1.99       63,915       936,085  

(1) On October 6, 2008, we announced that our Board of Directors had authorized a share repurchase program of up to 1,000,000 shares of our Common Stock. The share repurchase program will be implemented at management’s discretion from time to time.
 
-40-

 
ITEM 6.  
SELECTED FINANCIAL DATA
 
The selected consolidated statement of operations data for the years ended December 31, 2006, 2007 and 2008 and consolidated balance sheet data as of December 31, 2007 and 2008 has been derived from our audited Consolidated Financial Statements included in this Annual Report.  The selected consolidated statement of operations data for the years ended December 31, 2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006 has been derived from our unaudited consolidated financial statements not included herein.
 
This data should be read in conjunction with our Consolidated Financial Statements and related notes included herein and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
-41-

 
Selected Consolidated Statement of Operations Data:
 
   
For the Years Ended December 31,
 
   
2004
   
2005
   
2006
   
2007
   
2008
 
   
(in thousands, except per share data)
 
Sales
  $ 3,364     $ 4,187     $ 4,117     $ 5,660     $ 20,696  
Cost of sales
    2,491       2,945       2,763       4,248       14,163  
Gross profit
    873       1,242       1,354       1,412       6,533  
Research and development expenses
    30       53       324       415       1,169  
Acquired in-process research and development
                            2,444  
Selling, marketing, general and administrative expenses
    3,374       3,464       4,618       5,278       11,667  
Impairments
                40       112       3,664  
Operating loss
    (2,531 )     (2,275 )     (3,628 )     (4,393 )     (12,411 )
Finance expense, net
    (33 )     (12 )     (30 )     (1,585 )     (3,031 )
Gain on early redemption of Convertible Debentures
                            1,259  
Gain on Comverge IPO
                      16,169        
Gain on sale of shares in Comverge
    705                   23,124       8,861  
Gain (loss) on private placement of equity investments
                      (37 )     7  
Other income, net
    148             330              
Income (loss) from operations before taxes on income
    (1,711 )     (2,287 )     (3,328 )     33,278       (5,315 )
Income tax benefit (expense)
    (27 )     37       (183 )     445       (342 )
Income (loss) from operations of the Company and its consolidated subsidiaries
    (1,738 )     (2,250 )     (3,511 )     33,723       (5,657 )
Share of losses in Comverge
    (1,242 )     (380 )     (210 )            
Share of losses in Paketeria
                (424 )     (1,206 )     (1,560 )
Share of losses in GridSense
                            (926 )
Minority interests, net of tax
    (90 )     (73 )                 248  
Income (loss) from continuing operations
    (3,070 )     (2,703 )     (4,145 )     32,517       (7,895 )
Gain (loss) on sale of discontinued operations and contract settlement (in 2006), net of income taxes
          541       (2,069 )            
Income (loss) from discontinued operations, net of income taxes
    1,898       844       78              
Net income (loss)
  $ (1,172 )   $ (1,318 )   $ (6,136 )   $ 32,517     $ (7,895 )
Basic net income (loss) per share:
                                       
Income (loss) from continuing operations
  $ (0.39 )   $ (0.26 )   $ (0.48 )   $ 3.30     $ (0.69 )
Discontinued operations
    0.24       0.10       (0.23 )            
Net income (loss) per share
  $ (0.15 )   $ (0.16 )   $ (0.71 )   $ 3.30     $ (0.69 )
Weighted average number of shares outstanding
    7,976       8,117       8,689       9,848       11,374  
Diluted net income (loss) per share:
                                       
Income (loss) from continuing operations
  $ (0.39 )   $ (0.26 )   $ (0.48 )   $ 2.80     $ (0.69 )
Discontinued operations
    0.24       0.10       (0.23 )            
Net income (loss) per share
  $ (0.15 )   $ (0.16 )   $ (0.71 )   $ 2.80     $ (0.69 )
Weighted average number of shares outstanding
    7,976       8,117       8,689       12,177       11,374  
 
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Selected Consolidated Balance Sheet Data:
 
   
As of December 31,
 
   
2004
   
2005
   
2006
   
2007
   
2008
 
   
(in thousands)
 
Working capital
  $ 874     $ 1,458     $ 259     $ 13,843     $ 13,838  
Total assets
    17,025       10,173       7,258       96,967       51,055  
Short-term and long-term debt
    1,396       365       788       5,010       3,845  
Minority interests
    1,471                         1,975  
Total shareholders’ equity (deficit)
    2,125       820       (461 )     67,325       34,148  
 
ITEM 7.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RECENT DEVELOPMENTS
 
CoaLogix
 
On February 23, 2009, the U.S. Supreme Court refused to hear an appeal of the earlier decision by the U.S. Circuit Court of Appeals for the D.C. Circuit which vacated CAMR.  With this decision, CAMR is no longer effective.  CAMR was the federal government’s attempt to reduce mercury emissions from coal-fueled power plants, and with the vacature of CAMR there is no current federal regulation directly addressing reduction of mercury emissions from coal-fueled power plants.  The EPA is expected to promulgate new regulations restricting mercury emissions; however, there is no way to predict when such new regulations will be promulgated or effective.  The lack of federal regulations restricting mercury emissions could cause a delay for the demand for MetalliFix by utilities, and could have a negative impact upon CoaLogix’s marketing and sales of MetalliFix.
 
GridSense
 
On February 19, 2009, a majority of the shareholders approved a plan to make GridSense a private company by GridSense transferring its grid monitoring business to a newly formed Australian corporation that will be owned by certain of the significant shareholders of GridSense including Acorn Energy.  Under the plan, the debt of C$750,000 ($616,000) owed by GridSense will be continue to be owed  by GridSense’s  Australian operating subsidiary.  Our percentage ownership of the newly formed Australian corporation once GridSense has gone private is expected to be approximately 31.2%.  The going private transaction is expected to be effective in the second quarter of 2009.
 
DSIT
 
In February, DSIT received a $2.3 million order for its AquaShield™ underwater security system. The system will be used for the protection of a large energy facility at an undisclosed location in Asia. The system will include multiple AquaShield™ Diver Detection sonar (DDS) units, which will be combined and integrated into a comprehensive surveillance system. The system will guard and protect the customer infrastructure from underwater intrusion and sabotage. This order follows $1.7 million order for another AquaShield™ underwater security system in January plus another $0.2 million of other project orders for its other Naval & RT Solutions. The addition of these orders increased DSIT’s backlog from $4.8 million at December 31, 2008 to $9.0 million.
 
Comverge
 
The market value of our 502,500 common shares of Comverge on December 31, 2008 was approximately $2.5 million based on a market share price of $4.90 on that date.  Since December 31, 2008, (through March 26, 2009) we have sold 175,000 of our common shares of Comverge and received proceeds of approximately $1.2 million. The value of our remaining 337,500 shares of Comverge’s common shares as of March 26, 2009, is approximately $2.4 million based on a market share price of $7.19.
 
-43-

 
Corporate
 
During the period from January 1, 2009 to March 26, 2009, we continued to make purchases of our Common Stock and acquired an additional 145,653 shares for approximately $328,000.
 
OVERVIEW AND TREND INFORMATION
 
The following discussion includes statements that are forward-looking in nature.  Whether such statements ultimately prove to be accurate depends upon a variety of factors that may affect our business and operations.  Certain of these factors are discussed in “Item 1.  Business–Risk Factors Which May Affect Future Results.”
 
We operate in three reportable segments: CoaLogix, Naval and RT Solutions and EIS.  We acquired our interest in Coreworx which comprises our EIS segment on August 13, 2008; our results for 2008 include Coreworx’s results only for the period following the date of acquisition. CoaLogix was acquired on November 7, 2007; our results for 2007 include CoaLogix’s results only for the period following the date of acquisition.
 
The following analysis should be read together with the segment information provided in Note 24 to our Consolidated Financial Statements included in this report.
 
CoaLogix/SCR-Tech/MetalliFix
 
CoaLogix sales in 2008 were $10.1 million compared to 2007 sales of $4.5 million (of which we recorded only $0.8 million since we recorded CoaLogix sales only since our acquisition of SCR-Tech on November 7, 2007). The increase in CoaLogix's sales in 2008 compared to 2007 is due to increased penetration in the growing regeneration market. In addition, CoaLogix increased its production capacity in the fourth quarter of 2008 with the completion of a plant expansion. CoaLogix increased its sales from the $1.8 million recorded in the third quarter of 2008 to $4.7 million in the fourth quarter of 2008. The increase in sales was attributable largely to increased production volume facilitated by the plant expansion and to seasonal factors since power plants typically do not schedule service of the catalyst systems during the spring and summer ozone months.
 
CoaLogix gross profit in 2008 was $2.5 million compared to 2007 gross profit of $0.5 million (of which we recorded only $0.1 million since we recorded CoaLogix gross profit only since our acquisition of SCR-Tech on November 7, 2007). In increase in CoaLogix gross profit in 2008 was attributable to the increase in sales combined with increased efficiencies in our production. CoaLogix gross profit in the fourth quarter of 2008 was $1.6 million representing a $1.8 million increase over the negative gross loss of $0.2 million recorded by CoaLogix in the third quarter of 2008. The increase in CoaLogix gross profit was attributable to the significant increase in fourth quarter sales (an increase of $2.9 million) combined with third quarter gross profit being suppressed due to seasonal factors since power plants typically do not schedule service of the catalyst systems during the spring and summer ozone months. CoaLogix also completed some projects during the third quarter with negative margins caused by longer than expected times to complete these projects and by higher costs of the raw materials due to the product mix.
 
In March 2008, EnerTech Capital III, a strategic investor, acquired a 15% interest in CoaLogix.  We currently own 85% of CoaLogix following EnerTech’s investment.
 
In December 2008, CoaLogix completed an expansion to its SCR-Tech regeneration facility in Charlotte, NC. The expansion increased the overall efficiency of the facility and more than doubled its throughput capacity. This expansion will enable SCR-Tech to meet the growing demands of the catalyst and catalyst regeneration markets.

On January 1, 2009, Phase I of the Clean Air Interstate Rule (CAIR) went into effect.  This is designed to permanently cap and achieve substantial reductions in emissions of NOx across 28 Eastern states and the District of Columbia, which we believe will further increase the size of our addressable market.
 
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In 2009, we expect CoaLogix to improve on its 2008 results based upon on its year-end backlog for SCR services of $10.0 million and anticipated new orders, and the expected introduction of MetalliFix™ for mercury removal for coal-fired power generation plants. We expect that CoaLogix will need to expand its production capabilities in 2009 in order to accommodate anticipated growth in demand..
 
DSIT Solutions
 
Sales of our DSIT subsidiary increased by $3.4 million, or 170%, from $4.9 million in 2007 to $8.3 million in 2008 due to a $3.6 million increase in sales for the Naval & RT Solutions segment. The increase resulted from the recording of a full-year’s sales in 2008 on a three-year project for a sonar and acoustic system for the Israeli Ministry of Defense received in the middle of 2007 combined with increased sales from DSIT’s other real-time and embedded solutions projects. Fourth quarter 2008 sales for DSIT were $1.9 million reflecting a $0.1 million decrease from third quarter 2008 sales of $2.0 million.
 
Gross profit in DSIT in 2008 was $2.7 million which reflects an increase of $1.4 million or 106% from $1.3 million in 2007. DSIT’s gross profit of $0.7 million during the fourth quarter of 2008 represented a $0.1 million increase over DSIT’s third quarter 2008 gross profit despite a $0.1 million decrease in sales. The increase in gross profit was attributable to a high margin project commenced  by DSIT in the fourth quarter of 2008.
 
DSIT’s improved its gross margin to 32% in 2008 as compared to  25% in 2007. DSIT’s increased gross margins were due to higher margin projects being performed during the 2008 as compared to 2007.

Naval &RT Solutions
 
During 2006, 2007 and 2008, sales from our Naval & RT solutions in our DSIT subsidiary were $2.8 million, $3.5 million and $7.4 million, respectively, accounting for approximately 68%, 71% and 85% of DSIT’s consolidated sales for 2006, 2007 and 2008, respectively. The balance of DSIT’s sales of $1.3 million, $1.4 million and $1.2 million for the years ending December 31, 2006, 2007 and 2008, respectively, were derived from DSIT’s other IT and consulting activities.
 
Consolidated segment revenues increased by $3.6 million or 102% in 2008 as compared to 2007.  The increase in sales was the result of the acquisition of three significant Naval projects in 2007 and 2008.
 
·  
A NIS 30 million (approximately $7.8 million at December 31, 2008) three-year project for a sonar and underwater acoustic system for the Israeli Ministry of Defense, and
 
·  
An order to supply our AquaShield™ Diver Detection Sonar (DDS) system to protect a European oil terminal, which according to Jane’s International Defence Review is believed to mark the first commercial sale of a diver detection device to protect a critical coastal energy installation.
 
·  
A fourth quarter 2008 sale of AquaShield™ DDS System to an undisclosed EMEA government.
 
Two of these projects began in mid-2007 and our increased sales in 2008 are a direct result of our progress in those projects.  In addition to our increased sales from the abovementioned projects, we also recorded increased sales from our other real-time and embedded solutions projects.
 
Consolidated segment gross profit also increased (from $1.1 million in 2007 to $2.4 million in 2008) as a result of the increased sales from our three significant projects and our other projects. In addition, our gross profit margin increased from 2007 to 2008 from 33% to 35% due to higher gross margins recorded in our Acoustic & Sonar solutions projects as compared to our real-time and embedded solutions projects.
 
-45-

 
We anticipated continued growth in sales in 2009. We expect our sales growth to come primarily from our acoustic and sonar solutions projects with our embedded hardware and software development projects expected to remain relatively stable.  In the first three months of 2009, we have already received $4.0 million of new orders for our AquaShield™ DDS in addition to $0.2 million for other projects. DSIT reached profitability in 2008 and we expect 2009 to be profitable as well.
 
Coreworx
 
Coreworx, which we acquired on August 13, 2008, had sales in 2008 of CDN$4.4 million compared to 2007 sales of CDN$3.2 million.  The increase in Coreworx’s sales in 2008 compared to 2007 was principally due to new license sales to Fluor and BHP Billiton.

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

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

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

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

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

In 2009, we expect Coreworx to improve on its 2008 results based upon its year-end backlog of CDN$1.6 million, anticipation of new sales, the addition of ProExecute and expansion to Latin America.
 
Corporate
 
At the end of 2008, we began an effort to streamline our corporate costs. Towards that end, we have taken several steps in order to conserve our corporate cash including hiring in-house counsel, reducing personnel, consulting and marketing costs. We continue to have significant corporate expenses and will continue to expend in the future, significant amounts of funds on professional fees and other costs in connection with our strategy to seek out and invest in companies that fit our target business model.
 
CRITICAL ACCOUNTING POLICIES
 
The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
 
-46-

 
The following discussion of critical accounting policies represents our attempt to report on those accounting policies, which we believe are critical to our consolidated financial statements and other financial disclosure.  It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report.  In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application.  There are also areas in which the selection of an available alternative policy would not produce a materially different result.
 
We have identified the following as critical accounting policies affecting our Company: principles of consolidation and investments in associated companies; investments in marketable securities, revenue recognition, foreign currency transactions, stock-based compensation and impairments in goodwill and intangible assets.
 
Principles of Consolidation and Investments in Associated Companies
 
Our consolidated financial statements include the accounts of all majority-owned subsidiaries.  All intercompany balances and transactions have been eliminated.  Minority interests in net losses are limited to the extent of their equity capital.  Losses in excess of minority interest equity capital are charged against us in our consolidated statements of operations.
 
Investments in other entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or our ability to exercise significant influence over the operating and financial policies of the investee.  Investments of this nature are recorded at original cost and adjusted periodically to recognize our proportionate share of the investee’s net income or losses after the date of investment.  When net losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses are not recorded.  We resume accounting for the investment under the equity method when the entity subsequently reports net income and our share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended.  Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred. During 2008, wrote down our investments in Paketeria, GridSense and Enertech by a total of approximately $1.2 million.
 
Investments in Marketable Securities
 
We account for our investments in equity securities under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, (FAS 115).  Marketable securities are classified as available-for-sale securities and are accounted for at their fair value.  Unrealized gains and losses on these securities are reported as other comprehensive income (loss), respectively.  Under FAS 115, unrealized holding gains and losses are excluded from earnings and reported net of the related tax effect in other comprehensive income as a separate component of shareholders’ equity.
 
As of December 31, 2008, the 502,500 Comverge shares we held can be considered “available-for-sale” under SFAS 115.  Accordingly, we recorded our investment in Comverge based on Comverge’s share price of $4.90 at December 31, 2008 and recorded a decrease of $125,000 to our investment balance by recording those shares at fair market value to Accumulated Other Comprehensive Income with respect to the recording those shares at fair market value.
 
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Revenue Recognition
 
In the year ended December 31, 2008, we recorded approximately $10.1 million of revenues representing approximately 49% of our consolidated revenues in our CoaLogix subsidiary. Revenues related to SCR catalyst regeneration and cleaning services are recognized when the service is completed for each catalyst module.  Customer acceptance is not required for regeneration and cleaning services in that CoaLogix’s contracts currently provide that services are completed upon receipt of testing by independent third parties confirming compliance with contract requirements.
 
From time to time, CoaLogix purchases spent catalyst modules, regenerates them and subsequently sells them to customers as refurbished units.  In such cases, revenues are not recognized until the units are delivered to the customer.
 
Costs associated with performing SCR catalyst regeneration and cleaning services are expensed as incurred because of the close correlation between the costs incurred, the extent of performance achieved and the revenue recognized.  In the situation where revenue is deferred due to collectibility uncertainties, CoaLogix does not defer costs due to the uncertainties related to payment for such services. In the situation where revenue is deferred due to the non completion of regeneration services, the Company defers the related costs as deferred costs.
 
Revenue from time-and-materials service contracts, maintenance agreements and other services is recognized as services are provided.
 
In the year ended December 31, 2008, we recorded approximately $8.3 million of revenues representing approximately 38% of our consolidated revenues in our DSIT subsidiary.  In 2008, DSIT derived approximately $6.4 million or 76% of DSIT’s revenues from fixed-price type contracts.  Fixed-price type contracts require the accurate estimation of the cost, scope and duration of each engagement.  Revenue and the related costs for these projects are recognized for a particular period, using the percentage-of-completion method as costs (primarily direct labor) are incurred, with revisions to estimates reflected in the period in which changes become known.  If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future revenue and consulting margins may be significantly and negatively affected and losses on existing contracts may need to be recognized.  Any such resulting changes in revenues and reductions in margins or contract losses could be material to our results of operations.
 
At Coreworx, we recognize revenues in accordance with Statement of Position (“SOP”) 97-2, “Software Revenues Recognition,” issued by the American Institute of Certified Public Accountants, SOP 98-9, “Modification of 97-2, Software Recognition with Respect to Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 101 “Revenues Recognition in Financial Statements,” issued by the SEC. Coreworx’s revenues of approximately $2.3 million since its acquisition by us represents approximately 11% of our consolidated revenues for the year ended December 31, 2008.
 
 We record revenue when persuasive evidence of an arrangement exists, there are no significant uncertainties surrounding product acceptance, the fees are fixed or determinable and collection is considered probable.  Our application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. We use the residual method to recognize revenue on delivered elements when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If an undelivered element for the arrangement exists under the license arrangement, revenue related to the undelivered element is deferred based on VSOE of the fair value of the undelivered element.  In accordance with SOP 97-2, as amended, revenues derived from multiple-element software sale arrangements are recognized in earnings based on the relative fair values of the individual elements.
 
Our multiple-element sales arrangements include arrangements where software licenses and the associated post-contract customer support (“PCS”) are sold together.  We have established VSOE of the fair value of the undelivered PCS element based on the contracted price for renewal PCS included in the original multiple element sales arrangement, as substantiated by contractual terms and our PCS renewal experience.  If VSOE of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.
 
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If the revenue recognition criteria above are not satisfied, amounts received from customers are classified as deferred revenue on the balance sheet until such time as the revenue recognition criteria are met.
 
Foreign Currency Transactions
 
The currency of the primary economic environment in which our corporate headquarters and our U.S. subsidiaries operate is the United States dollar (“dollar”).  Accordingly, the Company and all of its U.S. subsidiaries use the dollar as their functional currency.
 
Coreworx’s, functional currency is the Canadian dollar (CDN$) and DSIT’s functional currency is the New Israeli Shekel (“NIS”). In the year ended December 31, 2008, 38% of our revenues (86% and 100% in the years ended December 31, 2007 and 2006, respectively) came from our DSIT subsidiary while 11% of our revenue in the year ended December 31, 2008 came from our Coreworx subsidiary. Their financial statements have been translated using the exchange rates in effect at the balance sheet date.  Statements of operations amounts have been translated using the exchange rate at date of transaction.  All exchange gains and losses denominated in non-functional currencies are reflected in finance expense, net in the consolidated statement of operations when they arise.
 
Stock-based Compensation
 
Effective January 1, 2006, we have accounted for share-based compensation pursuant to SFAS No. 123R, Share-Based Payment (SFAS 123R).  SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award.  As a result of our adoption of SFAS No. 123R, during the years ended December 31, 2008, 2007 and 2006, we recognized expense related to share options issued prior to but unvested as of January 1, 2006 as well as expense related to share options issued subsequent to January 1, 2006.
 
The fair values of all stock options granted were estimated using the Black-Scholes option-pricing model.  The Black-Scholes model requires the input of highly subjective assumptions such as risk-free interest rates, volatility factor of the expected market price of our Common Stock and the weighted-average expected option life.  The expected volatility factor used to value stock options in 2007 was based on the historical volatility of the market price of the Company’s Common Stock over a period equal to the estimated weighted average life of the options.  In December 2007, the SEC issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC’s views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R).  We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110.  For expected option life, we have what SAB 107 defines as “plain-vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options as permitted by SAB 107.  The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent with the expected term of the options. Historically, we have not paid dividends and we do not anticipate paying dividends in the foreseeable future; accordingly, our expected dividend rate is zero.  We recognize this expense on a straight-line basis over the requisite service period.  Due to the numerous assumptions involved in calculating share-based compensation expense, the expense recognized in our consolidated financial statements may differ significantly from the value realized by employees on exercise of the share-based instruments.  In accordance with the methodology prescribed by SFAS 123R, we do not adjust our recognized compensation expense to reflect these differences.  Recognition of share-based compensation expense had, and will likely continue to have, a material affect on our general and administrative line items within our consolidated statements of operations and also may have a material affect on our deferred income taxes and additional paid-in capital line items within our consolidated balance sheets.  Under SFAS No. 123R, we are required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited.  If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and our results of operations could be materially impacted.
 
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For the years ended December 31, 2008, 2007 and 2006, we incurred stock compensation expense of approximately $1.4, $0.9 million and $1.8 million, respectively. The 2008 expense includes stock compensation expense recorded with respect to stock option grants in our CoaLogix and Coreworx subsidiaries of $0.7 million.
 
See Note 20 to the consolidated financial statements for information on the impact of our adoption of SFAS 123R and the assumptions used to calculate the fair value of share-based employee compensation.
 
We account for stock-based compensation issued to non-employees on a fair value basis in accordance with SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling, Goods or Services” and related interpretations.
 
Business combination accounting
 
We have acquired a number of businesses during the last several years, and we may acquire additional businesses in the future.  Business combination accounting, often referred to as purchase accounting, requires us to determine the fair value of all assets acquired, including identifiable intangible assets, and liabilities assumed.  The cost of the acquisition is allocated to the assets acquired and liabilities assumed in amounts equal to the estimated fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill.  This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.  Certain identifiable intangible assets, such as customer lists and covenants not to compete, are amortized based on the pattern in which the economic benefits of the intangible assets are consumed over the intangible asset’s estimated useful life.  The estimated useful life of our amortizable identifiable intangible assets ranges from seven to sixteen years.  Goodwill is not amortized.  Accordingly, the acquisition cost allocation has had, and will continue to have, a significant impact on our current operating results. In 2008, as a result of our acquisition of Coreworx and the subsequent cost allocation, we recorded an immediate expense of approximately $2.4 million associated with acquired in-process research and development. In addition approximately $3.8 million was allocated to amortizable intangible assets and approximately $2.4 million to goodwill.
 
Goodwill
 
As a result of our various acquisitions, we have recorded goodwill. Our goodwill at December 31, 2008 was approximately $6.7 million. Our goodwill is allocated to our segments as follows: CoaLogix – approximately $3.7 million, Naval & RT Solutions – approximately $0.5 million and EIS – approximately $2.5 million. We record goodwill when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.
 
We determine whether the carrying value of recorded goodwill is impaired on an annual basis or more frequently if indicators of potential impairment exist. The first step of the impairment review process compares the fair value of the reporting unit in which the goodwill resides to the carrying value of that reporting unit. The second step measures the amount of impairment loss, if any, by comparing the implied fair value of the reporting unit goodwill with its carrying amount.
 
The determination of whether or not goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting units. Fair values are determined either by using a discounted cash flow methodology or by using a combination of a discounted cash flow methodology. The discounted cash flow methodology is based on projections of the amounts and timing of future revenues and cash flows, assumed discount rates and other assumptions as deemed appropriate. We consider factors such as historical performance, anticipated market conditions, operating expense trends and capital expenditure requirements. Additionally, the discounted cash flows analysis takes into consideration cash expenditures for further product development. Changes in our strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of goodwill.
 
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We perform our annual impairment tests in the fourth quarter. We determined that none of our reporting units were impaired as a result of our annual tests in 2008.
 
RESULTS OF OPERATIONS
 
The following table sets forth selected consolidated statement of operations data as a percentage of our total sales:
 
   
Year ended December 31,
 
   
2004
   
2005
   
2006
   
2007
   
2008
 
Sales
    100 %     100 %     100 %     100 %     100 %
Cost of sales
    74       70       67       75       68  
Gross profit
    26       30       33       25       32  
Research and development expenses
    1       1       8       7       6  
Acquired in-process research and development expenses
                            12  
Selling, general and administrative expenses
    100       83       112       93       56  
Impairments
                1       2       18  
Operating loss
    (75 )     (54 )     (88 )     (78 )     (60 )
Finance expense, net
    (1 )     0       (1 )     (28 )     (15 )
Gain on early redemption of convertible debentures
                            6  
Gain on sale of shares in Comverge
    21                   409       43  
Gain on IPO of Comverge
                      286        
Gain (loss) on private placement of equity investments
                      (1 )      
Other income, net
    4             8              
Income (loss) from operations before taxes on income
    (51 )     (55 )     (81 )     588       (26 )
Income tax benefit (expense)
    (1 )     1       (4 )     8       (2 )
Income (loss) from operations of the Company and its consolidated subsidiaries
    (51 )     (54 )     (85 )     596       (27 )
Share of losses in Paketeria
                (10 )     (21 )     (8 )
Share of losses in GridSense
                            (4 )
Share of losses in Comverge
    (37 )     (9 )     (5 )            
Minority interests, net of tax
    (3 )     (2 )                 1  
Income (loss) from continuing operations
    (91 )     (65 )     (101 )     575       (38 )
Gain (loss) on sale of discontinued operations and contract settlement (in 2006), net of income taxes
          13       (50 )            
Income from discontinued operations, net of income taxes
    56       20       2              
Net income (loss)
    (35 )%     (31 )%     (149 )%     575 %     (38 )%
 
The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2006, 2007 and 2008, including the percentages of revenues attributable to such segments.  (See Note 24 to our consolidated financial statements for the definitions of our reporting segments.).  The column marked “Other” aggregates information relating to miscellaneous operating segments, which may be combined for reporting under applicable accounting principles.
 
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CoaLogix
   
Naval &
RT
Solutions
   
EIS
   
Other
   
Total
 
   
(in thousands)
 
Year ended December 31, 2008:
                             
Revenues from external customers
  $ 10,099     $ 7,032     $ 2,330     $ 1,235     $ 20,696  
Percentage of total revenues from external customers
    49 %     34 %     11 %     6 %     100 %
Gross profit
    2,457       2,383       1,409       284       6,533  
Segment income (loss) before income taxes
    (1,433 )     605       (1,171 )     (86 )     (2,085 )
Year ended December 31, 2007:
                                       
Revenues from external customers
  $ 797     $ 3,472     $     $ 1,391     $ 5,660  
Percentage of total revenues from external customers
    14 %     61 %           25 %     100 %
Gross profit
    116       1,139             157       1,412  
Segment loss before income taxes
    (140 )     (309 )           (799 )     (1,248 )
Year ended December 31, 2006:
                                       
Revenues from external customers
  $     $ 2,797     $     $ 1,320     $ 4,117  
Percentage of total revenues from external customers
          68 %           32 %     100 %
Gross profit
          1,004             350       1,354  
Segment loss before income taxes
          (155 )           (296 )     (451 )
 
2008 COMPARED TO 2007
 
Sales.  Sales increased by $15.0 million or 266% to $20.7 million in 2008 as compared to sales of $5.7 million in 2007.  Of the increase in sales, $9.3 million was attributable to sales from our CoaLogix segment which was included for the full year 2008, but was included in 2007 only for the period from acquisition on November 7, 2007 to year end. In addition, our 2008 sales also include $2.3 million of sales by our recently acquired Coreworx subsidiary whose results since our acquisition (August 13, 2008) are included in our  results for 2008. Sales of our DSIT subsidiary increased by $3.4 million, or 170%, from $4.9 million in 2007 to $8.3 million in 2008 due to a $3.6 million increase in sales for the Naval & RT Solutions segment. The increase resulted from the recording of a full-year’s sales in 2008 on a three-year project for a sonar and acoustic system for the Israeli Ministry of Defense received in the middle of 2007 combined with increased sales from DSIT’s other real-time and embedded solutions projects.
 
Gross profit.  Gross profits in 2008 increased by $5.1 million or 363%, to $6.5 million from $1.4 million in 2007. The increase in gross profits was attributable to the inclusion in 2008 of a full year of CoaLogix and the inclusion of Coreworx from the date of its acquisition. Gross profit at CoaLogix and Coreworx in 2008 was $2.5 and $1.4 million, respectively. Gross profit in DSIT in 2008 was $2.7 million which reflects an increase of $1.4 million or 106% from $1.3 million in 2007. DSIT's gross profit increase was due primarily to its increased sales noted above combined with improved margins.
 
Gross margins also increased to 32% in 2008 compared to 25% in 2007. The increased gross margins were  the result of increased margins for both DSIT and CoaLogix.  DSIT’s increased its gross margin to 32% as compared to 2007’s 25% while CoaLogix increased its gross margins to 24% in 2008 from 14% in 2007 in the period from our acquisition. In addition, 2008 included Coreworx’s gross margins of 63%, which were not included in 2007 results. DSIT’s increased gross margins were due to higher margin projects being performed during the 2008 as compared to 2007. CoaLogix’s increased gross margins were due to higher margin projects in 2008 and efficiencies from higher revenue combined with relatively marginal growth in costs.
 
Acquired in-process research and development expenses (“IPR&D”).  IPR&D represents Coreworx’s research and development projects that had not reached technological feasibility and had no alternative future use when acquired. We have determined that approximately $2.4 million of the purchase price of Coreworx represents purchased in-process technology and expensed this amount immediately upon acquisition.

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Research and development expenses (“R&D”).  R&D expenses in 2008 increased by $0.7 million as compared to 2007. The increase in R&D expense was due to the inclusion in 2008 of Coreworx R&D expenses of approximately $0.9 million. This was partially offset by a decrease in R&D expense at DSIT.
 
Selling, general and administrative expenses (“SG&A”).   SG&A in 2008 increased by $6.4 million as compared to 2007. A portion of the increase was attributable to the inclusion of CoaLogix’s and Coreworx’s SG&A costs of $3.9 and $1.5 million, respectively (in 2007 CoaLogix’s SG&A costs in the period since our acquisition was $0.3 million). DSIT’s SG&A increased slightly from $2.0 million in 2007 to $2.1 million in 2008. Corporate SG&A expense also increased by approximately $1.1 million during 2008 to $4.1 million as compared to 2007. The increase in corporate SG&A is due to increased professional fees and salaries reflecting a higher level of corporate activity due to our M&A activity.
 
Impairments. During 2008, we recorded a loss provision on our loans to Paketeria of $2.5 million due to Paketeria’s increasing operating difficulties and our doubts as to its ability to repay its debt to us. In addition, we recorded a loss provision on the note payable from GridSense of $0.6 million due to doubts of GridSense’s ability to repay the note. We also recorded a loss of $0.5 million resulting from the impairment of our investment in and loans to Local Power.
 
Gain on early redemption of Debenture. In accordance with applicable accounting standards, we recorded a non-cash gain of approximately $1.3 million in connection with the January 2008 redemption of our Convertible Debentures.

Finance expense, net.  The increase in finance expense in the first nine months of 2008 compared with the first nine months of 2007 is due primarily to the non-cash interest expense of $3.1 million recorded with respect to the write-off of the remaining balances of debt origination costs, warrants value and beneficial conversion features in the early redemption of our convertible debentures. This was partially offset by interest income earned on the proceeds of the sale of Comverge shares.

Taxes on income.  In 2008, we recorded a non-cash expense of $0.9 million with respect to the elimination of deferred tax assets from our balance sheet due to the reduction in the value of Comverge shares. This was partially offset by a tax benefit of $0.3 million for overpayment of previous year’s taxes and $0.2 million resulting from our receipt of an exemption of income taxes from the State of Delaware thus reducing our effective income tax rate on domestic earnings to 34%.

Gain on sale of shares in Comverge.  In 2008, we sold 1,261,165 of the 1,763,665 Comverge shares we held at the beginning of 2008. We received proceeds of $15.4 million from the sales and recorded a pre-tax gain of $8.9 million.
 
Share of losses in GridSense. We record our share of income or loss in GridSense with a lag of three months as we are not able to receive timely financial information. We will record our share of GridSense’s fourth quarter results in the first quarter of 2009. In 2008, we recorded a loss of $123,000 representing our approximate 24% share of GridSense’s losses for the first nine months of 2008. In addition, we also recognized additional losses totaling $89,000 with respect to amortization related to acquired technologies, customer relationships and trademarks and the value of expiring warrants. On December 31, 2008, as a result of the steep, continuous decline in the share price of GridSense, we determined that the decline in value was other than temporary, and, accordingly recorded an impairment of $714,000 in the value of GridSense to bring the value of our investment in GridSense to its market value on the Toronto Stock Exchange on that date.

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Share of losses in Paketeria.  In 2008, we recorded a loss of $1.6 million of which approximately $1.0 million represents our approximate 31% share of Paketeria’s losses for the period and approximately $0.1 million representing amortization expense associated with acquired intangibles and approximately $0.5 million representing the impairment of the balance of our investment. As a result of these losses, our investment in Paketeria was reduced to zero and we have ceased recording losses in Paketeria.
 
Net income.  We had a net loss of $7.9 million in 2008 compared with net income of $32.5 million in 2007. Our loss in 2008 was due to impairments and losses of $6.2 million recorded with respect to our investments in Paketeria, GridSense and Local Power combined with $2.4 million of expense recorded with respect to acquired in-process research and development in our acquisition of Coreworx, $2.8 million of net finance expenses, CoaLogix and Coreworx losses of $1.4 million and $0.9 million, respectively, and corporate expenses of $4.1   million. Those losses were partially offset by the gain recognized on our sale of Comverge shares of $8.9 million and a non-cash gain of $1.3 million related to the early redemption of our convertible debentures.
 
2007 COMPARED TO 2006
 
Sales.  Sales increased by $1.54 million or 37% to $5.66 million in 2007 as compared to sales of $4.12 million in 2006.  Of the increase in sales, $0.8 million was attributable to sales from our newly acquired SCR-Tech subsidiary whose sales were included in our consolidated sales during the period from November 7, 2007 to year end.  Without SCR-Tech’s sales, our sales increased by $0.7 million or 18%.  The increase in sales is attributable to certain new projects (primarily a new Naval solutions project) in our RT Solutions segment.
 
Gross profit.  Gross profit increased marginally by $58,000 or 4% to $1.41 million in 2007 as compared to gross profit of $1.35 million in 2006.  If the gross profit from our newly acquired SCR-Tech subsidiary were excluded, our gross profit would have decreased by $58,000 or 4% in 2007 as compared to 2006.  Gross profit margins also decreased from 33% in 2006 to 25% in 2007, including SCR-Tech’s results, and 27% excluding SCR-Tech’s 2007 results.  Gross profit in our RT Solutions segment increased as a result of increased sales.  This increase was offset in part by a moderate decrease in gross margin for the segment (from 36% in 2006 to 33% in 2007) due to the completion in 2006 of a number of relatively high margin projects in the segment.  The large decrease in gross margin (from 27% in 2006 to 11% in 2007) in our Other segment was due to a significant decrease in the number of billable hours in our DSIT subsidiary’s non-RT Solution activities without a commensurate decrease in labor costs.
 
Research and development expenses (“R&D”).  R&D expenses increased in 2007 by $91,000 or 28% as compared to 2006.  In the first half of 2007, our DSIT subsidiary invested approximately $175,000 in developing costs for its OncoPro software.  Such development efforts ceased in the second half of 2007 when DSIT decided to concentrate its development efforts in its AquaShield™ Diver Detection Sonar.
 
Selling, marketing, general and administrative expenses (“SMG&A”).  Our SMG&A costs increased by $0.7 million or 14% to $5.3 million in 2007 as compared to $4.6 million in 2006.  A portion of the increase (approximately $250,000) was attributable to SMG&A costs from SCR-Tech for the period since our acquisition.  We also had significantly increased professional fees due to our increase in corporate activity and Sarbanes-Oxley compliance as well as increased administrative salary costs.  These increased costs offset the decrease of $0.8 million in non-cash stock compensation expense in 2007 as compared to 2006.
 
Finance expense, net.  Finance expense, net, increased in 2007 as compared to 2006 from $30,000 to $1.6 million.  The increase is entirely attributable to the finance costs associated with our private placement of convertible debt in the first and second quarters of 2007.  Of the $1.6 million of interest expense recorded in 2007, $1.3 million was non-cash interest expense related to the amortization of beneficial conversion features, debt origination costs and the value of warrants issued in connection with our 2007 private placement of convertible debt.
 
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Income tax benefit, net.  We had an income tax benefit of $445,000 in 2007 due to the recording of deferred tax assets of $0.9 million as well as a reduction of a $0.7 million tax provision recorded in a previous year with respect to one of our foreign subsidiaries.  Such tax benefits were partially offset by a $1.1 million current tax provision recorded as a result of our current year’s net income.
 
Gain on Comverge IPO.  In April 2007, Comverge completed its initial public offering.  As a result of the Comverge offering, the Company recorded an increase in its investment in Comverge and recorded a non-cash gain of $16.2 million in “Gain on public offering of Comverge”.
 
Gain on sale of shares in Comverge.  In December 2007, as part of Comverge’s follow-on offering, we sold 1,022,356 of its Comverge shares for approximately $28.4 million, net of transaction costs and recorded a pre-tax gain of approximately $23.1 million.
 
Loss on private placement of Paketeria.  In September 2007, Paketeria completed a private placement of shares.  As part of the transaction, the Company converted approximately $1.2 million of debt to equity in Paketeria.  As a result of the Paketeria private placement, the Company recorded a decrease in its investment in Paketeria and recorded a non-cash gain of $37,000 in “Loss on private placement of Paketeria”.
 
Share of losses in Paketeria.  In 2007, we recognized losses of $1.2 million representing our approximate 31% share of Paketeria’s losses for the year and amortization expense associated with acquired non-compete and franchise agreements and the change in value of options.
 
Net income.  We had net income of $32.5 million in 2007 compared with a net loss of $6.1 million in 2006, due to a non-cash gain on the Comverge IPO of $16.2 million plus the gain recognized on our sale of Comverge shares of $23.1 million.  Those gains were partially offset by our corporate expenses of approximately $3.1 million, net finance expenses of approximately $1.6 million, DSIT losses of $1.2 million and our share of losses in Paketeria of $1.2 million.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of December 31, 2008, we had working capital of $13.8 million, including $15.1 million of cash and cash equivalents not including current and non-current restricted deposits of $2.7 million (of which we expect approximately $2.2 million to be released in the second quarter of 2009).  Net cash used in the year ending December 31, 2008, was $4.5 million, of which $3.3 million was used in operating activities. The primary use of cash in operating activities in 2008 was our corporate cash operating expenditures of approximately $4.5 million which was offset by cash generated from operations of $0.6 million each and DSIT and CoaLogix.
 
Cash used in investing activities were primarily due to our acquisition of Coreworx ($2.5 million), $5.0 million of loans made to Paketeria, GridSense, Coreworx (in contemplation of our acquisition) and others, $2.0 million used for the acquisition of license technology by our CoaLogix subsidiary, $1.7 million used for acquisitions of property and equipment, $1.9 million used to fund our investment in GridSense and EnerTech, $1.0 million deposited in an Israeli bank as a guarantee for a project being performed by DSIT and $1.0 million of costs related to our November 2007 acquisition of SCR Tech. These amounts were offset by proceeds of $15.4 million from the sale of Comverge shares during 2008.
 
Net cash of $0.9 million was used in financing activities, primarily from the redemption of our debentures ($3.4 million) and repayment of short and long-term borrowings ($0.4 million) and the purchase of treasury shares ($0.1 million). This use of cash was partially offset by the $2.2 million investment made by EnerTech in CoaLogix and the $0.8 million of proceeds from the exercise of warrants and employee stock options.
 
As of March 1, 2009, the Company’s corporate operations (not including cash at any of our subsidiaries) had a total of approximately $12.0 million in cash and cash equivalents (not including the $2.7 million deposited in an account as a security for a guarantee for DSIT), reflecting a $0.6 million decrease from the balance as of December 31, 2008.
 
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We believe that the cash available and the cash potentially available from any of our assets will provide more than sufficient liquidity to finance Acorn’s activities for the foreseeable future and for the next 12 months in particular.

 At December 31, 2008, DSIT had approximately $526,000 in Israeli credit lines available to DSIT by an Israeli bank, $191,000 of which was then being used, net of secured deposits.  DSIT’s credit lines are available to it until March 2010, are denominated in NIS and bear interest at a weighted average rate of the Israeli prime rate per annum plus 3.0% (at December 31, 2007, plus 1.5%).  The Israeli prime rate fluctuates and as of December 31, 2008 was 4.0% (December 31, 2007, 0%).  The line-of-credit is subject to maintaining certain financial covenants. At December 31, 2008, DSIT was in compliance with its financial covenants. The Company has a floating lien and provided guarantees with respect to DSIT’s outstanding lines of credit.  In addition, Acorn has agreed to be supportive of DSIT’s liquidity requirements over the next 12 months.
 
At the beginning of March 2009, DSIT was utilizing approximately $191 of its $526 line-of-credit.  We believe that DSIT will have sufficient liquidity to finance its activities from cash flow from its own operations over the next 12 months.  This is based on continued utilization of its lines of credit and expected continued improvement of operating results stemming from anticipated growth in sales. DSIT is continuing to search for additional sources of financing to support its growth.
 
In October 2008, CoaLogix signed an agreement with Square 1 Bank for a $500,000 term loan and a $2 million formula based line-of-credit.  The term loan is for a period of 36 months and bears interest at prime plus 1.5%. The line-of-credit is for a period of one year and bears interest at prime plus 0.75%. Both the term loan and the line-of-credit are to finance CoaLogix’s working capital and to finance its growth and  are subject to certain financial covenants. We believe that CoaLogix will have sufficient liquidity to finance its operating activities from cash flow from its own operations and its bank financing over the next 12 months.  CoaLogix anticipates that it will need to increase production capacity by beginning construction of a new plant in 2009 in order to satisfy expected increased orders from customers. CoaLogix does not have the financial resources to finance the anticipated cost to build a new plant. CoaLogix is currently exploring options to obtain funding for the construction of the new plant.  

We expect that Coreworx will require additional working capital support in order to finance its working capital needs in 2009. This support may be in the form of a bank line, new investment by others, additional investment by Acorn, or a combination of the above. There is no assurance that such support will be available from such sources in sufficient amounts, in a timely manner and on acceptable terms.  The availability and amount of any additional investment from us in Coreworx may be limited by the working capital needs of our corporate activities and other operating companies.

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Contractual Obligations and Commitments
 
The table below provides information concerning obligations under certain categories of our contractual obligations as of December 31, 2008.
 
CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS
 
   
Years Ending December 31,
(in thousands)
 
   
Total
   
2009
      2010-2011       2012-2013    
2014 and
thereafter
 
Notes payable
  $ 3,400     $ 3,400     $     $     $  
EnerTech (1)
    3,850       3,850                    
Operating leases
    3,401       1,212       1,792       397        
Potential severance obligations to Israeli employees (2)
    2,651                         2,651  
Total contractual cash obligations
  $ 13,302     $ 8,462     $ 1,792     $ 397     $ 2,651  
 
We expect to finance these contractual commitments in 2008 from cash currently on hand and cash generated from operations.
 
(1) In August 2007, we committed to invest up to $5 million over a ten-year period in EnerTech Capital Partners III L.P. (“EnerTech III”), a proposed $250 million venture capital fund targeting early and expansion stage energy and clean energy technology companies that can enhance the profits of the producers and consumers of energy.
 
The primary objective of EnerTech III is to provide superior venture returns.  In so doing, EnerTech III may also provide investors with venture portfolio diversification, a hedge against rising commodity fuel prices and access to emerging companies that reduce the global dependence on hydrocarbons.
 
Our obligation under this commitment is presented as a current liability, though it is uncertain as to when actual payments may be made.  To date, we have received and funded a capital call of $1,150,000 to EnerTech III.
 
(2) Under Israeli law and labor agreements, DSIT is required to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances.  The obligation for severance pay benefits, as determined by the Israeli Severance Pay Law, is based upon length of service and last salary.  These obligations are substantially covered by regular deposits with recognized severance pay and pension funds and by the purchase of insurance policies.  As of December 31, 2008, we accrued a total of $2.7 million for potential severance obligations of which approximately $1.7 million was funded with cash to insurance companies.
 
Certain Information Concerning Off-Balance Sheet Arrangements.
 
Our DSIT subsidiary has provided various performance, advance and tender guarantees as required in the normal course of its operations.  As at December 31, 2008, such guarantees totaled approximately $3.9 million and were due to expire through 2010.  As security for a portion of these guarantees, Acorn has deposited with an Israeli bank approximately $2.7 million which is shown as restricted cash on our Consolidated Balance Sheets.  The Company expects a majority of the restricted cash to be released in the second quarter of 2009.
 
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Impact of Inflation and Currency Fluctuations
 
In the normal course of business, we are exposed to fluctuations in interest rates on lines-of-credit incurred to finance our operations in Israel, whose utilization at December 31, 2008 stood at approximately $191,000. Our non-US dollar monetary assets and liabilities (net assets of approximately $0.3 million at December 31, 2008) in Israel are exposed to fluctuations in exchange rates. Furthermore, $1.8 million and $0.7 million of our backlog of projects are contracts and orders that are denominated in NIS and linked to an Israeli Ministry of Defense Index, and denominated in NIS, respectively.
 
Historically, a majority of DSIT’s sales have been denominated in dollars or denominated in NIS linked to the dollar.  Such sales transactions are negotiated in dollars; however, for the convenience of the customer they are settled in NIS.  These transaction amounts are linked to the dollar between the date the transactions are entered into until the date they are effected and billed.  From the time these transactions are effected and billed through the date of settlement, amounts are primarily unlinked.  In 2009, we expect a significant portion of DSIT’s sales to be settled in dollars. A significant majority of DSIT’s expenses in Israel are in NIS, while a portion is in dollars or dollar-linked NIS.
 
The dollar cost of our operations in Israel may be adversely affected in the future by a revaluation of the NIS in relation to the dollar.  In 2008 the appreciation of the NIS against the dollar was 1.1% and in 2007 the appreciation of the NIS against the dollar was 9.0%.  Inflation in Israel was 3.8% in 2008 and 3.3% during 2007.  During the first two months of 2009, the dollar appreciated by 9.5% against the NIS and inflation during this period was -0.6%. In the first quarter of 2009, DSIT began to attempt to manage its foreign currency exposures by purchasing forward contracts on certain of its expected expenses.
 
As of December 31, 2008, virtually all of DSIT’s monetary assets and liabilities that were not denominated in dollars or dollar-linked NIS were denominated in NIS.  In the event that in the future we have material net monetary assets or liabilities that are not denominated in dollar-linked NIS, such net assets or liabilities would be subject to the risk of currency fluctuations.
 
In addition, our non-US dollar assets and liabilities (net liability of approximately $0.3 million at December 31, 2008) in Canada at our Coreworx subsidiary are also exposed to fluctuations in exchange rates. The dollar cost of our operations in Canada may also be adversely affected in the future by a revaluation of the Canadian dollar in relation to the US dollar.  In 2008 the appreciation of the US dollar against the Canadian dollar was 23.3%.  During the first two months of 2009, the US dollar appreciated by 4.5% against the Canadian dollar.
 
As of December 31, 2008, virtually all of Coreworx’s assets and liabilities that were not denominated in dollars were denominated in Canadian dollars.  In the event that in the future we have material net assets or liabilities that are not denominated in US dollars, such net assets or liabilities would be subject to the risk of currency fluctuations.
 
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SUMMARY QUARTERLY FINANCIAL DATA (Unaudited)
 
The following table sets forth certain of our unaudited quarterly consolidated financial information for the years ended December 31, 2007 and 2008.  This information should be read in conjunction with our Consolidated Financial Statements and the notes thereto.
 
   
2007
   
2008
 
             
   
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
   
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
 
   
(in thousands, except per share amounts)
 
Sales
  $ 1,039     $ 681     $ 1,595     $ 2,345     $ 4,295     $ 3,607     $ 4,628     $ 8,166  
Cost of sales
    754       625       1,122       1,747       2,897       2,575       3,731       4,960  
Gross profit
    285       56       473       598       1,398       1,032       897       3,206  
Research and development expenses
    130       103       77       105       51       57       402       659  
Acquired in-process research and development*