UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2006

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

LIME ENERGY CO.

(Exact name of Registrant as specified in its charter)

Delaware		36-4197337
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)
1280 Landmeier Road, Elk Grove Village, IL		60007-2410
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number (847) 437-1666

Securities registered under Section 12(b) of the Exchange Act:

Title of each class		Name of each exchange on which registered
Common Stock $0.0001 par value		Over-the-counter market

Securities registered under Section 12(g) of the Exchange Act:

None

Indicate by checkmark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

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. o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large Accelerated Filer o      Accelerated Filer o      Non-Accelerated Filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the registrant’s common stock held by non-affiliates was $30,179,191 based on the reported last sale price of common stock on June 30, 2006, which was the last business day of the registrant’s most recently completed second fiscal quarter. For purposes of this computation, all executive officers, directors and 10% stockholders were deemed affiliates. Such a determination should not be construed as an admission that such executive officers, directors or 10% stockholders are affiliates.

As of March 28, 2007, there were 50,566,468 shares of common stock, $0.0001 par value, of the Company issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION		10-K PART
Portions of the Registrant’s notice of annual meeting of shareowners and proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of December 31, 2006 are incorporated by reference into Part II, Item 5 and Part III of this Report.		II, ITEM 5 III

 

 

TABLE OF CONTENTS

PART I					1
Item 1.		Description of Business			1
Item 1A.		Risk Factors			6
Item 1B.		Unresolved Staff Comments			10
Item 2.		Properties			10
Item 3.		Legal Proceedings			11
Item 4.		Submission of Matters to a Vote of Security Holders			11
PART II					12
Item 5.		Market for Common Equity and Related Stockholder Matters			12
Item 6.		Selected Financial Data			15
Item 7.		Management's Discussion and Analysis or Plan of Operation			16
Item 8.		Financial Statements and Supplemental Data			31
Item 9		Change in and Disagreements with Accountants on Accounting and Financial Disclosure			31
Item 9A.		Controls and Procedures			32
Item 9B.		Other Information			32
PART III					33
Item 10.		Directors, Executive Officers of the Registrant and Corporate Governance			33
Item 11.		Executive Compensation			33
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			33
Item 13.		Certain Relationships and Related Transactions, and Director Independence			33
Item 14.		Principal Accountant Fees and Services			33
PART IV					34
Item 15.		Exhibits and Financial Statement Schedules			34
SIGNATURES					39
Specimen Stock Certificate
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

PART I

Item 1. Description of Business

          Included in this report, exhibits and associated documents are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as historical information. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurances that such expectations reflected in such forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “project,” “plan,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, such statements involve risks and uncertainties and no assurance can be given that the actual results will be consistent with these forward-looking statements.

          Unless the context otherwise requires, “Lime Energy,” the “Company,” “we,” “our,” “us” and similar expressions refers to Lime Energy Co. and its subsidiaries.

Overview/History

          We are a developer, manufacturer and integrator of energy saving technologies and provide energy engineering services. Our energy saving products include the eMAC system, which provides intelligent control and continuous monitoring of HVAC and lighting equipment via wireless communication technology to reduce energy usage and improve system reliability. The eMAC technology has been installed in applications in commercial buildings, factories and office structures.

          From June 2001 through March 2006 we also provided, through our subsidiary, Great Lakes Controlled Energy Corporation, a Delaware Corporation (“Great Lakes”), integrated building and environmental control solutions for commercial and industrial facilities.

          Until June 1, 2003, we also manufactured custom electrical switchgear through our subsidiary Switchboard Apparatus Inc. (“Switchboard”)

          Until recently we also marketed the EnergySaver, a product that reduces energy usage in ballasted lighting fixtures with minimal lighting level reduction. In conjunction with the EnergySaver we also marketed the GlobalCommander, a system that allows us to link multiple EnergySaver units together and to provide remote communications, measurement and verification of energy savings. The EnergySaver achieves energy savings by taking advantage of certain characteristics of passive ballasts used with fluorescent and high intensity discharge (“HID”) fixtures, which up until recently were the predominate ballasts used for these types of fixtures. We recently decided to discontinue the active marketing of the EnergySaver because lighting manufacturers have recently begun to discontinue the sale of certain passive ballasts and we believe will discontinue the sale of all passive ballasts in the near future. While there is still a large base of installed passive ballasts in the United States, we believe that most of these passive ballasts will be replaced over the next 5 to 7 years with active or electronic ballasts, which are not compatible with the EnergySaver. Our management decided that rather than continuing to sell a technology to customers that would have a limited useful life, going forward we would concentrate our sales and marketing efforts on other forms of energy technology and services.

          On December 5, 1997, we were initially formed as Electric City LLC, a Delaware limited liability company. On June 5, 1998, we changed from a limited liability company into a corporation by merging Electric City LLC into Electric City Corp., a Delaware corporation.

          On June 10, 1998, Electric City issued shares of our common stock with a fair market value of $1,200,272, representing approximately six (6%) percent of Electric City’s then issued and outstanding common stock, to the approximately 330 shareholders of Pice Products Corporation (“Pice”), an inactive, unaffiliated company with minimal assets, pursuant to a merger agreement under which Pice was merged with and into Electric City. The purpose of the merger was to substantially increase the number of our shareholders to facilitate the establishment of a public trading market for our common stock. Trading in our common stock commenced on August 14, 1998 through the OTC Bulletin Board under the trading symbol “ECCC”.

          In May 1999, we purchased most of the assets of Marino Electric, Inc., an entity engaged in the business of designing and manufacturing custom electrical switchgear and distribution panels.

          On August 31, 2000 we acquired Switchboard Apparatus.

          On June 7, 2001 we acquired Great Lakes.

          On June 3, 2003, we entered into an asset purchase agreement with Hoppensteadt Acquisition Corp., whereby Hoppensteadt acquired all of the assets, except for certain receivables and cash, and assumed all of the liabilities, except for bank debt, of Switchboard Apparatus, as of May 31, 2003.

          On May 3, 2005, we acquired Maximum Performance Group, Inc. (“MPG”). MPG is a technology based provider of energy and asset management products and services. MPG manufactures and markets its eMAC line of controllers for HVAC and lighting applications. The eMAC line of controllers provide intelligent control and continuous monitoring of HVAC and lighting equipment via wireless communication technology to reduce energy usage and improve system reliability. MPG has offices in New York City and San Diego, California.

          On April 3, 2006, we sold all of the capital stock of Great Lakes Controlled Energy Corporation to its former owners, effective as of March 31, 2006.

          On June 29, 2006, we acquired Parke P.A.N.D.A. Corporation (“Parke”). Parke (now named Parke Industries, LLC) is an energy services provider specializing in the design, engineering and installation of energy efficient lighting upgrades for commercial and industrial users. Parke has 30 employees and is headquartered in Glendora, California, with offices in Danville and Carmel, California.

          On September 13, 2006 we changed our name to Lime Energy Co. after merging with a wholly owned subsidiary which was set up solely for the purpose of effecting a name change. On September 22, 2006 our stock began trading on the OTC Bulletin Board under the trading symbol “LMEC,”

          On September 26, 2006, we acquired Kapadia Consulting, Inc. (now named Kapadia Energy Services, Inc.), effective September 27, 2006. Kapadia is an engineering firm that specializes in energy management consulting and energy efficient lighting upgrades for commercial and industrial users. Kapadia has seven employees, is headquartered in Peekskill, New York, and has an office in Ventura, California.

Products And Services

          The Company currently markets products or provides services under two distinct business segments. The energy technology segment includes the development and sale of the eMAC and uMAC product lines. Commencing June 30, 2006, we formed an energy services business segment, which is served by our subsidiaries, Parke Industries, LLC and Kapadia Energy Services, Inc. Parke specializes in the design, engineering and installation of energy efficient lighting upgrades for commercial and industrial users and Kapadia is an engineering consulting firm that specializes in energy efficiency and energy management. See Note 28 to the consolidated financial statements for additional information regarding the segments of our business.

eMAC & uMAC

          The eMAC system is comprised of a heating, ventilating and air conditioning (“HVAC”) controller with wireless communication capabilities and a central, server based, Internet accessible software that monitors and controls the operation of the connected HVAC units. The eMAC system is designed for use in commercial and industrial applications with packaged (primarily rooftop) HVAC equipment of 2 to 40 tons (1 ton = 12,000 Btu/hr cooling capacity) and up to 500,000 Btu/hr of heating capacity.

          The eMAC controller is contained in a small box that is mounted on the exterior of a customer’s HVAC unit. The controller is wired into the HVAC equipment and monitors up to 126 points of the equipment’s operation. In addition, each eMAC contains a Pentech Energy Recovery Controller (“PERC”), a patented third generation microprocessor-based technology.

          PERC was developed by Pentech Solutions, a predecessor company to MPG, and is designed to dynamically match an HVAC system’s output to any given load condition, thereby improving the operating efficiency of the equipment. Since most HVAC systems are designed to maintain comfortable environmental conditions on both the hottest and coldest days likely to be experienced, there exists substantial excess system capacity on most days of the year. Due to this excess capacity, the system quickly satisfies a thermostat’s call for heating or cooling, and in doing so overshoots the thermostat set point and leaves Btu’s of heat or cooling in the heat exchanger, cooling coils and air ducts. The PERC controller acts to correct this by periodically turning off the air conditioner’s compressor and condenser fan while continuing to run the evaporator fan, thereby continuing to deliver cooling to the conditioned space utilizing the energy stored in the cooling coils, heat exchanger and air ducts. In heating applications, PERC periodically closes the gas valve while continuing to operate the indoor air fan, delivering heated air into the space utilizing the heat stored in the heat exchanger and air ducts. At the same time, the PERC controller is monitoring the rate of temperature change in the conditioned space in order to avoid overshooting the desired temperature setting. The PERC technology typically will result in energy savings of 15% to 20% for our end user customers.

          The wireless communication capabilities of the eMAC allow us to monitor and remotely manage the operation of a customer’s HVAC equipment. A customer can log on to our eMAC web site and obtain information regarding the operation of its HVAC equipment and change equipment operating parameters, such as hours of operation and temperature. The eMAC will also send alarms to our central server when any of the up to 126 monitored points of operation fall outside predetermined operating ranges. This often permits us to react to a potential equipment problem before the occupants of the space are aware of an equipment malfunction. We charge our customers for this ability to communicate and remotely monitor and mange their equipment, though we often include an initial monitoring period with the purchase of the eMAC so that our customers can become familiar with the benefits of this service.

          The uMAC is a version of the eMAC which has been simplified to remotely control the operation of a facility’s lights via wireless communications. Using the uMAC a customer can remotely, via the Internet, turn lights on and off and change the daily schedule for the operation of a facility’s lighting.

Energy Services

          Through our wholly owned subsidiary, Parke Industries, LLC, which we acquired at the end of June 2006, we market, design, engineer and install energy efficient lighting upgrades for commercial and industrial users. Parke seeks to determine the best lighting solutions for its customer, taking into consideration factors such as lighting requirements, building environmental conditions, energy costs, available utility and/or tax incentives, and installation, operating and maintenance costs of various lighting alternatives, to select what it believes is the best solution for its customer. It will then remove the existing lighting system and replace it with the new lighting system using its own installation crews. In most situations, Parke’s customer will realize paybacks of 12 to 24 months on their lighting system upgrade and very often also improve the overall quality of lighting in their facilities.

          Our other recently acquired subsidiary, Kapadia Energy Services, Inc., provides energy engineering services to assist customers in improving their energy efficiency and to better manage their energy costs. Some of the services that Kapadia offers its customers include building energy audits to determine ways to improve energy efficiency, HVAC and boiler system optimization, energy management planning, engineering design review with a view to optimizing energy efficiency and energy rebates, energy project management, and lighting engineering and design. Kapadia will also provide turnkey lighting upgrades in which it will purchase all of the materials and labor for energy efficient lighting upgrades, much like Parke does, except that it uses subcontractors to perform the installation of the new lighting fixtures.

Marketing, Sales and Distribution

          The majority of our sales are derived through the efforts of our internal sales force. We currently have 23 employees whose primary responsibility is sales working out of nine sales offices, some of which are home offices. Our sales people have been trained to sell all of our products and services, regardless of the subsidiary that employs them or the office that they work out of. Our sales leads are developed from of a combination of cold calls, referrals and repeat customers.

Customers

          During 2006, three customers, Kohl’s Department Stores, Modell’s Sporting Goods and Automated Building Controls accounted for 14%, 13% and 13% of our consolidated billings, respectively. During 2005, two customers, Kohl’s Department Stores and Duane Read Inc., accounted for approximately 37% and 11% of our consolidated billings, respectively and during 2004, sales to five customers Public Energy Solutions, Electric City of New Jersey, Electric City of Pennsylvania, Control Ambiento Y Mantenimiento and the New York Power Authority accounted for 39%, 14%, 12%, 11% and 10% of our consolidated revenue, respectively.

Competition

          While there are other HVAC controllers that provide energy saving benefits similar to the eMAC, we are not aware of any competing product available at a comparable cost to the eMAC that provides the communications, remote monitoring and diagnostic features of the eMAC. Large, national control companies provide systems that can do much of what the eMAC can do, but the installed cost of such systems make them impractical for smaller applications, which is the market we are targeting with the eMAC.

          There are many competitors in the energy services business, including small regional lighting retrofit companies, electrical contractors and large national energy service companies. The large national energy service companies tend to market to large national companies and compete for large energy retrofit projects in which lighting is one piece of the total project. Parke focuses on providing lighting retrofit services to the under-served market for small to mid-sized commercial and industrial users (which we believe is under-served) and to niche markets, where installations are more difficult. In these markets Parke sells its services based on the financial return to its customers and differentiates itself through its experience and reputation for quality work and superior service.

          Energy engineering services such as those provided by Kapadia are also generally widely available. The certifications held by Kapadia’s staff of engineers include: Professional Engineer (“PE”); Certified Energy Engineer (“CEM”); and Certified Lighting Efficiency Professional (“CLEP”). To obtain these certifications an individual must have a high level of experience and demonstrated knowledge of engineering and energy engineering concepts. Kapadia differentiates itself from its competitors through its reputation for quality work and its 26 years of experience as an energy engineering firm. A significant amount of Kapadia’s business comes from repeat customers or referrals.

Manufacturing

          The eMAC is manufactured for us by a contract manufacturer in southern California. We believe that this contract manufacturer has sufficient capacity to handle our anticipated growth in eMAC sales for the foreseeable future. In addition, we believe that there are many contract manufacturers across the country that could manufacture the eMAC for us if for some reason our current contract manufacturer could not meet our needs.

          The primary components of the eMAC are sourced from multiple suppliers. We periodically engage in discussions with additional parts suppliers, seeking to ensure lowest cost pricing and reliability of supply.

          Our lighting products are purchased from third party suppliers and manufacturers. These products are generally widely available and are selected based on a combination of price, performance, features and availability.

          During 2006 approximately 12% of our consolidated purchases were made from one supplier. During 2005, approximately 20% of our consolidated material purchases were made from four suppliers. Purchases from any one supplier will vary year-to-year depending on sales and inventory levels. None of our largest suppliers sell the Company proprietary products that we could not purchase from other vendors.

Compliance With Environmental Laws

          Neither the Company’s production, nor sale of its products, in any material way generate activities or materials that require compliance with federal, state or local environmental laws. Our Energy Services businesses use licensed disposal firms to dispose of old lamps, lighting ballasts or other products that may contain heavy metals or other potential environmental hazards.

Research and Development

          The Company, through the day-to-day use of the eMAC and its components and through various testing sites around the country, develops modifications and improvements to our products. Total research and development costs charged to operations were approximately $535,000, $395,000 and $150,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Intellectual Property

          As of December 31, 2006, we had nine issued patents and three patents pending before the U.S. Patent and Trademark Office, as well as foreign patent offices on various aspects of the EnergySaver, eMAC and GlobalCommander technologies. In addition we have registered four trademarks and have one additional trademark registration pending.

Employees

          As of March 15, 2007, we had 74 full time employees and 3 part time employees, of which 13 were management and corporate staff, 9 were engineers, 24 were engaged in sales and marketing and 31 were engaged in customer support and field service.

Item 1A. Risk Factors

          The following disclosure of risk factors include all material risks known to us at this time. Additional risks we are not presently aware of or that we currently believe are immaterial may prove to impair our business and financial performance. Our business could be harmed by any of these risks, whether stated or unstated. We operate in a continually changing business environment and may as a result enter into new businesses and product lines. We cannot predict new risk factors that may arise in the future, and we cannot assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, you should not rely on forward-looking statements as a prediction of actual results. In addition, our estimates of future operating results are based on our current complement of businesses, which is subject to change as we continue to assess and refine our business strategy. If any of the following risks actually occur, our business, results of operations, and financial condition could be adversely affected in a material manner.

Risks Related to Our Business

We have incurred significant operating losses since inception and may not achieve or sustain profitability in the future.

          We have experienced operating losses and negative cash flow from operations since our inception in December 1997 and we currently have an accumulated deficit. Our ability to continue as a going concern is ultimately dependent on our ability to increase sales to a level that will allow us to operate profitably and sustain positive operating cash flows. Although we are continuing our efforts to improve profitability through expansion of our business in both current and new markets, we must overcome marketing hurdles, including gaining market acceptance, in order to sell large quantities of our products and services. In addition, we may be required to reduce the prices of our products in order to increase sales. If we reduce prices, we may not be able to reduce costs sufficiently to achieve acceptable profit margins. As we strive to grow our business, we have spent and expect to continue to spend significant funds (1) for general corporate purposes, including working capital, marketing, recruiting and hiring additional personnel; and (2) for research and development. To the extent that our revenues do not increase as quickly as these costs

and expenditures, our results of operations and liquidity will be materially adversely affected. If we experience slower than anticipated revenue growth or if our operating expenses exceed our expectations, we may not achieve profitability. Even if we achieve profitability in the future, we may not be able to sustain it.

Failure to effectively market our energy management products and services could impair our ability to sell significant quantities of these products and services.

          One of the challenges we face in commercializing our energy management products and services is demonstrating the advantages of our products and services over competitive products and services. To do this, we will need to further develop our marketing and sales force. If we do not successfully develop and expand our internal sales force, we may not be able to generate significant revenues.

If our products and services do not achieve or sustain market acceptance, our ability to compete will be adversely affected.

          To date, we have not sold our eMAC product line in very large quantities and a sufficient market may not develop for it. Significant marketing will be required in order to establish a sufficient market for these products. The technology underlying our products may not become a preferred technology to address the energy management needs of our customers and potential customers. Failure to successfully develop, manufacture and commercialize products on a timely and cost-effective basis will have a material adverse effect on our ability to compete in the energy management market or survive as a business.

Failure to replace a significant customer could materially and adversely affect our results of operations and financial condition.

          We have historically derived a significant portion of our annual revenue from a limited number of customers. Seldom has any one customer represented 10% or more of our revenues for more than one year in a row. This requires that we continually replace major customers, whose needs we have satisfied, with one or more new customers. The failure to replace a major customer could have a significant negative effect on our results of operations and financial condition. We believe that as a result of the acquisition of Parke and Kapadia during 2006 we will experience an increased diversification of our customer base, reducing the amount of our revenue associated with several large customers, but this remains to be seen.

A decrease in electric retail rates could lessen demand for our products.

          Our products and services have the greatest sales and profit potential in areas where commercial electric rates are relatively high. However, retail electric rates for commercial establishments in the United States may not remain at their current levels. Due to a potential overbuilding of power generating stations in certain regions of the United States, wholesale power prices may decrease in the future. Because the price of commercial retail electric power is largely attributed to the wholesale cost of power, it is reasonable to expect that commercial retail rates may decrease as well. In addition, much of the wholesale cost of power is directly related to the price of certain fuels, such as natural gas, oil and coal. If the prices of those fuels decrease, the prices of the wholesale cost of power may also decrease. This could result in lower electric retail rates and reduced demand for our energy saving products and services.

If we are not able to protect our intellectual property rights against infringement, or if others obtain intellectual property rights relating to energy management technology, we could lose our competitive advantage in the energy management market.

          We regard our intellectual property rights, such as patents, licenses of patents, trademarks, copyrights and trade secrets, as somewhat important to our success. Although we have entered into confidentiality and rights to inventions agreements with our employees and consultants, the steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our intellectual property rights or we may not be able to detect unauthorized use and take appropriate steps to enforce our rights. Failure to take appropriate protective steps could materially adversely affect any competitive advantage we may have in the energy management market. In addition, patents held by third parties may limit our ability to manufacture, sell or otherwise commercialize products and could result in the assertion of claims of patent infringement against us. If that were to happen, we could try to modify our products to be non-infringing, but we might not be successful or such modifications might not avoid infringing on the intellectual property rights of third parties.

          Claims of patent infringement against us, regardless of merit, could result in the expenditure of significant financial and managerial resources by us. We could be forced to seek to enter into license agreements with third parties to resolve claims of infringement by our products of the intellectual property rights of third parties. Such licenses may not be available on acceptable terms or at all. The failure to obtain such licenses on acceptable terms could have a negative effect on our business.

If we are unable to achieve or manage our growth, it will adversely affect our business, the quality of our products and services, and our ability to attract and retain key personnel.

          If we succeed in growing our sales as we need to do, we will be subject to the risks inherent in the expansion and growth of a business enterprise. Growth in our business will place a strain on our operational and administrative resources and increase the level of responsibility for our existing and new management personnel. To manage our growth effectively, we will need to:

	•		further develop and improve our operating, information, accounting, financial and other internal systems and controls on a timely basis;
	•		improve our business development, marketing and sales capabilities; and
	•		expand, train, motivate and manage our employee base.

          Our systems currently in place may not be adequate if we grow and may need to be modified and enhanced. The skills of management currently in place may not be adequate if we experience significant growth.

If our management fails to properly identify companies to acquire and to effectively negotiate the terms of these acquisition transactions, our growth may be impaired.

          As part of our growth strategy, we intend to seek to acquire companies with complementary technologies, products and/or services. Our management, including our board of directors, will have discretion in identifying and selecting companies to be acquired by us and in structuring and negotiating these acquisitions. In general, our common stockholders may not have the opportunity to approve these acquisitions. In addition, in making acquisition decisions, we will rely, in part, on financial projections developed by our management and the management of potential target companies. These projections will be based on assumptions and subjective judgments. The actual operating results of any acquired company or the combination of us and an acquired company may fall significantly short of projections.

          We may be unable to acquire companies that we identify as targets for various reasons, including:

	•		our inability to interest such companies in a proposed transaction;
	•		our inability to agree on the terms of an acquisition;
	•		incompatibility between our management and management of a target company; and
	•		our inability to obtain the approval of the holders of our common stock, if required.

          If we cannot consummate acquisitions on a timely basis or agree on terms at all, or if we cannot acquire companies with complementary technologies, products and/or services on terms acceptable to us, our future growth may be impaired.

Our growth may be impaired and our current business may suffer if we do not successfully address risks associated with acquisitions.

          Since January 1, 2000, we have acquired five companies; Switchboard Apparatus Inc., Great Lakes Controlled Energy Corporation, Maximum Performance Group, Inc., Parke P.A.N.D.A. Corporation and Kapadia Consulting, Inc., two of which (Switchboard Apparatus and Great Lakes Controlled Energy) we subsequently sold at a loss. Our future growth may depend, in part, upon our ability to successfully identify, acquire and operate other complementary businesses. We may encounter problems associated with such acquisitions, including the following:

	•		difficulties in integrating acquired operations and products with our existing operations and products;
	•		difficulties in meeting operating expectations for acquired businesses;
	•		diversion of management’s attention from other business concerns;
	•		adverse impact on earnings of amortization or write-offs of goodwill and other intangible assets relating to acquisitions; and
	•		issuances of equity securities that may be dilutive to existing stockholders to pay for acquisitions.

          In addition, often an acquired company’s performance is largely dependent on a few key people, particularly in smaller companies. If these key people leave the company, become less focused on the business or less motivated to make the business successful after the acquisition, the performance of the acquired company may suffer.

If sufficient additional funding is not available to us, the commercialization of our products and services and our ability to grow is likely to be hindered.

          Our operations have not generated positive cash flow since the inception of the Company in 1997. We have funded our operations through the issuance of common and preferred stock and secured debt. Our ability to continue to operate until our cash flow turns positive may depend on our ability to continue to raise funds through the issuance of equity or debt. If we are not successful in raising additional funds, we might have to significantly scale back or delay our growth plans, sell some of our businesses or possibly cease operations altogether. Any reduction or delay in our growth plans could materially adversely affect our ability to compete in the marketplace, take advantage of business opportunities and develop or enhance our products and services. If we should have to cease operations altogether, our stockholders’ investment is likely to be lost.

Raising additional capital or consummation of additional acquisitions through the issuance of equity or equity-linked securities could dilute your ownership interest in us.

          We have recently raised additional capital through the issuance of common stock to repay debt, fund an acquisition, grow our product development, marketing and sales activities at the pace that we intend, and to continue to fund operating losses until our cash flow turns positive. We may find it necessary to raise capital again some time in the future. If we raise additional funds in the future through the issuance of equity securities or convertible debt securities, our existing stockholders will likely experience dilution of their present equity ownership position and voting rights. Depending on the number of shares issued and the terms and conditions of the issuance, new equity securities could have rights, preferences, or privileges senior to those of our common stock. Depending on the terms, common stock holders may not have approval rights with respect to such issuances.

Item 1B. Unresolved Staff Comments

          None

Item 2. Properties

          Our headquarters are located at 1280 Landmeier Road in Elk Grove Village, Illinois. This facility is approximately 13,000 square feet and houses the corporate headquarters and a warehouse. We acquired this facility in August 1998 with a combination of stock and cash. The cash portion of the purchase price was financed through a mortgage on the building. The mortgage was refinanced in December 2006, bears interest at the rate of prime (currently 8.25%) plus 0.5%, and is payable in monthly installments of $3,000 plus interest, until a final balloon payment which is due on February 2008. There is no penalty for prepayment of the mortgage. As of March 2, 2007, the outstanding principal amount of the mortgage was $517,000.

          On May 3, 2005, we acquired Maximum Peformance Group, Inc (“MPG”). MPG currently leases a 3,100 square foot office in San Diego, California and a 2,800 square foot office in New York City. The San Diego lease expired during 2005 and is currently operating on a month to month basis with a 90 day termination notice requirement. The New York office lease has a term of five years and will expire in September 2010.

          On June 29, 2006, we acquired Parke P.A.N.D.A. Corporation (now known as Parke Industries, LLC) (“Parke”). As part of the acquisition we assumed Parke’s lease of a 5,000 square foot office in Glendora, California. The lease which expires on December 31, 2009 provides for monthly rent of $3,500, increasing 3% on the first of each year beginning on January 1, 2007. The building is owned by a company controlled by the former stockholder of Parke, Daniel Parke, who is currently Lime Energy’s President, Chief Operating Officer and a Director.

          On September 26, 2006, we acquired Kapadia Consulting, Inc. (now known as Kapadia Energy Services, Inc.), effective September 27, 2006. Kapadia leases a 2,000 square foot office in Peekskill, NY and a 918 square foot office in Ventura, California. The New York lease expired in 2000 and is operating on a month to month basis. The California lease expires on October 31, 2007.

          We believe that the space and location of our current facilities in combination with the current and planned outsourcing of our manufacturing will be sufficient to reach a level of production projected for the current year.

Item 3. Legal Proceedings

          From time to time, the Company has been a party to routine pending or threatened legal proceedings and arbitrations that are routine and incidental to its business. Based upon information presently available, and in light of legal and other defenses available to the Company, management does not consider the liability from any threatened or pending litigation to be material to the Company.

Item 4. Submission of Matters to a Vote of Security Holders

          No matters were submitted to a vote of security holders during the three months ended December 31, 2006.

          In January 2007, we requested written consent from our stockholders to approve an amendment to our certificate of incorporation to setting forth the 1 for 15 reverse split of our common stock. A proxy statement containing the written consent was distributed to stockholders of record on January 2, 2007. On January 22, 2007, we received the consent and approval from stockholders holding a majority of our outstanding common stock approving the proposed amendment, and on January 23, 2007 we filed the amendment to our certificate of incorporation with the Secretary of State of Delaware.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

          From December 12, 2000 to June 9, 2006, our common stock was listed on the American Stock Exchange under the trading symbol “ELC”. From June 12, 2006 through September 21, 2006, our common stock traded on the OTC Bulletin Board under the trading symbol “ELCY.” Since September 22, 2006 our stock has traded on the OTC Bulletin Board under the symbol “LMEC.”

          In June, 2006, we announced a 1 for 15 reverse split of our common stock, effective on June 15, 2006 and since that date, our common stock has been trading on that basis.

          The closing price of our common stock on March 28, 2007 was $1.00. The following table sets forth the quarterly high and low selling prices for our common stock as reported on The American Stock Exchange and OTC Bulletin Board since January 1, 2004, adjusted for the reverse split.

		Common Stock
		High				Low
Fiscal Year Ended December 31, 2004:
Fiscal Quarter Ended March 31, 2004		$	37.05			$	25.50
Fiscal Quarter Ended June 30, 2004		$	31.20			$	23.25
Fiscal Quarter Ended September 30, 2004		$	28.95			$	16.65
Fiscal Quarter Ended December 31, 2004		$	21.30			$	15.75
Fiscal Year Ended December 31, 2005:
Fiscal Quarter Ended March 31, 2005		$	19.50			$	12.90
Fiscal Quarter Ended June 30, 2005		$	16.05			$	12.15
Fiscal Quarter Ended September 30, 2005		$	18.60			$	10.05
Fiscal Quarter Ended December 31, 2005		$	13.65			$	7.50
Fiscal Year Ended December 31, 2006:
Fiscal Quarter Ended March 31, 2006		$	16.80			$	8.40
Fiscal Quarter Ended June 30, 2006		$	10.20			$	0.70
Fiscal Quarter Ended September 30, 2006		$	1.40			$	0.75
Fiscal Quarter Ended December 31, 2006		$	1.29			$	0.76

Holders

          As of March 29, 2007 we had approximately 4,850 holders of record of our common stock and 50,316,902 shares of common stock outstanding.

Dividends

          No dividends were declared or paid during the three month period ended December 31, 2006.

          For a further discussion regarding preferred stock dividends, see “Item 7 – Management’s Discussion and Analysis or Plan of Operations – Preferred Stock Dividends.”

          We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

          During the twelve months ended December 31, 2006, we issued the securities listed below:

•		During the first three months of 2006, two holders of our Series E Convertible Preferred Stock converted a total of 7,130 shares of Series E Convertible Preferred Stock into 47,533 shares of common stock.
•		Effective March 31, 2006, we received 14,194 shares of our common stock as part of the sale of our Great Lakes Controlled Energy Corporation subsidiary to Messrs. Eugene Borucki and Denis Enberg. These shares have been returned to the status of authorized, unissued shares of common stock.
•		On June 29, 2006 we entered into a Securities Purchase Agreement and issued to 17 investors, including 10 existing holders of our Series E Convertible Stock, for an aggregate purchase price of $17,875,000, 17,875,000 shares of our common stock (the “PIPE Transaction”). We used $2.72 million of the proceeds to fund the cash consideration for the acquisition of Parke P.A.N.D.A. Corporation; approximately $5.6 million to prepay two convertible secured term loans and related prepayment penalties and accrued interest owed to Laurus Master Fund Ltd.; $400,000 to pay off Parke’s line of credit and $90,079 for transaction related costs. The balance of the gross proceeds of approximately $9 million has been and will be used for working capital and other general corporate purposes, except that $1,250,000 was used to pay the cash portion of the acquisition price for Kapadia Consulting, Inc. in September 2006, as described in Note 5 to our financial statements.
•		Concurrently with the closing of the PIPE Transaction pursuant to the Securities Purchase Agreement described above, the holders of all of our outstanding Series E Preferred Stock converted such shares into 21,648,346 shares of our common stock. The Series E Preferred Stock as originally issued was convertible at $15.00 per share. The outstanding Series E shares prior to the PIPE Transaction were convertible into 1,574,027 shares of our common stock, however, the Series E contained antidilution provisions which automatically reduced the conversion price of the Series E to the $1.00 per share issuance price of common stock in the PIPE Transaction. This adjustment in the conversion price resulted in 20,074,319 additional shares being issued upon conversion of the Series E.

•		A number of our common stock warrants, all but one of which are held by former holders of our Series E Convertible Preferred Stock (the exception is a warrant held by an affiliate of a former holder of Series E Preferred), contain antidilution provisions that automatically adjust the exercise price on the warrants to the issuance price of any security convertible into our common stock if the price is less than the exercise price on the holder’s warrant. Prior to the PIPE Transaction, the exercise price on these warrants ranged from $13.50 per share to $15.00 per share (adjusted for the reverse split). The issuance of common stock in the PIPE Transaction caused the exercise price on these warrants to automatically be reduced to $1.00 per share.
•		Immediately following completion of the PIPE Transaction and prepayment of the Laurus term loans, Laurus elected to convert the entire outstanding balance on its revolving line of credit, along with accrued interest thereon, into 950,865 shares of our common stock. In addition, in consideration of our issuance of 392,596 shares of common stock, Laurus agreed to (i) waive the payment of liquidated damages due as a result of our failure to register shares of common stock into which the November 2005 $5 million term loan was convertible, and (ii) terminate the requirement that we pay it a portion of the cash flows generated by VNPP projects for a period of 5 years following the repayment of the November 2005 $5 million convertible term loan.
•		On June 30, 2006, we issued 5,000,000 shares to the Parke Family Trust as part of the consideration in the acquisition of Parke P.A.N.D.A. Corporation.
•		During the first six months of 2006, our Board of Directors declared dividends payable on our Series E Convertible Preferred Stock of $698,000. The dividends were paid with 6,980 additional shares of Series E Convertible Preferred Stock.
•		On July 25, 2006, we issued a three year warrant to purchase 60,000 shares of our common stock at $1.00 per share to Bristol Capital, Ltd. as consideration for services.
•		On September 26, 2006, we issued 500,000 shares of our common stock to Pradeep and Susan Kapadia as part of the consideration in the acquisition of Kapadia Consulting, Inc.
•		The sales and issuances of common stock, debt instruments and warrants to purchase common stock in private placements listed above were made by us in reliance upon the exemptions from registration provided under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D, promulgated by the SEC under federal securities laws and comparable exemptions for sales to “accredited” investors under state securities laws. The offers and sales were made to accredited investors as defined in Rule 501(a) under the Securities Act and no general solicitation was made by us or any person acting on our behalf; the securities sold were subject to transfer restrictions, and the certificates for those shares contained an appropriate legend stating that they had not been registered under the Securities Act and may not be offered or sold absent registration unless sale is pursuant to an exemption therefrom.

Item 6. Selected Financial Data

          The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K, which are incorporated herein by reference, in order to understand further the factors that may affect the comparability of the financial data presented below.

LIME ENERGY CO. AND SUBSIDIARIES
Selected Financial Data

		Year ended December 31,
		2006 (1)				2005				2004				2003				2002 (2)
Statement of Operations Data:
Revenue		$	8,143,624			$	3,693,429			$	733,630			$	2,280,532			$	3,627,113
Cost of sales			6,931,294				3,691,854				862,366				1,945,554				3,273,150
Gross profit			1,212,330				1,575				(128,736	)			334,978				353,963
Selling, general and administrative			12,165,700				5,363,503				4,234,240				3,921,121				5,464,950
Amortization of intangibles			1,210,006				471,765				—				—				—
Impairment loss			1,183,525				242,830				—				—				108,000
Operating loss			(13,346,901	)			(6,076,523	)			(4,362,976	)			(3,586,143	)			(5,218,987	)
Other income (expense)			(3,079,188	)			(544,253	)			(626,049	)			(354,941	)			(32,920	)
Loss from continuing operations			(16,426,089	)			(6,620,776	)			(4,989,025	)			(3,941,084	)			(5,251,907	)
Loss from discontinued operations			(21,425	)			(251,962	)			(170,337	)			(1,540,858	)			(1,756,020	)
Cumulative effect of accounting change			—				—				—				—				(4,103,872	)
Net loss			(16,447,514	)			(6,872,738	)			(5,159,362	)			(5,481,942	)			(11,111,799	)
Basic and diluted loss per common share from continuing operations (3)		$	(1.52	)		$	(2.65	)		$	(3.62	)		$	(3.90	)		$	(4.50	)
Basic and diluted loss per common share (3)			(1.52	)			(2.73	)			(3.68	)			(4.58	)			(7.32	)
Weighted average common shares outstanding (3)			26,908,608				3,190,664				2,660,092				2,250,766				2,080,878
Balance Sheet Data:
Cash and cash equivalents		$	4,663,618			$	4,229,150			$	1,789,808			$	2,467,023			$	1,555,904
Working capital			3,606,419				646,483				263,304				2,050,157				3,546,270
Total assets			25,396,865				17,098,974				6,479,320				7,353,627				8,908,551
Long-term debt, including current portion			567,091				4,980,032				1,230,353				1,348,645				1,089,791
Total stockholders’ equity			18,184,756				4,377,637				1,780,271				3,040,932				4,284,291

Item 7. Management’s Discussion and Analysis or Plan of Operation

          The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this report on Form 10-K. The discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate” or “continue” or the negative of such terms or other variations of such terms or comparable terminology. You are cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. We do not have a policy of updating or revising forward-looking statements and, therefore, you should not assume that our silence over time means that actual events are bearing out as estimated in such forward-looking statements.

Critical Accounting Policies and Estimates

          The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 4 in the notes to the consolidated financial statements.

          Use of Estimates

          Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and related contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, warranty accrual, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

          Revenue Recognition

          We recognize revenue when all four of the following criteria are met: (i) persuasive evidence has been received that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. In addition, we follow the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, Revenue Recognition, which sets forth guidelines in the timing of revenue recognition based upon factors such as passage of title, installation, payments and customer acceptance. Any amounts received prior to satisfying our revenue recognition criteria is recorded as deferred revenue.

          Our MPG subsidiary often bundles contracts to provide monitoring services and web access with the sale of its eMAC hardware. As a result, these sales are considered to be contracts with multiple deliverables which at the time the hardware is delivered and installed includes undelivered services

essential to the functionality of the product. Accordingly, we defer the revenue for the product and services and the cost of the equipment and installation and recognize them over the term of the monitoring contract. The monitoring contracts vary in length from 1 month to 5 years.

          Profit Recognition on Long-Term Contracts

          We account for revenue on most of our long-term contracts on the completed contract method, whereby revenue is recognized once the project is substantially complete. However, we account for revenues on some long-term contracts under the percentage of completion method in conjunction with the cost-to-cost method of measuring the extent of progress toward completion. Any anticipated losses on contracts are charged to operations as soon as they are determinable.

          Allowance for Doubtful Accounts

          We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance is largely based upon specific knowledge of customers from whom collection is determined to be doubtful and our historical collection experience with such customers. If the financial condition of our customers or the economic environment in which they operate were to deteriorate, resulting in an inability to make payments, or if our estimates of certain customers’ ability to pay are incorrect, additional allowances may be required. During 2006, we increased our allowance by $105,000 and wrote-off receivables of $62,000. As of December 31, 2006 our allowance for doubtful accounts was approximately $366,000, or 11.5% of the outstanding accounts receivable, of which approximately $342,000 was associated with our EnergySaver business.

          Impairment of Long-Lived Assets.

          We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions.

          During 2006, we determined that our VNPP (“Virtual Negawatt Power Plan”) Asset was completely impaired and recorded an impairment charge of $1,183,525 to reduce the carrying value of the asset to zero. Please refer to Note 10 in the accompanying consolidated financial statements for further information regarding this impairment charge.

          Goodwill

          We have made acquisitions in the past that included a significant amount of goodwill and other intangible assets. Under generally accepted accounting principles in effect through December 31, 2001, these intangible assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives. Effective in 2002, goodwill is no longer amortized but is subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Estimated fair value is less than value based on undiscounted operating earnings because fair value estimates include a discount factor in valuing future cash flows. There are many assumptions and estimates underlying the determination of an impairment loss, including economic and competitive conditions, operating costs and efficiencies. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. In February 2006 we signed a non-binding letter of intent to sell Great Lakes Controlled Energy. To determine if our goodwill would be impaired as a result of the expected sale, we compared the carrying value of the related reporting unit to the expected

sale price of the business and determined that the goodwill was impaired. As a result we recorded an impairment loss as of December 31, 2005 of $242,830.

          At the end of 2006 we completed an assessment of the goodwill associated with the acquisition of Maximum Performance Group, Inc. and determined fair value of the related reporting unit exceeded the carrying value, indicating that the goodwill was not impaired.

          It is possible that upon completion of future impairment tests, as the result of changes in facts or circumstances, we may have to take additional charges in future periods to recognize a further write-down of the value of the goodwill attributed to our acquisitions to their estimated fair values.

          Stock-based Compensation

          We have a stock incentive plan that provides for stock-based employee compensation, including the granting of stock options and shares of restricted stock, to certain key employees. The plan is more fully described in Note 26 to our financial statements. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-based Payment” (“SFAS 123(R)”), which requires, among other things, that compensation expense be recognized for employee stock options. Prior to the adoption of SFAS 123(R), we accounted for stock compensation using the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under that method, compensation expense was recorded only if the current market price of the underlying stock on the date of grant exceeded the option exercise price. Since stock options are granted at exercise prices that are greater than or equal the market value of the underlying common stock on the date of grant under our stock incentive plan, no compensation expense related to stock options was recorded in the Consolidated Statements of Operations prior to January 1, 2006. During 2006, we recognized $4,828,955 of stock compensation expense.

Material Trends and Uncertainties

          From time to time changes occur in our industry or our business that makes it reasonably likely that aspects of our future operating results will be materially different than historical operating results. Sometimes these matters have not occurred, but their existence is sufficient to raise doubt regarding the likelihood that historical operating results are an accurate gauge of future performance. We attempt to identify and describe these trends, events, and uncertainties to assist investors in assessing the likely future performance of the Company. Investors should understand that these matters typically are new, sometimes unforeseen, and often are fluid in nature. Moreover, the matters described below are not the only issues that can result in variances between past and future performance nor are they necessarily the only material trends, events, and uncertainties that will affect the Company. As a result, investors are encouraged to use this and other information to judge for themselves the likelihood that past performance will be indicative of future performance.

          The trends, events, and uncertainties set out in the remainder of this section have been identified as those we believe are reasonably likely to materially affect the comparison of historical operating results reported herein to either other past period results or to future operating results. These trends, events and uncertainties include:

          Decision to Discontinue the Active Marketing of the EnergySaver. At the end of 2006, we decided to discontinue the active marketing of the EnergySaver and GlobalCommander and write-off most of our remaining inventory of EnergySaver parts due to changes in lighting technology which we believe will diminish the future prospects for the product. The Company was founded in 1997 for the

purpose of manufacturing and marketing the EnergySaver and the EnergySaver has been a material source of revenue for the Company for the last nine years, with the product line contributing approximately 74% and 21% of our consolidated revenue in 2005 and 2006, respectively. We will continue to accept orders for the EnergySaver from former customers and those dealers who continue to market the product, but we do not expect sales of this product line to represent a significant portion of our revenue in future periods. We have acquired three companies within the last two years, Maximum Performance Group, Inc., Parke P.A.N.D.A. Corporation and Kapadia Consulting, Inc. which we believe will provide most, if not all of the Company’s revenue and earnings in future periods. As a result of these changes we will no longer be manufacturing any of our own products (the eMAC is manufactured for us by a contract manufacturer) and we believe a significant portion of our future revenue will be derived from the sale of services. These decisions will fundamentally change the nature of our business, though we remain focused on providing energy conservation technologies and services.

Results of Operations

          Our revenues reflect the sale of our products and services, net of allowances for returns and other adjustments. Lime Energy’s sales are generated from the sale of products and services, primarily in the U.S. Three customers collectively accounted for approximately 40% of our consolidated billings during the year ended December 31, 2006, while one customer accounted for approximately 30% of our consolidated billings during the year ended December 31, 2005.

          Our cost of goods sold consists primarily of materials and labor. Also included in our cost of goods sold are freight, the costs of operating our manufacturing facility, charges from the contract manufacturer that manufactures the eMAC line of controllers, charges from outside contractors used to install our product in our customers’ facilities, depreciation, and charges for potential future warranty claims and royalty costs related to EnergySaver sales.

          Sales and gross profits depend in part on the volume and mix of products sold during any given period. Generally our proprietary products have a higher gross profit margin than products and services that we purchase and resell.

          A portion of our operating expense is relatively fixed, such as the cost of our facilities and certain support personnel. Accordingly, an increase in the volume of sales will generally result in an increase to our gross margins since these fixed expenses do not increase proportionately with sales.

          Selling, general and administrative (“SG&A”) expenses include the following components:

	•		direct labor and commission costs related to our employee sales force;
	•		expenses related to our non-manufacturing management, supervisory and staff salaries and employee benefits, including the costs of share based compensation;
	•		commission costs related to our independent sales representatives and our distributors;
	•		costs related to insurance, travel and entertainment and office supplies and the cost of non-manufacturing utilities;
	•		costs related to marketing and advertising our products;
	•		legal and accounting expenses;
	•		research and development expenses;
	•		costs related to administrative functions that serve to support the existing businesses of the Company, as well as to provide the infrastructure for future growth.

          Interest expense for continuing operations includes the costs and expenses associated with working capital indebtedness, the mortgage on our headquarters building, convertible term loans, and various auto loans, all as reflected on our current and prior financial statements. Also included in interest expense is amortization of debt discount and deferred financing costs. The debt discount includes the fair value of the warrants issued to Laurus Master Fund in 2003 and 2005, as well as the value of the beneficial conversion feature attributed to the convertible term loan which we entered into with Laurus in 2003. We repaid the Laurus convertible term loans and revolver in full in June 2006.

Twelve-Month Period Ended December 31, 2006 Compared With the Twelve-Month Period Ended December 31, 2005

          Revenue. Our revenue increased $4,450,195, or 120% to $8,143,624 during the year ended December 31, 2006, as compared to $3,693,429 for the year ended December 31, 2005. Revenue generated by our Energy Services segment was responsible for $3,302,014 or 74% of the increase in our revenue for 2006. The Energy Services segment was created in 2006 through the acquisition of Parke on June 29, 2006 and Kapadia on September 27, 2006. The balance of the increase was related to increased revenue associated with the eMAC, partially offset by lower EnergySaver sales. The increase in the eMAC revenue was due to the inclusion of a full year of results for MPG (MPG was acquired effective May 3, 2005) and higher unit sales. We expect to see steady growth in revenue in future periods from both the Energy Services segment and MPG. This growth in revenue will be partially offset by declining EnergySaver sales due to our recent decision to discontinue the active marketing of this product line.

          Gross Profit. Our gross profit increased $1,210,755 to $1,212,330 for the year ended December 31, 2006, as compared to $1,575 for the year ended December 31, 2005, while our gross profit margin increased to 14.89% for 2006 as compared to 0.04% earned in 2005. Included in the 2006 cost of sales was a $568,577 one time charge to write-off most of our EnergySaver inventory due to our decision to terminate the active marketing of this product. Adjusting for this charge, our gross profit for 2006 was $1,780,907, or 21.87% of sales. The increase in gross profit from 2005 was primarily attributable to increased sales of the eMAC and the acquisition of Parke on June 29, 2006. The 2006 cost of goods sold includes $296,953 of share based compensation expense as a result of our adoption of SFAS 123(R) on January 1, 2006. No share based compensation was included in the 2005 cost of goods sold. We believe that a full year of contributions from Parke and Kapadia in addition to continued revenue increases at MPG will contribute to continued improvements in our gross margin in future periods.

          SG&A Expenses and Amortization of Intangibles. Our selling, general and administrative expense increased $6,802,197 or 127% to $12,165,700 for 2006, as compared to $5,363,503 for 2005. Approximately 67% or $4,532,001 of the increase in the 2006 SG&A was related to our adoption of SFAS 123(R) on January 1, 2006. SFAS 123(R) requires that we record stock compensation expense for stock options granted to our employees and directors. This non-cash expense is equal to the grant date fair market value of these options, amortized over the options’ vesting periods. We did not record stock compensation expense in 2005. Also contributing to the increase in SG&A expense was $531,000 in penalties resulting from our inability to have the Laurus registration and the June PIPE registration declared effective within the timeframes required under the related documents, an increase in legal expenses of approximately $200,000, a $140,000 increase in research and development expense related to enhancements to the eMAC, approximately $100,000 in higher than normal accounting expenses related to the various registration statements filed during 2006, approximately $660,000 of SG&A expense resulting from the inclusion of Parke and Kapadia for portions of 2006 and approximately $680,000 from the inclusion of MPG for the full year. Elimination of those expenses which are non-recurring changes is expected to result in a decrease in SG&A during 2007.

          Impairment Loss. As is more fully explained in Note 10 to the financial statements, during the quarter ended September 30, 2006, we completed a preliminary impairment analysis and determined that the carrying value of the ComEd VNPP (“Virtual Negawatt Power Plan”) asset exceeded its fair value by $760,488. In order to reduce the carrying value to the fair value we recorded a non-cash impairment charge of $760,488 in September 2006. During the fourth quarter of 2006 we updated our analysis based on new information and revised assumptions and determined that the asset was completely impaired. As a result we reduced the carrying value of the asset to $0 and recorded an additional impairment charge of $423,037 in December 2006.

          Other Non-Operating Income (Expense). Other Expense increased $2,534,935 during 2006 to $3,079,188, compared to $544,253. Interest expense increased $2,670,380 to $3,273,370 during 2006 from $602,990 during 2005. The components of interest expense for the years ended December 31, 2006 and 2005 are as follows:

Twelve months ended December 31,		2006				2005
Contractual interest		$	364,239			$	277,577
Amortization of deferred issuance costs and debt discount			1,175,970				165,413
Value of warrant			—				160,000
Value of adjustment in conversion price			950,865				—
Prepayment penalties			516,071				—
Termination of post re-payment interest obligation			266,225				—
Total Interest Expense		$	3,273,370			$	602,990

          Contractual interest expense (the interest on outstanding loan balances) increased $86,662 or 31% to $364,239 during 2006 from $277,577 in 2005. The increase in contractual interest was the result of higher average outstanding balances, due in part to the issuance of the $5 million term loan in November 2005 (which was repaid in June 2006), and higher average interest rates. Amortization of the deferred issuance costs and the debt discount related to the Laurus revolver and convertible term loans, which is included in interest expense, increased $1,010,557 to $1,175,970 during 2006 from $165,413 during 2005. With the early repayment of all of the Laurus loans in June 2006, we were required to recognize as interest expense the remaining unamortized balances of the capitalized issuance costs and the debt discount of $1,009,277. The balance of the increase in amortization expense was related to the amortization of deferred issuances costs associated with the $5 million term loan issued in November 2005. 2006 interest expense also includes prepayment penalties of $516,071 for the early repayment of the Laurus term loans and $266,225 for the cost of terminating the obligation to pay Laurus a portion of the cash flows generated by certain VNPP projects for the next five years. Upon the closing of the PIPE Transaction and repayment of the term loans in June 2006, Laurus elected to convert the outstanding balance on the revolving note into shares of our common stock. The revolving note contained antidilution provisions which automatically adjusted the conversion price of the note to $1.00 per share—the price at which we issued shares as part of the PIPE Transaction. Laurus would have received 59,902 shares of common stock upon conversion of the revolving note utilizing the conversion price prior to the adjustment, but as a result of this adjustment it received 943,455 shares. The market value of the 883,553 additional shares it received as a result of the adjustment was recorded as interest expense in the amount of $950,865.

          During April 2005 we issued a warrant to purchase 400,000 shares of our common stock to Laurus in exchange for its consent to a private equity issuance and the acquisition of MPG, as well as waiving its right to adjust the conversion price on its convertible term note and convertible revolving note. The warrant was valued at $160,000 using a modified Black-Scholes option pricing model and charged to interest expense during the period.

          Preferred Stock Dividends. Dividend expense recognized during the years ended December 31, 2005 and 2006 is comprised of the following:

Year ended December 31,		2006				2005
Accrual of Series E Convertible Preferred dividend		$	698,000			$	1,366,900
Deemed dividend associated with change in conversion price of the Series E Convertible Preferred Stock			23,085,467				—
Deemed dividend associated with change in the exercise price of warrants to purchase shares of common stock			564,258				484,445
Total		$	24,347,725			$	1,851,345

          Dividend expense increased $22,496,380 to $24,347,725 in 2006, from $1,851,345 in 2005. Dividends accrued on the outstanding Series E Convertible Preferred declined $668,900 to $698,000 in 2006 from $1,366,900 in 2005, due to the conversion of all of the outstanding Series E Convertible Preferred to common stock on June 29, 2006.

          We have issued certain securities in the past that contain anti-dilution provisions (commonly referred to as ratchets) which automatically adjust the exercise or conversion price of the security if we issue any new equity security, or securities convertible into equity, at a price below the exercise or conversion price of the security with the anti-dilution provision. Primarily as a result of our declining stock price, we had three instances during 2006 where we had to adjust the exercise price or the conversion price on one or more securities, each of which resulted in us recording a charge for a non-cash deemed dividend. In January we issued stock options to our new CEO at the then market price of $9.30 per share, which was less than the $13.80 exercise price on a warrant held by one of our former Series E Preferred stock holders. Adjusting the exercise price of this warrant resulted in a non-cash deemed dividend of $266,390.

          On June 29, 2006, we issued shares in the PIPE Transaction at $1.00 per share (as discussed in Note 21 to our financial statements). The issuance price of the securities issued in this transaction was less than the conversion price on our Series E Convertible Preferred stock, which contained anti-dilution provisions. Prior to the anti-dilution adjustment the holders of the Series E Convertible Preferred stock would have been entitled to 1,574,027 shares of common stock on conversion, whereas after the adjustment they were entitled to 21,648,346 shares of common stock on conversion. The market value of the additional 20,074,319 shares receivable upon conversion was recorded as a non-cash deemed dividend in the amount of $23,085,467 on June 29, 2006.

          In addition, a number of the outstanding common stock warrants, most of which were held by former holders of our Series E Convertible Preferred Stock, also contained similar anti-dilution provisions. Prior to the June 2006 PIPE Transaction the exercise price on these warrants ranged from $13.50 per share to $15.00 per share. The issuance of common stock in the June 2006 PIPE Transaction caused the exercise price on these warrants to automatically be reduced to $1.00 per share. We compared the value of the warrants with the old exercise price to the value of the warrants with the reduced exercise price, through the use of a modified Black-Sholes option pricing model, and determined that the reduction in the exercise price had increased the value of the warrants by $297,868. We recognized the expense as a deemed dividend by offsetting charges and credits to additional paid-in capital, without any effect on total stockholders equity.

          On April 28, 2005, in exchange for $5,625,000 in gross proceeds, we issued a package of securities to five institutional investors. The package of securities included 416,667 shares of our common stock and 42 month warrants to purchase 208,333 additional shares of common stock at $15.75 per share. The issuance of these shares caused the exercise price of certain warrants with anti-dilution provisions to automatically adjust to $13.50 per share. We compared the value of the warrants with the old exercise price to the value of the warrants with the reduced exercise price, through the use of a modified Black-Sholes option pricing model, and determined that the reduction in the exercise price had increased the value of the warrants by $484,445. Since these warrants were issued as part of a securities offering the increase in value is considered to be a deemed dividend to the security holders. We recorded the deemed dividend by offsetting charges and credits to additional paid-in capital, without any effect on total stockholders equity.

Twelve-Month Period Ended December 31, 2005 Compared With the Twelve-Month Period Ended December 31, 2004

          Revenue. Our revenue increased $2,959,799 to $3,693,429 during the year ended December 31, 2005 from $733,630 during the year ended December 31, 2004. Approximately $950,000 or 39% of the increase was due to the acquisition of Maximum Performance Group in May 2005. EnergySaver related sales increased approximately $1,700,000 during 2005 over the year earlier period as the result of increased EnergySaver sales. Unit sales of EnergySavers increased 198% from 67 units in 2004 to 200 units in 2005. One customer was responsible for a significant portion of this increase. Approximately $325,000 of the increase in revenue was due to a short term utility consulting project completed in May 2005.

          Gross Profit. Our consolidated gross profit increased $130,311 in 2005 to $1,575 from a loss of $128,736 in 2004. The increase in gross profit was due to a consulting assignment completed in May 2005 by the Energy Technology segment and to improved margins on EnergySaver sales primarily as the result of increased volume.

          SG&A Expenses and Amortization of Intangibles. Selling, general and administrative expenses increased $1,129,263 or 27% to $5,363,503 during 2005 from $4,234,240 in 2004. Inclusion of eight months of expense from MPG was responsible for approximately $1,365,000 of the 2005 SG&A expense.

          Impairment Loss. We incurred an impairment loss of $242,830 during 2005 related to the reduction in carrying value of goodwill associated with the acquisition of Great Lakes Controlled Energy. In February 2006 we signed a letter of intent to sell Great Lakes Controlled Energy and we sold the Company effective March 31, 2006. At the end of 2005 we compared the carrying value of the goodwill related to Great Lakes to the expected sale price of the business and determined that the goodwill was impaired. As a result, we recorded an impairment loss as of December 31, 2005 of $242,830. There was no impairment loss recorded in 2004.

          Other Non-Operating Income (Expense). Other non-operating expense is comprised of interest expense and interest income. Interest expense declined $45,564 to $602,990 during 2005 from $648,554 during 2004. The components of interest expense for the years ended December 31, 2005 and 2004 are as follows:

Twelve months ended December 31,		2005				2004
Contractual interest		$	277,577			$	74,117
Amortization of deferred issuance costs and debt discount			165,413				574,437
Value of warrant			160,000				—
Total Interest Expense		$	602,990			$	648,554

          Amortization of the deferred issuance costs and debt discount related to the Laurus revolver and convertible term loans, which are included in interest expense, declined $409,024 to $165,413 for 2005 from $574,437 during 2004. The deferred issuance costs and debt discount was being amortized using the effective interest method, thus decline as the outstanding balance on the related term loan is repaid or converted. During January 2004, Laurus converted a portion of its term loan resulting in accelerated recognition of $193,000 in amortization expense. No such conversions occurred during 2005. Other interest expense increased $203,720 during 2005 primarily as a result of borrowings under the revolver, a new $5,000,000 term loan entered into in late November 2005, and higher interest rates. There were no borrowings under the revolver during 2004. During the second quarter of 2005 we issued a 5 year warrant to purchase 26,667 shares of our common stock at $15.00 per share to Laurus in exchange for its consent and waiver to permit us to complete a private placement of our common stock and to acquire MPG. This warrant was valued at $160,000 using a modified Black-Sholes option pricing model and the value was charged to interest expense during the period.

          Interest income increased $36,232 to $58,737 during 2005 from $22,505 earned in 2004. The increase in interest income was due to higher average invested cash balances and increases in the interest rates paid on the invested balances.

          Preferred Stock Dividends. The dividend expense recognized during 2005 and 2004 was comprised of the following:

Year ended December 31,		2005				2004
Accrual of dividend on Series A Convertible Preferred		$	—			$	540,705
Accrual of Series C Preferred dividend			—				53,206
Accrual of Series D Preferred dividend			—				35,932
Accrual of Series E Preferred dividend			1,366,900				1,006,937
Deemed dividend associated with beneficial conversion price on shares issuable in satisfaction preferred dividends			—				1,127,021
Deemed dividend associated with the redemption and exchange of outstanding preferred stock			—				1,860,458
Deemed dividend associated with change in the expiration date of warrants to purchase shares of preferred stock			—				15,000
Deemed dividend associated with change in the exercise price of warrants to purchase shares of common stock			484,455				—
Total		$	1,851,345			$	4,639,259

          Our dividend expense for 2005 declined $2,787,914 or 60% to $1,851,345 from $4,639,259 in 2004. We accrued dividends of $1,366,900 and $1,636,780 on our Convertible Preferred Stock during 2005 and 2004, respectively. This decline in accrued dividends was the result of the reduction in the number of preferred shares outstanding and a reduction in the dividend rate that resulted from the redemption and exchange effected in March 2004. The dividends accrued during 2005 and 2004 were satisfied through the issuance of 13,669 shares of preferred stock and 16,368 shares of preferred stock, respectively. We were required to recognize a non-cash deemed dividend of $1,127,021 during 2004 because the conversion price on these dividend shares was lower than the market price of our common stock on the date of issue.

          On April 28, 2005, in exchange for $5,625,000 in gross proceeds, we issued a package of securities to five institutional investors. The package of securities included 416,667 shares of our common stock and 42 month warrants to purchase 208,333 additional shares of common stock at $15.75 per share. The issuance of these shares caused the exercise price of certain warrants with anti-dilution provisions to automatically adjust to $13.50 per share. We compared the value of the warrants with the old exercise price to the value of the warrants with the reduced exercise price, through the use of a modified Black-Sholes option pricing model, and determined that the reduction in the exercise price had increased the value of the warrants by $484,445. Since these warrants were issued as part of a securities offering the increase in value is considered to be a deemed dividend to the security holders. We recorded

the deemed dividend by offsetting charges and credits to additional paid-in capital, without any effect on total stockholders equity.

          As part of the redemption and exchange completed in March 2004, shares of our Series A, Series C and Series D convertible preferred stock were exchanged for shares of the new Series E preferred stock at the rate of 10 shares of old preferred for each share of new Series E preferred stock. Additionally, each share of old preferred stock was convertible into 0.667 shares of common stock, whereas each share of new Series E convertible preferred stock was convertible into 6.67 shares of common stock. Despite the fact that we believe the redemption and exchange transaction was favorable for the Company and its common stockholders (see Note 23(c) to the financial statements), we were required to record a non-cash deemed dividend on the transaction of $1,860,458. For accounting purposes the transaction was viewed as a redemption for cash and shares of Series E Preferred stock. The non-cash deemed dividend was determined by comparing the fair value of the consideration given (the cash and the market value of the Series E Preferred) to the carrying value of the old preferred stock that was redeemed. The fair value of the consideration given exceeded the carrying value of the old preferred primarily due to the fact that the market price of our common stock was higher on the day the redemption and exchange transaction closed than it was when the shares of the old preferred stock were originally issued.

          We also incurred a $15,000 deemed dividend during 2004 when we agreed to extend the expiration date on warrants to purchase shares of our Series E Convertible Preferred stock from September 30, 2004 to December 31, 2004. We agreed to extend these warrants to permit holders who participated in the redemption and exchange more time to exercise their warrants without violating the short swing trading rules of section 16(b) of the Securities Act of 1934 or our insider trading policy which prohibits the trading of our securities during certain blackout periods prior to the filing of our financial statements.

Liquidity and Capital Resources

          During the twelve-month period ended December 31, 2006 we incurred a net loss of $16.4 million and used $6.3 million of cash for operating activities. We have taken steps to improve our current liquidity and provide the growth capital necessary to fund our plan for 2007 and for future growth. Our efforts to raise additional capital are discussed below.

          As of December 31, 2006, we had cash and cash equivalents of $4,663,618, compared to cash and cash equivalents of $4,229,150 on December 31, 2005. Our contractual obligations as of December 31, 2006 totaled $3,182,693, and include: $572,755 of debt and capital leases; $422,438 in office leases; and $2,187,500 under various employment agreements.

          The Company’s principal cash requirements are for operating expenses, including employee costs, the costs related to research and development, advertising costs, the cost of outside services including those providing contract manufacturing, accounting, legal, engineering and electrical contracting services, and the funding of inventory and accounts receivable, and capital expenditures. The Company has financed its operations since inception primarily through the private placement of its common and preferred stock, as well as through various forms of secured debt.

          The following table summarizes, for the periods indicated, selected items in our consolidated statement of cash flows:

Year ended December 31		2006				2005				2004
Net cash used in operating activities		$	(6,248,085	)		$	(6,956,642	)		$	(4,039,058	)
Net cash used in investing activities			(4,264,930	)			(2,181,846	)			(149,603	)
Net cash provided by financing activities			10,947,483				11,577,830				3,511,446
Net Increase (Decrease) in Cash and Cash Equivalents			434,468				2,439,342				(677,215	)
Cash and Cash Equivalents, at beginning of period			4,229,150				1,789,808				2,467,023
Cash and Cash Equivalents, at end of period		$	4,663,618			$	4,229,150			$	1,789,808

2006 Compared to 2005

          Net cash increased $434,468 and $2,439,342 during the years ended December 31, 2006 and 2005, respectively.

Operating Activities

          The net cash consumed in operating activities declined $708,557 or 10% to $6,248,085 in 2006 compared to $6,956,642 in 2005. The cash consumed before changes in working capital increased $209,099 or 4% to $5,624,078 in 2006 compared to $5,414,979 in 2005. The cash consumed in 2006 was primarily the result of our net loss. We expect the cash consumed before changes in working capital to decline with increases in revenue and the elimination of some of the expenses included in SG&A that we do not expect to recur in future periods, including registration penalties, the temporary increase in research and development expenses, and some higher than normal legal and accounting fees.

          The cash consumed by working capital declined 60% or $917,656 to $624,007 in 2006 from $1,541,663 consumed in 2005. Contributing to this reduction were improvements in Accounts Receivable collections, reductions in inventories and the use of the advance to suppliers. We expect cash consumed by working capital to increase in future periods as a result of increases in accounts receivable (associated with increased revenue), which should be partially offset by expected increases in accounts payable (due to increases in material purchases).

Investing Activities

          Cash consumed in investing activities increased $2,083,084 to $4,264,930 in 2006 from $2,181,846 in 2005. During 2006 we used cash of $4,098,377 to fund the acquisitions of Parke and Kapadia. As part of the acquisition of Parke we paid the selling stockholder $2.72 million in cash and incurred expenses related to the transaction of $145,605, which was partially offset by cash balances of $1,710 acquired as part of the transaction. Cash used to fund the Kapadia acquisition included $1,250,000 for the cash portion of the purchase consideration and $31,811 for expenses, partially offset by $47,329 of cash acquired in the transaction. We sold all of the stock of Great Lakes Controlled Energy Corporation to the former owners of that company in March 2006. Great Lakes’ cash balances of $83,586 were transferred with the sale of the company. We also invested $82,967 in property, plant and equipment during the year, most of which was associated with purchases of computer equipment for new employees and service vehicles for use in our Energy Services segment

          During 2005, we used $1,632,972 for the acquisition of Maximum Performance Group, including $1,632,078 paid to the selling shareholders, and $137,386 of transaction costs less cash acquired of $136,492. We also invested $478,249 in VNPP assets and purchased furniture, equipment and vehicles totaling $70,625.

          We do not anticipate making any unusual capital expenditures during 2007.

Financing Activities

          During 2006 we generated net cash of $10,947,483 through financing activities as compared to generating $11,577,830 of net cash during 2005. In June 2006 we raised $17,875,000 in gross proceeds through the sale of our common stock, while incurring $115,107 in costs related to the issuance. We used $5,038,030 million of the proceeds to pre-pay the principal on two Laurus convertible term loans and Laurus converted $943,455 outstanding on the revolving note to common stock. Also during 2006 we used $1,056,545 to pay down our revolver, $317,835 for scheduled principal payments and $400,000 to pay off the balance on a revolving line credit assumed as part of the acquisition of Parke.

2005 Compared to 2004

          Net cash increased $2,439,342 during the year ended December 31, 2005, while net cash declined $677,215 during the year ended December 31, 2004.

Operating Activities

          The cash consumed by operating activities increased $2,917,584 or 72.2% to $6,956,642 during the twelve-month period ended December 31, 2005 as compared to consuming $4,039,058 during the twelve-month period ended December 31, 2004. The loss from operations was the primary contributor to the cash consumed in operating activities in both years. The increase in cash consumed in operating activities in 2005 was largely the result of the acquisition of Maximum Performance Group in May 2005, which consumed approximately $2.5 million of cash for operating activities. Reductions in accounts payable at our other companies also contributed to the increase in cash consumed in operating activities.

Investing Activities

          Investing activities consumed $2,181,846 in 2005, an increase of $2,032,243 from the $149,603 consumed in 2004. During 2005 we used $1,632,972 to fund the acquisition of Maximum Performance Group, including $1,632,078 paid to the selling shareholders, and $137,386 of transaction costs less cash acquired of $136,492. We also invested $478,249 in VNPP assets and purchased furniture, equipment and vehicles totaling $70,625 during 2005. During 2004 we invested $135,512 in VNPP assets and $14,091 in manufacturing and office equipment.

Financing Activities

          Financing activities generated $11,577,830 during the year ended December 31, 2005 as compared to generating $3,511,446 during the year ended December 31, 2004. In April of 2005, we raised $5,625,000 through the private placement of 416,667 shares of our common stock. We incurred $211,787 in expenses related to this issuance. In November of 2005 we borrowed $5 million under a secured convertible term loan and incurred $293,836 in expenses related to the transaction. During the year we also drew $2 million on our revolving line of credit and made scheduled payments of $385,000 on a term loan, $36,000 on our mortgage, $95,349 on amounts owed to the selling shareholders of Maximum Performance Group and approximately $25,000 on various auto loans and capitalized leases.

          During 2004, we raised $11,000,000 through the issuance of a package of securities that included shares of our common stock and common stock warrants. We used $7,000,006 of the net proceeds from this issuance to effect a redemption and exchange offer for our Series A, Series C and Series D Convertible Preferred Stock. We incurred expenses related to these transactions of $910,393. During the period we also made scheduled principal payments on our mortgage and auto loan of $39,155 and received $461,000 in net proceeds from the exercise of warrants to purchase shares of our common and preferred stock.

LIQUIDITY

          Our primary sources of liquidity are our available cash reserves.

          During fiscal 2006, operating activities consumed cash of $6.3 million. We believe that changes we implemented in 2006, including the repayment of most of our outstanding debt, the discontinuation of the active marketing of the EnergySaver business prospectively for 2007, the acquisitions of Parke and Kapadia and various personnel changes will lead to a reduction in our operating loss and the cash consumed in operating activities before changes in working capital. In February 2007 we commenced a stockholder rights offering in which we distributed to stockholders of record on February 23, 2007 (other than the former Series E Preferred stockholders and Daniel Parke) five non-transferable subscription rights to purchase shares of the Company’s common stock at $1.00 per share, for a total of 38,825,160 subscription rights. Proceeds from the rights offering, which is scheduled to close on March 30, 2007, will be used for general corporate purposes.

          Our ability to continue to expand the sales of our products and services will require the continued commitment of significant funds. The actual timing and amount of our future funding requirements will depend on many factors, including the amount and timing of future revenues, working capital requirements, the level and amount of product marketing and sales efforts and the magnitude of research and development, among other things.

          During the last six fiscal years we have raised net proceeds of approximately $59 million through the issuance of shares of our common and preferred stock and notes, which has allowed us acquire companies such as MPG, Parke and Kapadia and to continue to execute our business plan. Most of these funds have been consumed by operating activities, either to fund our losses or for working capital requirements. As of December 31, 2006 our cash balance was $4,663,618. In an attempt to move the Company to a position where it can start to generate positive cash flow our management has set the following key strategies for cash flow improvement in 2007:

•

Focus on increasing the sales of our products and services. During 2006 we were able to increase our revenue by 120% and we saw our gross margin increase from $1,575 to $1,780,907 (excluding the write-off of obsolete inventory). Although the increase in our gross margin was more than offset by increases in SG&A, much of this increase in SG&A was the result of non-cash charges (share based compensation and amortization of intangibles) or expenses we do not expect to recur (asset write-offs, registration penalties, legal and accounting costs). We believe that we have the infrastructure in place to support revenue of two to three times what we achieved in 2006, without the need to significantly increase our SG&A expense in 2007. If we can achieve this, we believe we will significantly reduce or eliminate the cash consumed for operating activities, before changes in working capital. We have taken several important steps toward increasing our revenue, starting with the acquisitions of Parke and Kapadia. Dan Parke, our new President and COO, is an experienced manager who has spent the last six months focused on integrating and training our sales and marketing staff. We have increased the number of people involved in sales and marketing from 9 at the end of last year to 23 currently, all but five of which

			are new. We have also invested a great deal of time and money in training these sales people how to sell our products. We believe the sales we recorded in the fourth quarter of 2006 indicate that some of these efforts are beginning to have their desired affect.
	•		Expand our sales through internal product development, acquisitions and/or opening new offices. We believe there are opportunities for further growth through geographic and product line expansion. We can expand geographically by opening new offices, hiring additional sales people and/or by acquiring established businesses in regions of the country we do not currently serve. We can add to our product line through internal product development, partnerships, joint ventures, licensing agreements and/or by acquiring business with products, services and/or expertise that we do not currently have. An expanded product line would allow us to offer additional energy solutions to our customers, thereby increasing the value of each customer relationship. During 2006 we decided to invest in research and development to enhance the capabilities of the eMAC with the objective of addressing needs that we see in the market, thereby creating new opportunities for selling the product.
	•		Aggressively manage our costs in order to conserve cash. The prudent use of the capital resources available to us remains one of our top priorities. We are constantly reviewing our operations looking for more efficient ways to achieve our objectives.

          We believe that if we are successful in achieving these priorities we should have sufficient liquidity to allow us to operate until our operations turn cash flow positive. If we are not able to achieve some or all of these priorities, we may begin to experience a liquidity shortage in the latter half of 2007 which could force us to raise additional capital, scale back our growth plans, or in the worst case cease operations.

          If in the future we raise additional capital (which may require stockholder approval), our existing stockholders to the extent they don’t participate in the capital raise, will likely experience dilution of their present equity ownership position and voting rights, depending upon the number of shares issued and the terms and conditions of the issuance. If we raise capital through the issuance of additional equity, the new equity securities issued will likely have rights, preferences or privileges senior to those of our common stock.

Contractual Obligations

          Our obligations to make future payments under contracts as of December 31, 2006 are as follows:

		Payments due by period
						Less than				1 to 3				3 to 5				More than
Contractual Obligations		Total				1 year				years				years				5 years
Long-term debt (1)		$	572,382			$	48,128			$	506,896			$	13,886			$	3,472
Capital leases			373				373				—				—				—
Operating leases			422,438				140,803				228,321				53,314				—
Employment agreements			2,187,500				1,290,000				897,500				—				—
Total		$	3,182,693			$	1,479,304			$	1,632,717			$	67,200			$	3,472

Recent Accounting Pronouncements

          In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on our results of operations or our financial position.

Item 7A. Quantitative and Qualitative Disclosures

          The only significant exposure we have to market risk is the risk of changes in market interest rates. The interest rate on our mortgage is variable and changes with changes in the prime rate. The interest rate on the mortgage is equal to the prime rate plus ¹/2%. As of December 31, 2006, the prime rate was 8.25%. If the prime rate were to increase 1 percentage point, the aggregate annual interest cost on the mortgage would increase by approximately $5,000.

Item 8. Financial Statements and Supplemental Data

          Index to Financial Statements:

		F-1		Report of Independent Registered Public Accounting Firm
		F-2 - F-3		Consolidated Balance Sheets as of December 31, 2006 and December 31, 2005
		F-4		Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
		F-5		Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004
		F-6 - F-8		Statements of Consolidated Cash Flows for the years ended December 31, 2006, 2005 and 2004
		F-9 - F-48		Notes to Consolidated Financial Statements
		F-49		Schedule II, Valuation and Qualifying Accounts

Item 9		Change in and Disagreements with Accountants on Accounting and Financial Disclosure

          None

Item 9A. Controls and Procedures

	(a)		Explanation of disclosure controls and procedures. Our chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures were effective.
	(b)		Changes in internal controls. During the fourth quarter of 2006 there were no changes in the Company’s internal controls or in other factors which materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Item 9B. Other Information

     None

PART III

     Certain information required to be included in Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the “Proxy Statement”) no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference.

Item 10. Directors, Executive Officers of the Registrant and Corporate Governance

     The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned “Proposal 1- Election of Directors,”“Executive Compensation” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934.”

Item 11. Executive Compensation

     Information regarding compensation of the Company’s named executive officers is set forth under “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference. Information regarding compensation of the Company’s directors is set forth under “Compensation of Directors” in the Proxy Statement, which information is incorporated herein by reference.

Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth under “Security Ownership of Principal Stockholders and Management” in the Proxy Statement, which information is incorporated herein by reference.

     Information regarding the Company’s equity compensation plans, including both stockholder approved plans and plans not approved by stockholders, is set forth in the section entitled “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

     Information regarding certain relationships and related transactions is set forth under “Certain Relationships and Related Transactions” in the Proxy Statement, which information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

     Information regarding principal auditor fees and services is set forth under “Principal Accountant Fees and Services” in the Proxy Statement, which information is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

		(a)(1)		Financial Statements
				The information required by this item is included in Item 8 of Part II of this report.
		(a)(2)		Financial Statement Schedule
				The information required by this item is included in Item 8 of Part II of this report.
		(a)(3)		Exhibits
				See Item 15(b) below.

     (b) Exhibits

Exhibit
Number		Description of Exhibit
2.01 (12)		Agreement and Plan of Merger, dated as of April 29, 2005, by and among Electric City Corp., MPG Acquisition Corporation, and Maximum Performance Group, Inc.
2.02 (20)		Agreement and Plan of Merger, dated as of May 19, 2006, by and among Electric City Corp., Parke Acquisition LLC, and Parke P.A.N.D.A. Corporation
2.03 (25)		Agreement and Plan of Merger dated September 26, 2006 by and among Lime Energy Co., Kapadia Acquisition, Inc., Kapadia Consulting, Inc., and Pradeep Kapadia.
3.01 (1)		Certificate of Incorporation
3.02 (1)		By-laws
3.03 (4)		Certificate of Amendment to Certificate of Incorporation dated August 30, 2001.
3.04 (4)		Bylaws, as amended
3.05 (5)		Certificate of Amendment to Certificate of Incorporation, dated July 31, 2002.
3.06 (9)		Charter of Audit Committee, as restated.
3.07 (9)		Charter of Governance and Nominating Committee
3.08 (17)		Certificate of Amendment to Certificate of Incorporation, dated May 4, 2005.
3.09 (24)		Certificate of Ownership and Merger Merging Lime Energy Subsidiary Company into Electric City Corp.
3.10 (27)		Certificate of Amendment to Certificate of Incorporation, dated January 23, 2007
4.01(2)		Specimen Stock Certificate
4.02 (3)		2001 Stock Incentive Plan
4.03 (7)		Certificate Of Designations, Preferences And Relative, Participating, Optional And Other Special Rights Of Preferred Stock And Qualifications, Limitations And Restrictions Thereof Of Series E Convertible Preferred Stock Of Electric City Corp.

Exhibit
Number		Description of Exhibit
4.04 (7)		Amended and Restated Investor Rights Agreement, dated as of March 19, 2004 made by and among Electric City Corp. and Newcourt Capital USA Inc., CIT Capital Securities, Inc., Morgan Stanley Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P., Cinergy Ventures II, LLC, Leaf Mountain Company, LLC, SF Capital Partners, Ltd., Richard Kiphart, David P. Asplund, John Thomas Hurvis Revocable Trust, John Donohue, Augustine Fund, LP, And Technology Transformation Venture Fund, LP
4.07 (10)		Amended and Restated Directors’ Stock Option Plan
4.08 (11)		Form of Common Stock Warrant Used to Pay Certain Vendors
4.09 (11)		Form of Common Stock Warrant (with Cashless Exercise Provision) Used to Pay Certain Vendors
4.10 (12)		Form of Common Stock Warrant, With Vesting Period issued April 28, 2005
4.11 (12)		Form of Common Stock Warrant, Without Vesting Period issued April 28, 2005
4.12 (12)		Stock Trading Agreement dated as of April 29, 2005
4.13 (13)		Warrant Certificate dated November 22, 2005 to Purchase 2,000,000 shares of common stock Par Value $0.0001 Per Share, of Electric City Corp. issued to Laurus Master Fund, Ltd.
4.14 (13)		Registration Rights Agreement dated November 22, 2005 by and between Electric City Corp. and Laurus Master Fund, Ltd.
4.15 (19)		Amendment to 2001 Stock Incentive Plan
4.16 (22)		Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and David Asplund
4.17 (22)		Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and Daniel Parke
4.18 (22)		Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and Jeffrey Mistarz
4.19 (22)		Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and Leonard Pisano
4.20 (23)		Employee Option Agreement dated August 15, 2006 between Electric City Corp. and Jeffrey Mistarz
10.01 (1)		Sales, Distribution and Patent License Agreement, dated January 1, 1998, by and between Giorgio Reverberi and Joseph C. Marino
10.02 (1)		Sublicense Agreement, dated June 24, 1998, by and between the Electric City Corp. and Joseph C. Marino
10.03 (6)		Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City Corp. in favor of Laurus Master Fund, Ltd.
10.04 (6)		Form of Secured Convertible Revolving Note dated September 11, 2003, made by Electric City Corp. in favor of Laurus Master Fund, Ltd.
10.05 (14)		Third Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated December 13, 2005 by Electric City Corp. and American Chartered Bank.
10.06 (14)		Amended and Restated Mortgage Note made and entered into on the 13th day of December 2005, by and among American Chartered Bank and Electric City Corp., and Great Lakes Controlled Energy Corporation.
10.07 (17)		Employment Agreement, dated as of May 3, 2005, between the Company and Leonard Pisano

Exhibit
Number		Description of Exhibit
10.08 (15)		Consulting agreement with John Mitola dated January 21, 2006
10.09 (16)		Employment Agreement, dated as of January 23, 2006, between the Company and David Asplund
10.10 (18)		Stock Purchase Agreement dated as of April 3, 2006 between Electric City Corp., Eugene Borcuki and Denis Enberg
10.11 (18)		Non-Competition, Non-Disclosure And Non-Solicitation Agreement Dated as of March 31, 2006 between Electric City Corp. and Eugene Borucki
10.12 (18)		Non-Competition, Non-Disclosure And Non-Solicitation Agreement Dated as of March 31, 2006 between Electric City Corp. and Denis Enberg
10.13 (21)		Securities Purchase Agreement dated June 29, 2006
10.14 (23)		Employment Agreement, dated as of August 9, 2006, between the Company and Jeffrey Mistarz
10.15 (26)		Fourth Modification to Mortgage, Assignment of Rents and Security Agreement dated December 28, 2006 by Electric City Corp. and American Chartered Bank.
10.16 (26)		Second Amended and Restated Mortgage Note made and entered into on the 28th day of December 2006, by and among American Chartered Bank and Electric City Corp., and Great Lakes Controlled Energy Corporation.
10.17 (28)		Agreement with The Parke Family Trust dated February 1, 2007
10.18 (28)		Agreement with the PIPE Transaction investors dated February 1, 2007
10.19 (28)		Agreement with David Asplund dated November 3, 2006
10.20 (28)		Agreement with Richard Kiphart dated November 2, 2006
10.21 (28)		Agreement with David Valentine dated November 2, 2006
14.1 (8)		Code of Ethics For Chief Executive Officer And Chief Financial Officer of Electric City Corp.
14.2(17)		Code of Business Conduct And Ethics (All Officers, Directors and Employees)
21 *		List of subsidiaries
23.01*		Consent of BDO Seidman LLP with respect to the consolidated financial statements of Electric City Corp.
24		Power of Attorney (included on signature page hereto)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		LIME ENERGY CO.
		By:		/s/ David R. Asplund
				David R. Asplund
				Chief Executive Officer

April 2, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature				Date
/s/ David R. Asplund				April 2, 2007
David R. Asplund
Chief Executive Officer & Director (principal executive officer)
/s/ Jeffrey R. Mistarz				April 2, 2007
Jeffrey R. Mistarz
Chief Financial Officer (principal financial and accounting officer)

POWER OF ATTORNEY

     The undersigned hereby constitutes and appoints David Asplund and Jeffrey Mistarz, and each of them, as his true and lawful attorneys-in-fact and agents, jointly and severally, with full power of substitution and resubstitution, for and in his stead, in any and all capacities, to sign on his behalf this Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission and granting unto said attorneys-in-fact and agents, and each of them, jointly and severally, the full power and authority to do and perform each and every act and thing necessary or advisable to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, jointly or severally, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature		Title		Date
/s/ David Asplund		Chief Executive Officer & Director		April 2, 2007
David Asplund
/s/ Daniel Parke		President, Chief Operating Officer & Director		April 2, 2007
Daniel Parke
/s/ Jeffrey Mistarz		Chief Financial Officer & Treasurer		April 2, 2007
Jeffrey Mistarz
/s/ Richard Kiphart		Chairman of the Board		April 2, 2007
Richard Kiphart
/s/ Gregory Barnum		Director		April 2, 2007
Gregory Barnum
/s/ William Carey		Director		April 2, 2007
William Carey
/s/ Joseph Desmond		Director		April 2, 2007
Joseph Desmond
/s/ Gerald Pientka   Gerald Pientka		Director		April 2, 2007
/s/ David Valentine		Director		April 2, 2007
David Valentine

Report of Independent Registered Public Accounting Firm

Lime Energy Co.
Elk Grove Village, Illinois

We have audited the accompanying consolidated balance sheets of Lime Energy Co. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. We have also audited the schedule in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lime Energy Co. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share- Based Payments” using the modified prospective transition method.

Chicago, Illinois		/s/ BDO SEIDMAN, LLP
March 30, 2007

Lime Energy Co.
Consolidated Balance Sheets

December 31,		2006				2005
Assets
Current Assets
Cash and cash equivalents		$	4,663,618			$	4,229,150
Accounts receivable, less allowance for doubtful accounts of $366,000 and $325,000 at December 31, 2006 and 2005, respectively			2,825,947				1,747,019
Inventories (Note 7)			614,491				1,457,789
Advances to suppliers			132,083				324,677
Costs and estimated earnings in excess of billings on uncompleted contracts			—				28,462
Prepaid expenses and other			279,017				207,480
Total Current Assets			8,515,156				7,994,577
Net Property and Equipment (Note 8)			1,201,008				2,514,196
Long Term Receivables			102,904				—
Deferred Financing Costs, net of amortization of $680,100 at December 31, 2005 (Note 14)			—				299,964
Intangibles, net of amortization of $1,681,771 and $471,765 at December 31, 2006 and 2005, respectively (Notes 4 and Note 9)			5,126,829				1,960,835
Cost in Excess of Assets Acquired			10,450,968				4,329,402
		$	25,396,865			$	17,098,974

Lime Energy Co.
Consolidated Balance Sheets

December 31,		2006				2005
Liabilities and Stockholders’ Equity
Current Liabilities
Line of credit (Note 13)		$	—			$	2,000,000
Notes payable (Note 15)			150,000				150,000
Current maturities of long-term debt (Notes 14 and 16)			46,699				651,313
Accounts payable			1,344,725				913,369
Accrued expenses (Note 11)			1,251,777				1,228,765
Deferred revenue			967,446				984,728
Customer deposits			1,148,090				1,419,919
Total Current Liabilities			4,908,737				7,348,094
Deferred Revenue			748,980				1,044,524
Long-Term Debt, less current maturities net of unamortized discount of $0 and $898,409 as of December 31, 2006 and 2005, respectively (Notes 14 and 16)			520,392				4,328,719
Deferred Tax Liability			1,034,000				—
Total Liabilities			7,212,109				12,721,337
Commitments (Note 18 and 20)
Stockholders’ Equity (Notes 21, 22, 23, 24 and 25)
Preferred stock, $.01 par value; 5,000,000 shares authorized, Series E –0 and 236,254 issued and outstanding as of December 31, 2006 and December 31, 2005, respectively (liquidation value of $0 and $47,250,800 at December 31, 2006 and December 31, 2005, respectively)			—				2,363
Common stock, $.0001 par value; 200,000,000 shares authorized, 49,786,611 and 3,386,465 issued as of December 31, 2006 and December 31, 2005, respectively			4,979				339
Additional paid-in capital			95,025,912				64,773,556
Accumulated deficit			(76,846,135	)			(60,398,621	)
Total Stockholders’ Equity			18,184,756				4,377,637
		$	25,396,865			$	17,098,974

See accompanying notes to consolidated financial statements.      

Lime Energy Co.
Consolidated Statements of Operations

		Year ended				Year ended				Year ended
		December 31, 2006				December 31, 2005				December 31, 2004
Revenue		$	8,143,624			$	3,693,429			$	733,630
Cost of sales (includes reserve for obsolete inventory of $578,442 and $35,078 in the years ended December 31, 2006 and 2005)			6,931,294				3,691,854				862,366
Gross profit (loss)			1,212,330				1,575				(128,736	)
Selling, general and administrative (includes share based compensation expense of $4,532,001, $0 and $0 for the years ended December 31, 2006, 2005 and 2004, respectively)			12,165,700				5,363,503				4,234,240
Amortization of intangibles (Note 9)			1,210,006				471,765				—
Impairment loss (Note 10)			1,183,525				242,830				—
Operating loss			(13,346,901	)			(6,076,523	)			(4,362,976	)
Other Income (Expense)
Interest income			194,182				58,737				22,505
Interest expense (Notes 13, 14 and 17)			(3,273,370	)			(602,990	)			(648,554	)
Total other income (expense)			(3,079,188	)			(544,253	)			(626,049	)
Loss from continuing operations before discontinued operations			(16,426,089	)			(6,620,776	)			(4,989,025	)
Discontinued Operations:
Loss from operation of discontinued business			(21,425	)			(251,962	)			(170,337	)
Net Loss			(16,447,514	)			(6,872,738	)			(5,159,362	)
Preferred Stock Dividends (Note 24)			(24,347,725	)			(1,851,345	)			(4,639,259	)
Net Loss Available to Common Shareholders		$	(40,795,239	)		$	(8,724,083	)		$	(9,798,621	)
Basic and diluted loss per common share from continuing operations		$	(1.52	)		$	(2.65	)		$	(3.62	)
Discontinued operations			0.00				(0.08	)			(0.06	)
Basic and Diluted Loss Per Common Share		$	(1.52	)		$	(2.73	)		$	(3.68	)
Weighted Average Common Shares Outstanding (Note 25)			26,908,608				3,190,664				2,660,092

See accompanying notes to consolidated financial statements.

Lime Energy Co.
Consolidated Statements of Stockholders’ Equity

																																																		Total
										Series A				Series A				Series C				Series C				Series D				Series D				Series E				Series E				Additional				Accumu-				Stock-
		Common				Common				Preferred				Preferred				Preferred				Preferred				Preferred				Preferred				Preferred				Preferred				Paid-in				lated				holders’
		Shares				Stock				Shares				Stock				Shares				Stock				Shares				Stock				Shares				Stock				Capital				Deficit				Equity
Balance, December 31, 2003			2,289,468			$	229				2,396,590			$	23,966				233,614			$	2,336				157,769			$	1,578				—			$	—			$	51,379,344			$	(48,366,521	)		$	3,040,932
Issuance of common stock (net of offering costs of $910,393)			333,333				33				—				—				—				—				—				—				—				—				10,089,574				—				10,089,607
Conversion of preferred stock			130,447				13				(145,000	)			(1,450	)			—				—				—				—				(5,067	)			(51	)			1,488				—				—
Redemption of preferred stock			—				—				(514,375	)			(5,144	)			—				—				(24,087	)			(241	)			—				—				(6,994,621	)			—				(7,000,006	)
Exchange of preferred stock			—				—				(1,737,215	)			(17,372	)			(233,614	)			(2,336	)			(133,682	)			(1,337	)			210,451				2,105				18,940				—				—
Cumulative dividends on preferred stock			—				—				—				—				—				—				—				—				—				—				(1,636,780	)			—				(1,636,780	)
Satisfaction of accrued dividends through the issuance of preferred stock			—				—				—				—				—				—				—				—				16,368				164				1,636,616				—				1,636,780
Conversion of term note			8,667				1				—				—				—				—				—				—				—				—				275,599				—				275,600
Exercise of warrants (net of offering costs of $24,000)			12,333				1				—				—				—				—				—				—				3,000				30				460,969				—				461,000
Warrants issued for services received			—				—				—				—				—				—				—				—				—				—				72,500				—				72,500
Other			(74	)			—				—				—				—				—				—				—				—				—				—				—				—
Net loss for the year ended December 31, 2004			—				—				—				—				—				—				—				—				—				—				—				(5,159,362	)			(5,159,362	)
Balance, December 31, 2004			2,774,174			$	277				—			$	—				—			$	—				—			$	—				224,752			$	2,248			$	55,303,629			$	(53,525,883	)		$	1,780,271
Issuance of common stock (net of offering costs of $211,787)			416,666				42				—				—				—				—				—				—				—				—				5,413,171				—				5,413,213
Conversion of preferred stock			14,446				2				—				—				—				—				—				—				(2,167	)			(22	)			20				—				—
Acquisition of Maximum Performance Group, Inc.			166,148				16				—				—				—				—				—				—				—				—				2,691,591				—				2,691,607
Cumulative dividends on preferred stock			—				—				—				—				—				—				—				—				—				—				(1,366,900	)			—				(1,366,900	)
Satisfaction of accrued dividends through the issuance of preferred stock			—				—				—				—				—				—				—				—				13,669				137				1,366,763				—				1,366,900
Warrants issued in connection with convertible debt issuance			—				—				—				—				—				—				—				—				—				—				920,000				—				920,000
Common stock issued for services received			15,031				2				—				—				—				—				—				—				—				—				125,482				—				125,484
Warrants issued for services received			—				—				—				—				—				—				—				—				—				—				319,800				—				319,800
Net loss for the year ended December 31, 2005			—				—				—				—				—				—				—				—				—				—				—				(6,872,738	)			(6,872,738	)
Balance, December 31, 2005			3,386,465			$	339				—			$	—				—			$	—				—			$	—				236,254			$	2,363			$	64,773,556			$	(60,398,621	)		$	4,377,637
Issuance of common stock (net of offering costs of $115,107)			17,875,000				1,787				—				—				—				—				—				—				—				—				17,758,107				—				17,759,894
Cumulative dividends on preferred stock			—				—				—				—				—				—				—				—				—				—				(698,000	)			—				(698,000	)
Satisfaction of accrued dividends through the issuance of preferred stock			—				—				—				—				—				—				—				—				6,980				70				697,930				—				698,000
Conversion of preferred stock			21,695,879				2,170				—				—				—				—				—				—				(243,234	)			(2,433	)			263				—				—
Sale of Great Lakes Controlled Energy Corporation			(14,194	)			(1	)			—				—				—				—				—				—				—				—				(193,742	)			—				(193,743	)
Acquisition of Parke P.A.N.D.A. Corporation			5,000,000				500				—				—				—				—				—				—				—				—				4,999,500				—				5,000,000
Acquisition of Kapadia Consulting, Inc.			500,000				50				—				—				—				—				—				—				—				—				479,950				—				480,000
Conversion of revolver			950,865				95				—				—				—				—				—				—				—				—				951,882				—				951,977
Beneficial value of adjustment in revolver conversion price			—				—				—				—				—				—				—				—				—				—				950,865				—				950,865
Term loan liquidated damages satisfied through the issuance of common stock			161,096				16				—				—				—				—				—				—				—				—				185,244				—				185,260
Termination of post repayment interest obligation			231,500				23				—				—				—				—				—				—				—				—				266,202				—				266,225
Warrants issued for services received			—				—				—				—				—				—				—				—				—				—				25,200				—				25,200
Share based compensation			—				—				—				—				—				—				—				—				—				—				4,828,955				—				4,828,955
Net loss for the year ended December 31, 2006			—				—				—				—				—				—				—				—				—				—				—				(16,447,514	)			(16,447,514	)
Balance, December 31, 2006			49,786,611			$	4,979				—			$	—				—			$	—				—			$	—				—			$	—			$	95,025,912			$	(76,846,135	)		$	18,184,756