**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended**September
                30, 2006**





Commission
      file number: **0-19771**





**ACORN
      FACTOR, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **22-2786081**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**200
                Route 17, Mahwah, New Jersey**
            
            **07430**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(201)
      529-2026**


(Registrant’s
      telephone number, including area code)





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.




Yesx
            No ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx




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




Yes ̈
            Nox





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at November 15, 2006Common
                Stock, $0.01 par value per share
            
            9,453,659














**ACORN
      FACTOR, INC.**


**Quarterly
      Report on Form 10-Q**


**for
      the Quarterly Period Ended September 30, 2006**





**TABLE
      OF CONTENTS**





**PART
                I. Financial Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Financial Statements:Consolidated
                Balance Sheetsas
                of December 31, 2005 and September 30, 2006
            
            1Consolidated
                Statements of Operationsfor
                the nine and three month periods ended September 30, 2005 and
                2006
            
            2Consolidated
                Statement of Changes in Shareholders’ Equityfor
                the nine month period ended September 30, 2006
            
            3Consolidated
                Statements of Cash Flowsfor
                the nine month periods ended September 30, 2005 and 2006
            
            4Notes
                to Consolidated Financial Statements
            
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            
            19Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            26Item
                4.
            Controls
                and Procedures
            
            26**PART
                II. Other Information**Item
                1.
            Legal
                Proceedings
            
            27Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            27Item
                5.
            Other
                Information
            
            27Item
                6.
            Exhibits
            
            28**Signatures**
            
            29




Certain
      statements contained in this report are forward-looking in nature. These
      statements are generally identified by the inclusion of phrases such as “we
      expect”, “we anticipate”, “we believe”, “we estimate” and other phrases of
      similar meaning. Whether such statements ultimately prove to be accurate depends
      upon a variety of factors that may affect our business and operations. Many
      of
      these factors are described in our most recent Annual Report on Form 10-K as
      filed with Securities and Exchange Commission.







**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**Consolidated
      Balance Sheets**


(in
      thousands, except share and per share data)




**As
                of December 31, 2005**
            
            **As
                of September 30, 2006**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            913
            
            $
            1,830Restricted
                cash
            
            
            247
            
            
            —Restricted
                cash (under agreement with a related party)
            
            
            300
            
            
            —Accounts
                receivable, net
            
            
            4,096
            
            
            867Unbilled
                work-in-process
            
            
            348
            
            
            630Inventory
            
            
            25
            
            
            —Other
                current assets
            
            
            709
            
            
            264Total
                current assets
            
            
            6,638
            
            
            3,591Property
                and equipment, net
            
            
            500
            
            
            438Investment
                in Paketeria
            
            
            —
            
            
            811Other
                assets
            
            
            334
            
            
            314Funds
                in respect of employee termination benefits
            
            
            1,441
            
            
            1,489Restricted
                cash - non-current (under agreement with a related party)
            
            
            1,050
            
            
            —Goodwill
            
            
            129
            
            
            135Other
                intangible assets, net
            
            
            81
            
            
            57Total
                assets
            
            $
            10,173
            
            $
            6,835LIABILITIES
                AND SHAREHOLDERS’ EQUITY
              (NET
                OF SHAREHOLDERS’ DEFICIT)Current
                liabilities:Short-term
                bank credit
            
            $
            130
            
            
            —Current
                maturities of long-term debt
            
            
            160
            
            
            65Trade
                accounts payable
            
            
            1,950
            
            
            354Accrued
                payroll, payroll taxes and social benefits
            
            
            740
            
            
            443Other
                current liabilities
            
            
            2,200
            
            
            1,674Total
                current liabilities
            
            
            5,180
            
            
            2,536Long-term
                liabilities:Investment
                in Comverge, net
            
            
            1,824
            
            
            1,824Long-term
                debt
            
            
            75
            
            
            —Liability
                for employee termination benefits
            
            
            2,264
            
            
            2,452Other
                liabilities
            
            
            10
            
            
            26Total
                long-term liabilities
            
            
            4,173
            
            
            4,302Shareholders’
                equity:Common
                stock - $0.01 par value per share:Authorized
                - 20,000,000 shares; Issued -8,966,195 sharesat
                December 31, 2005 and September 30, 2006
            
            
            88
            
            
            101Additional
                paid-in capital
            
            
            40,011
            
            
            43,493Warrants
            
            
            183
            
            
            999Deferred
                stock-based compensation
            
            
            (36
            )
            
            —Accumulated
                deficit
            
            
            (35,608
            )
            
            (41,021
            )Treasury
                stock, at cost - 820,704 and 777,371 shares for December 31, 2005
                and
                September 30, 2006, respectively
            
            
            (3,791
            )
            
            (3,592
            )Accumulated
                other comprehensive income (loss)
            
            
            (27
            )
            
            17Total
                shareholders’ equity (net of shareholders’ deficit)
            
            
            820
            
            
            (3
            )Total
                liabilities and shareholders’ equity (net ofshareholders’
                deficit)
            
            $
            10,173
            
            $
            6,835




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




-1-


**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Operations** (unaudited)


(in
      thousands, except per share data)




**Nine
                months ended**
              **September
                30,**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Sales:Projects
            
            $
            2,243
            
            $
            2,203
            
            $
            586
            
            $
            682Services
                and other
            
            
            747
            
            
            683
            
            
            196
            
            
            241Total
                sales
            
            
            2,990
            
            
            2,886
            
            
            782
            
            
            923Cost
                of sales:Projects
            
            
            1,601
            
            
            1,490
            
            
            474
            
            
            469Services
                and other
            
            
            607
            
            
            547
            
            
            156
            
            
            178Total
                cost of sales
            
            
            2,208
            
            
            2,037
            
            
            630
            
            
            647Gross
                profit
            
            
            782
            
            
            849
            
            
            152
            
            
            276Operating
                expenses:Research
                and development expenses
            
            
            42
            
            
            184
            
            
            16
            
            
            87Selling,
                marketing, general and administrative expenses
            
            
            2,939
            
            
            3,735
            
            
            996
            
            
            1,769Total
                operating expenses
            
            
            2,981
            
            
            3,919
            
            
            1,012
            
            
            1,856Operating
                loss
            
            
            (2,199
            )
            
            (3,070
            )
            
            (860
            )
            
            (1,580
            )Finance
                expense, net
            
            
            (13
            )
            
            (23
            )
            
            (23
            )
            
            (17
            )Other
                income
            
            
            —
            
            
            330
            
            
            —
            
            
            —Loss
                before taxes on income
            
            
            (2,212
            )
            
            (2,763
            )
            
            (883
            )
            
            (1,597
            )Taxes
                on income
            
            
            49
            
            
            8
            
            
            43
            
            
            2Loss
                from operations of the Company and its consolidated
                subsidiaries
            
            
            (2,163
            )
            
            (2,771
            )
            
            (840
            )
            
            (1,599
            )Share
                of losses in Paketeria
            
            
            —
            
            
            (52
            )
            
            —
            
            
            (52
            )Share
                of losses in Comverge
            
            
            (380
            )
            
            (210
            )
            
            —
            
            
            —Minority
                interests
            
            
            (73
            )
            
            —
            
            
            (14
            )
            
            —Net
                loss from continuing operations
            
            
            (2,616
            )
            
            (3,033
            )
            
            (854
            )
            
            (1,651
            )Net
                income from discontinued operations,net
                of tax
            
            
            936
            
            
            78
            
            
            185
            
            
            —Gain
                on sale of dsIT Technologies, net of tax
            
            
            542
            
            
            —
            
            
            542
            
            
            —Loss
                on sale of discontinued operations and contract settlement, net of
                tax
            
            
            —
            
            
            (2,298
            )
            
            —
            
            
            —Net
                loss
            
            $
            (1,138
            )
            $
            (5,253
            )
            $
            (127
            )
            $
            (1,651
            )Basic
                and diluted net income (loss) per share:Loss
                per share from continuing operations
            
            $
            (0.32
            )
            $
            (0.37
            )
            $
            (0.11
            )
            $
            (0.20
            )Discontinued
                operations
            
            
            0.18
            
            
            (0.27
            )
            
            0.09
            
            
            —Net
                loss per share - basic and diluted
            
            $
            (0.14
            )
            $
            (0.64
            )
            $
            (0.02
            )
            $
            (0.20
            )Weighted
                average number of shares outstanding -basic and diluted
            
            
            8,117
            
            
            8,163
            
            
            8,117
            
            
            8,164




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




-2-


**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**Consolidated
      Statement of Changes in Shareholders’ Equity** (unaudited)


(in
      thousands)





Number
                of Shares
            
            Common
                Stock
            
            Additional
              Paid-In
              Capital
            
            Warrants
            
            Stock-Based
                Deferred Compensation
            
            Accumulated
                Deficit
            
            Treasury
                Stock
            
            Accumulated
                Other Comprehensive Loss
            
            TotalBalances
                as ofDecember
                31, 2005
            
            
            8,937
            
            $
            88
            
            $
            40,011
            
            $
            183
            
            $
            (36
            )
            $
            (35,608
            )
            $
            (3,791
            )
            $
            (27
            )
            $
            820Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,253
            )
            
            —
            
            
            —
            
            
            (5,253
            )Differences
                from translation of financial statements of subsidiaries
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            44
            
            
            44Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,389
            )Reclassification
                of stock-based deferred compensation
            
            
            —
            
            
            —
            
            
            (36
            )
            
            —
            
            
            36
            
            
            —
            
            
            —
            
            
            —
            
            
            —Private
                placement of common stock, net of issuance costs
            
            
            26
            
            
            12
            
            
            1,858
            
            
            695
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,565Warrants
                issued with respect to financial advisory services
            
            
            —
            
            
            —
            
            
            —
            
            
            121
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            121Exercise
                of options
            
            
            3
            
            
            1
            
            
            120
            
            
            —
            
            
            —
            
            
            (160
            )
            
            199
            
            
            —
            
            
            160Stock
                option compensation
            
            
            —
            
            
            —
            
            
            1,540
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,540Balances
                as ofSeptember
                30, 2006
            
            
            8,966
            
            $
            101
            
            $
            43,493
            
            $
            999
            
            $
            -
            
            $
            (41,021
            )
            $
            (3,592
            )
            $
            17
            
            $
            (3
            )




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




-3-


**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Cash Flows** (unaudited)


(dollars
      in thousands)




**Nine
                months ended September 30,****2005**
            
            **2006**Cash
                flows provided by (used in) operating activities:Net
                loss
            
            $
            (1,138
            )
            $
            (5,253
            )Adjustments
                to reconcile net loss to net cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            $
            198
            
            
            165Change
                in minority interests
            
            
            73
            
            
            —Share
                in losses of Comverge
            
            
            380
            
            
            210Share
                in losses of Paketeria
            
            
            —
            
            
            52Change
                in deferred taxes
            
            
            311
            
            
            —Increase
                in liability for employee termination benefits
            
            
            49
            
            
            188Gain
                on disposition of property and equipment
            
            
            (33
            )
            
            —Amortization
                of stock-based deferred compensation
            
            
            17
            
            
            1,346Gain
                on sale of dsIT Technologies
            
            
            (915
            )
            
            —Loss
                on sale of Databit and contract settlement
            
            
            —
            
            
            2,298Other
            
            
            (62
            )
            
            8Change
                in operating assets and liabilities:Decrease
                in accounts receivable, unbilled work-in process and other current
                and
                other assets
            
            
            164
            
            
            642Increase
                in inventory
            
            
            (31
            )
            
            (18
            )Increase
                (decrease) in accounts payable and other liabilities
            
            
            (350
            )
            
            (708
            )Net
                cash used in operating activities
            
            
            (199
            )
            
            (1,070
            )Cash
                flows provided by (used in) investing activities:Release
                of restricted cash
            
            
            —
            
            
            247Release
                of restricted cash (under agreement with a related party)
            
            
            —
            
            
            1,350Change
                in restricted cash
            
            
            (1,426
            )
            
            —Investment
                in Comverge
            
            
            —
            
            
            (210
            )Investment
                in Paketeria
            
            
            —
            
            
            (863
            )Amounts
                funded for employee termination benefits
            
            
            (46
            )
            
            (48
            )Maturity
                of short-term deposits
            
            
            72
            
            
            —Acquisitions
                of property and equipment
            
            
            (183
            )
            
            (119
            )Proceeds
                from sale of property and equipment
            
            
            122
            
            
            —Sale
                of dsIT Technologies - Appendix A
            
            
            2,927
            
            
            —Sale
                of Databit Inc. - Appendix B
            
            
            —
            
            
            (911
            )Net
                cash provided by investing activities
            
            
            1,466
            
            
            (554
            )Cash
                flows provided by (used in) financing activities:Short-term
                debt borrowings (repayments), net
            
            
            182
            
            
            (130
            )Proceeds
                from note payable to related party
            
            
            425
            
            
            —Repayment
                of note payable to a related party
            
            
            (425
            )
            
            —Proceeds
                from long-term debt
            
            
            90
            
            
            —Repayments
                of long-term debt
            
            
            (412
            )
            
            (112
            )Proceeds
                from private placement of common stock, net of issuance costs
            
            
            —
            
            
            2,623Proceeds
                from employee stock option exercises
            
            
            —
            
            
            160Net
                cash provided by (used in) financing activities
            
            
            (140
            )
            
            2,541Net increase
                (decrease) in cash and cash equivalents
            
            
            (11
            )
            
            917Cash
                and cash equivalents at beginning of period
            
            
            685
            
            
            913Cash
                and cash equivalents at end of period
            
            $
            674
            
            $
            1,830Supplemental
                cash flow information:Cash
                paid during the period for:Interest
            
            $
            127
            
            $
            23Income
                taxes
            
            $
            41
            
            $
            8




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




-4-




Non-cash
                items:Accrued
                expenses in respect of private placement of common stock
            
            $
            58




**Appendix
                A**
            
            **Nine
                months ended September 30, 2005**
            
            **Nine
                months ended September 30, 2006**Assets/liabilities
                disposed of in sale of dsIT Technologies:Current
                assets
            
            $
            679Non-current
                assets
            
            
            1,134Goodwill
            
            
            4,301Short-term
                debt
            
            
            (701
            )Current
                liabilities
            
            
            (327
            )Other
                liabilities
            
            
            (1,455
            )Minority
                interests
            
            
            (1,552
            )Unpaid
                transaction costs in disposition of dsIT Technologies
            
            
            (67
            )Gain
                on the sale of dsIT Technologies
            
            
            915Net
                cash provided by business disposition
            
            $
            2,927




**Appendix
                B**Assets/liabilities
                disposed of in disposition of Databit Inc. and contract
                settlement:Current
                assets
            
            $
            2,815Non-current
                assets
            
            
            40Debt
            
            
            (20
            )Current
                liabilities
            
            
            (1,816
            )Stock
                compensation costs
            
            
            315Unpaid
                transaction costs in disposition of Databit and contract
                settlement
            
            
            63Other
            
            
            (10
            )Loss
                on the sale of Databit and contract settlement
            
            $
            (2,298
            )Net
                cash used in business disposition
            
            $
            (911
            )








-5-


**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements** (unaudited)


(dollars
      in thousands)




**Note
      1: Basis of Presentation**




The
      accompanying unaudited consolidated financial statements of Acorn Factor, Inc.
      (“Acorn”) and subsidiaries (the “Company”) have been prepared in accordance with
      accounting principles generally accepted in the United States of America for
      interim financial information and with the instructions to Article 10 of
      Regulation S-X. Accordingly, they do not include all of the information and
      footnotes required by accounting principles generally accepted in the United
      States of America for complete consolidated financial statements. In the opinion
      of management, all adjustments considered necessary for a fair presentation
      have
      been included. Operating results for the nine-month period ended September
      30,
      2006 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2006. These unaudited consolidated financial statements
      should be read in conjunction with the consolidated financial statements and
      footnotes thereto included in the Company’s Annual Report on Form 10-K as
      amended, for the year ended December 31, 2005. **** Certain
      reclassifications have been made to the Company’s prior period’s consolidated
      financial statements to conform to the current period’s consolidated financial
      statement presentation. ****




As
      further described in Note 4, in March 2006, the Company completed the sale
      of
      its subsidiary, Databit Inc. The transferred operation is reflected as a
      discontinued operation for all periods presented in the Consolidated Statements
      of Operations.




**Note
      2: Financing of Operations**




In
      July
      2006, the Company completed a private placement of its Common Stock resulting
      in
      the issuance of 1,200,003 shares of Common Stock. In connection with the
      placement, the Company entered into subscription agreements with certain
      accredited investors for the purchase of the shares at a purchase price of
      $2.65
      per share, resulting in gross proceeds to the Company of $3,180 and net proceeds
      of approximately $2,565 after deducting commissions and other transaction costs.




The
      $1,055 of working capital at September 30, 2006, included approximately $560
      of
      working capital in the Company’s 80% owned dsIT Solutions Ltd. subsidiary
      (“dsIT”). Due to Israeli tax and company law constraints, as well as dsIT’s own
      cash flow requirements, such working capital and cash flows from dsIT’s
      operations are not readily available to finance US based corporate
      activities.




dsIT
      was
      not utilizing any of its $360 lines of credit as of September 30, 2006. dsIT's
      lines of credit are denominated in NIS and bear a weighted average interest
      rate
      of the Israeli prime rate
      plus
      2.5% per annum.
      The Israeli prime rate fluctuates and as of September 30, 2006 was 7.0%.




As
      of
      September 30, 2006, dsIT is in technical violation of its covenant with one
      of
      its banks though the bank is continuing to provide funding to dsIT despite
      the
      technical violation. dsIT is working towards remedying the technical violation.
      In addition, the Company has agreed to be supportive of dsIT’s liquidity
      requirement over the next 12 months.




The
      Company’s available cash is not expected to be sufficient to fund its US based
      corporate activities for the next 12 months. The Company is exploring possible
      financing transactions to raise additional funds to finance its US activities. The
      Company’s CEO has agreed to provide up to $300 of financing to the Company over
      the next year to fund its US activities to the extent that it is not able to
      raise that amount from other sources.




**Note
      3: Accounting Policies**




(a)
      Stock
      Based Compensation




Prior
      to
      January 1, 2006, the Company accounted for share-based compensation in
      accordance with Accounting Principles Board Opinion No. 25, (“APB 25”)
“Accounting for Stock Issued to Employees,” and related interpretations. The
      Company also followed the disclosure requirements of SFAS No. 123, “Accounting
      for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure”. As a result, no expense
      was recognized for options to purchase the Company’s common stock that were
      granted with an exercise price equal to fair market value at the day of the
      grant. Effective January 1, 2006, the Company adopted the provisions of
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment,” (“SFAS 123R”) which establishes accounting for equity instruments
      exchanged for services. Under the provisions of SFAS 123R, share-based
      compensation cost is measured at the grant date, based on the fair value of
      the
      award, and is recognized as expense on a straight-line basis over the employee’s
      requisite service period (generally the vesting period of the equity grant).
      The
      Company elected to adopt the modified prospective transition method as provided
      by SFAS 123R and, accordingly, financial statement amounts for the prior periods
      presented in this Form 10-Q have not been restated to reflect the fair value
      method of expensing share-based compensation. The Company has applied the
      provisions of SAB 107 in its adoption of SFAS 123R. See Note 7 to the condensed
      consolidated interim financial statements for information on the impact of
      the
      Company’s adoption of SFAS 123R and the assumptions used to calculate the fair
      value of share-based employee compensation.




-6-




The
      Company recognizes no income tax benefit on its stock compensation expense
      as it
      is not “more likely than not” that it will be able to utilize them to offset
      future income taxes.




The
      following table illustrates the effect on net income and net income per share
      if
      the Company had applied the fair value recognition provisions of SFAS 123R
      for
      periods prior to January 1, 2006:





Nine
                months ended September 30, 2005
            
            Three
                months ended September 30, 2005Net
                loss as reported
            
            $
            (1,138
            )
            $
            (127
            )Plus:
                Stock-based employee and director compensation expense included in
                reported net loss
            
            
            17
            
            
            5Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (242
            )
            
            (80
            )Pro
                forma net loss
            
            $
            (1,363
            )
            $
            (202
            )Net
                loss per share:Basic
                and diluted - as reportedFrom
                continuing operations
            
            $
            (0.32
            )
            $
            (0.11
            )From
                discontinued operations
            
            
            0.18
            
            
            0.09Basic
                and diluted loss per share as reported
            
            $
            (0.14
            )
            $
            (0.02
            )Basic
                and diluted - pro formaFrom
                continuing operations
            
            $
            (0.33
            )
            $
            (0.10
            )From
                discontinued operations
            
            
            0.16
            
            
            0.08Basic
                and diluted loss per share - pro forma
            
            $
            (0.17
            )
            $
            (0.02
            )





The
      historical pro forma impact of applying the fair value method prescribed by
      SFAS
      123R is not representative of the impact that may be expected in the future
      due
      to changes resulting from additional grants in future years and changes in
      assumptions such as volatility, interest rates and expected life used to
      estimate fair value of the grants in future years.




For
      restricted common stock, we recognize compensation expense over the vesting
      period for the difference between the exercise price or purchase price and
      the
      fair market value on the measurement date.




(b)
      Recently Issued Accounting Pronouncements




In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 155, “Accounting for Certain Hybrid Financial Instruments — an
      Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS
      No. 155 allows financial instruments that contain an embedded derivative
      and that otherwise would require bifurcation to be accounted for as a whole
      on a
      fair value basis, at the holders’ election. SFAS No. 155 also clarifies and
      amends certain other provisions of SFAS No. 133 and SFAS No. 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006 (January 1, 2007 for the
      Company). The adoption of SFAS No. 155 is not expected to have a material
      impact on the Company’s consolidated financial condition or results of
      operations.




-7-




In
      June
      2006, the FASB issued FASB Interpretation No. 48 ( FIN 48), Accounting for
      Uncertainty in Income Taxes, an Interpretation of SFAS No. 109. FIN 48 clarifies
      the accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS No. 109, Accounting for Income
      Taxes, by prescribing a recognition threshold and measurement attribute for
      the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. Under FIN 48, the financial statement
      effects of a tax position should initially be recognized when it is more likely
      than not, based on the technical merits, that the position will be sustained
      upon examination. A tax position that meets the more-likely-than-not recognition
      threshold should initially and subsequently be measured as the largest amount
      of
      tax benefit that has a greater than fifty percent likelihood of being realized
      upon ultimate settlement with a taxing authority. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The cumulative effect, if any, of
      applying the provisions of FIN 48 will be reported as an adjustment to the
      opening balance of retained earnings in the period adopted. The Company is
      currently evaluating the impact that the adoption of FIN 48 will have on its
      consolidated financial position, results of operations, and
      liquidity.




In
      September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (“SAB 108”). SAB 108 addresses the diversity in practice of
      quantifying financial statement misstatements resulting in the potential build
      up of improper amounts on the balance sheet. SAB 108 provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a current year misstatement.
      The SEC staff believes that registrants should quantify errors using both a
      balance sheet and an income statement approach and evaluate whether either
      approach results in quantifying a misstatement that, when all relevant
      quantitive and qualitative factors are considered, is material. SAB 108 is
      effective for companies with fiscal years ending after November 15, 2006. SAB
      108 allows a one-time transitional cumulative effect adjustment to beginning
      retained earnings, in the first year of adoption, for errors that were not
      previously deemed material, but are material under the guidance in SAB 108.
      The
      Company is currently assessing the impact of SAB 108 on its consolidated
      financial statements and results of operations.




In
      September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
      Measurements”, which defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. This Statement applies in conjunction
      with other accounting pronouncements that require or permit fair value
      measurements. This Statement shall be effective for financial statements issued
      for fiscal years beginning after November 15, 2007. The Company is currently
      evaluating the impact that the adoption of SFAS 157 will have on its
      consolidated financial position and results of operations.




**Note
      4: Sale of Databit and Contract Settlement**




On
      March
      10, 2006 the Company entered into a Stock Purchase Agreement dated as of March
      9, 2006 (the "SPA"), for the sale of all the outstanding capital stock of its
      Databit Inc. subsidiary ("Databit") to Shlomie Morgenstern, President of Databit
      and a Vice President of the Company. The transactions contemplated under the
      SPA, and the related transactions to which the Company, Shlomie Morgenstern
      and
      the Company’s CEO, George Morgenstern, were party, were consummated on March 10,
      2006 and included the following:




(a)
      Termination of the Employment Agreement dated August 19, 2004 among Shlomie
      Morgenstern, Databit and the Company and the release of the Company from any
      and
      all liability (other than under the related stock option and restricted stock
      agreements which would be modified as described below) including the waiver
      by
      Shlomie Morgenstern of any and all severance or change of control payments
      to
      which he would have been entitled.




(b)
      Amendment of the option and restricted stock agreements between the Company
      and
      Shlomie Morgenstern to provide for acceleration of any unvested grants on the
      closing of the transactions and for all options to be exercisable through 18
      months from the closing.




-8-




(c)
      The
      assignment to and assumption by Databit of the obligations of the Company to
      George Morgenstern under the Employment Agreement between the Company and George
      Morgenstern dated January 1, 1997, as amended (the "GM Employment Agreement")
      upon the following terms:




(i)
      Reduction of the amounts owed to George Morgenstern under the GM Employment
      Agreement by the lump sum payment described below and the modifications to
      options and restricted stock agreements described below.




(ii)
      A
      release by George Morgenstern of the Company from any and all liability and
      obligations to him under the GM Employment Agreement, subject to a lump sum
      payment of $600 (the “contract settlement”).




(d)
      The
      assumption by Databit of the Company's obligations under the Company's leases
      for the premises in New York City and Mahwah, New Jersey, which provide for
      aggregate rents of approximately $450 over the next three years.




(e)
      The
      amendment of the option agreement with George Morgenstern dated December 30,
      2004 to provide for the acceleration of the 60,000 options that are not
      currently vested and the extension of the exercise period for all options held
      by George Morgenstern to the later of (i) September 2009 and (ii) 18 months
      after the cessation of service under the new consulting agreement described
      below.




(f)
      The
      amendment of the Restricted Stock Agreement dated August 31, 1998 between George
      Morgenstern and the Company to provide for the removal of any vesting conditions
      from the 20,000 shares still subject to such conditions.




(g)
      Execution and delivery by George Morgenstern and the Company of a new consulting
      agreement for a period of two years, pursuant to which George Morgenstern would
      serve as a consultant to the Company, primarily to assist in the management
      of
      the Company's dsIT subsidiary, which agreement provides for de minimus
      compensation per year plus a non-accountable expense allowance of $65 per year
      to cover expected costs of travel and other expenses.




As
      a
      result of the transaction, the Company transferred the following assets and
      liabilities:




**Assets**Cash
            
            $
            185Accounts
                receivable, net
            
            
            2,696Inventory
                and other current assets
            
            
            119Property
                and equipment, net
            
            
            35Other
                assets
            
            
            5****Reduction
                in total assets
            
            $
            3,040**Liabilities**Trade
                payables, accrued payroll, payroll taxes and social benefits and
                other
                current liabilities
            
            $
            1,816Long-term
                debt
            
            
            20Reduction
                in total liabilities
            
            $
            1,836Excess
                of assets over liabilities
            
            $
            1,204




The
      excess of assets over liabilities transferred was treated as part of the loss
      on
      the sale of Databit.




-9-




Profit
      and loss of the discontinued operations of Databit were as follows:




Period
                ended
              March
                9, 2006
            
            Nine
                months ended September 30, 2005
            
            Three
                months ended September 30, 2005Sales
            
            $
            2,949
            
            $
            13,637
            
            $
            4,491Cost
                of sales
            
            
            2,316
            
            
            11,140
            
            
            3,670Gross
                profit
            
            
            633
            
            
            2,497
            
            
            821Selling,
                marketing, general and administrative expenses
            
            
            558
            
            
            2,358
            
            
            785Income
                from operations
            
            
            75
            
            
            139
            
            
            (36
            )Other
                income, net
            
            
            3
            
            
            —
            
            
            —Finance
                income (expense), net
            
            
            —
            
            
            (5
            )
            
            2Net
                income before income taxes
            
            
            78
            
            
            134
            
            
            (34
            )Income
                taxes
            
            
            —
            
            
            (16
            )
            
            1Net
                income (loss) from discontinued operations
            
            $
            78
            
            $
            118
            
            $
            (33
            )




As
      a
      result of the transaction, the Company recorded a loss of $2,298. In addition,
      cash, which had previously been restricted with respect to the GM Employment
      Agreement, was no longer restricted. Subsequent to the first quarter of 2006,
      the Company no longer has any activity in its Computer Hardware
      segment.





The
      loss
      of the sale of Databit and contract settlement is comprised of the
      following:





Excess
                of assets over liabilities transferred
            
            $
            1,204Contract
                settlement costs
            
            
            600Stock
                compensation expense
            
            
            315Professional
                fees and other transaction costs
            
            
            179****Total
                loss on the sale of Databit and contract settlement
            
            $
            2,298




**Note
      5: Investment in Comverge**




The
      change in the Company’s Comverge investment, during the nine months ended
      September 30, 2006 is as follows:




Common
                stock
            
            Preferred
                stock
            
            Provision
                for unrecognized losses
            
            Net
                investment in ComvergeBalances
                as of December 31, 2005
            
            $
            (1,824
            )
            $
            (173
            )
            $
            173
            
            $
            (1,824
            )Additional
                investment in Preferred stock
            
            
            —
            
            
            210
            
            
            —
            
            
            210Equity
                loss in Comverge
            
            
            —
            
            
            (841
            )
            
            631
            
            
            (210
            )Balances
                as of September 30, 2006
            
            $
            (1,824
            )
            $
            (804
            )
            $
            804
            
            $
            (1,824
            )




In
      the
      first quarter of 2006, the Company recorded an additional $210 investment in
      Comverge’s Series C Preferred Stock. As result of the investment, the Company
      maintained its preferred stock holdings at approximately 7%. In addition, the
      Company also owns approximately 76% of Comverge’s common shares. As a result of
      the investment, the Company immediately recognized a loss equal to (i) its
      provision for unrecognized losses in Comverge of $173 as
      of
      December 31, 2005 and (ii) an additional $37 representing its 7% equity share
      of
      Comverge’s losses for the first quarter of 2006.




-10-




As
      of
      September 30, 2006, the Company’s accumulated share of losses attributable to
      its Comverge preferred stock was equal to its investment in Comverge’s preferred
      stock. As a result, the Company has ceased recording losses against its
      preferred stock investment. In the future, equity income will be recorded to
      the
      Company’s preferred stock investment only once Comverge’s equity reaches the
      level it was when the Company ceased recording equity losses. As at September
      30, 2006, the Company had a provision for unrecognized losses in Comverge of
      $804 and the Company will record equity income from its preferred investment
      in
      Comverge, if and when Comverge’s records net income in excess of approximately
      $11,950. Equity income from the Company’s preferred investment may be recorded
      up to the Company’s original $3,854 preferred
      share investment in Comverge, and thereafter to its investment in Comverge’s
      common shares, of which the Company currently owns approximately
      76%.




**Note
      6: Investment in Paketeria**




On
      August
      7, 2006 the Company entered into a Common Stock Purchase Agrement with Paketeria
      GmbH, a limited liability company incorporated under the laws of Germany, and
      certain Paketeria shareholders, for the purchase by the Company of an
      approximately 23% interest in Paketeria for a purchase price of approximately
      €598 ($776) plus transaction fees of approximately $87. Paketeria is a Berlin
      based store owner and franchisor whose stores provide eBay drop shop, post
      and
      parcels, office supplies, photo processing, photocopy and printer cartridge
      refilling services in Germany.




In
      addition to the Common Stock Purchase Agreement, the Company also entered into
      a
      Note Purchase Agreement with Paketeria’s founder and managing director. Under
      the Note Purchase Agrement, the Company is obligated to purchase from the
      founder and managing director all or a portion of the €210 Promissory Note
      issued by Paketeria and payable to him. The Promissory Note is convertible
      into
      shares of Paketeria at a conversion price of €50.70 per share, accrues interest
      at a rate of 8% per annum, matures on August 7, 2009 and may be redeemed by
      the
      Company in whole or in part at any time prior to its maturity or conversion.
      Under the terms of the Note Purchase Agreement, the Company would be required
      to
      purchase one third of the principal amount of the Note upon Paketeria’s
      achieving each of three franchise licensing milestones—the licensing of its
      60th, 75th, and 115th franchises.




The
      Company has allocated $31 of the purchase price to the fair market value of
      the
      call option to purchase and convert the Note in shares of Paketeria.




The
      Company has allocated $30 of the purchase price to the fair value of the put
      option which requires the Company to purchase the principal amount of the Note.
      At September 30, 2006, the Company redetermined the fair value of the put option
      and determined it to be $15 based upon Paketeria’s advancement on the milestones
      noted above. The reduction in the fair value of the put option was recorded
      as
      part of the Company’s equity loss in Paketeria.





The
      Company also entered into a Stock Purchase Agreement with two shareholders
      of
      Paketeria—one of whom is the Company’s President and Chief Executive Officer and
      the other who is one of the Company’s new directors. Pursuant to that agreement,
      the Company is entitled through August 2007 to purchase the shares of Paketeria
      held by the two Paketeria shareholders for an aggregate purchase price of the
      US
      dollar equivalent on the date of purchase of €598 (approximately $758 at the
      current exchange rate), payable in Company Common Stock and warrants on the
      same
      terms as the Company’s recently completed private placement. At the current
      exchange rate this would result in the issuance of approximately 273,000 shares
      of Common Stock and warrants exercisable for 68,000 shares of Common Stock.
      The
      warrants would have an exercise price of $2.78 per share and be exercisable
      for
      five years from their grant date. The Company has determined the fair value
      of
      the option to purchase the shares under the Stock Purchase Agreement to be
      $68.





The
      Company’s investment in Paketeria is accounted for using the equity method in
      accordance with APB Opinion No. 18, “The Equity Method of Accounting for
      Investments in Common Stock” and has been allocated to the underlying assets in
      accordance with FAS No. 141 “Business Combinations”. Subject to confirmation
      from an independent appraisal, the Company has allocated the entire remaining
      balance of the investment in Paketeria of $794 to the non-compete agreement
      given to Paketeria’s founder and managing director. The Company is awaiting the
      completion of an independent assessment of its Purchase Price Allocation. The
      non-compete agreement is to be amortized over four years and is subject to
      periodic tests for impairment in accordance with FAS No. 142 “Goodwill and Other
      Intangible Assets”. The non-compete ageement is not reported as such in the
      consolidated balance sheet of the Company, but it is reported as a component
      of
      the equity investment. The Company’s share of losses in Paketeria for the period
      from August 7, 2006 to September 30, 2006 of $52 is comprised of $34 reflecting
      the Company’s equity loss in Paketeria’s earnings and $33 of amortization of the
      non-compete agreement offset by the reduction in the fair value of the put
      option of $15.




-11-





In
      connection with its investment in Paketeria, the Company also entered into
      an
      Investors’ Rights Agreement with Paketeria and it shareholders, whereby it was
      given certain rights including a right of first offer, with respect to any
      future issuance of Paketeria securities, and tag-along rights, with respect
      to
      any future sale by an existing shareholder. The Company was also given certain
      blocking rights with respect to decisions of the shareholders and management
      of
      Paketeria.





See
      Note
      9(c) with respect to the options granted to Paketeria’s founder and managing
      director as part of the Company’s investment in Paketeria.




-12-


**Note
      7: Goodwill and Other Intangible Assets**




There
      were no acquisitions or impairments of goodwill recorded during the nine-month
      period ended September 30, 2006.




The
      Company’s amortizable intangible assets consisted of software licenses, with a
      nominal gross carrying amount of $224 and nominal accumulated amortization
      of
      $143 and $169, as of December 31, 2005 and September 30, 2006, respectively.
      All
      intangibles assets are being amortized over their estimated useful lives, which
      averaged five years and the nominal a mortization
      expense for each of the nine months ended September 30, 2005 and 2006 amounted
      to $24 and $29, respectively. Nominal amortization expense of the remaining
      balance of these assets, for the years ending September 30, 2007, 2008, 2009
      and
      2010, is estimated to be $29, $12 $7 and $7, respectively.




**Note
      8: Private Placement of Common Stock**




In
      July
      2006, the Company completed a private placement of its Common Stock, par value
      $.01 per share, resulting in the issuance of 1,200,003 shares of Common Stock.
      In connection with the placement, the Company entered into subscription
      agreements with certain accredited investors for the purchase of the shares
      at a
      purchase price of $2.65 per share, resulting in gross proceeds to the Company
      of
      $3,180. By the terms of the subscription agreements, each subscriber, in
      addition to the Common Stock purchased, received a warrant exercisable for
      the
      purchase of 25% of the number of shares purchased, resulting in the issuance
      of
      warrants to purchase 300,005 shares. The warrants are exercisable for shares
      of
      the Company’s Common Stock for a period of five years at an exercise price of
      $2.78 per share and are cancelable by the Company in certain circumstances.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the warrants to purchase 300,005 shares of common stock of the Company, using
      a
      risk free interest rate of 5.1%, its contractual life of five years, an annual
      volatility of 102% and no expected dividends. The Company estimated the fair
      value of the warrants to be approximately $493.




In
      connection with the offering, the Company retained a registered broker-dealer
      to
      serve as placement agent. In accordance with the terms of the agreement, the
      placement agent received a 7% selling commission, 3% management fee, and 1%
      advisory fee of the gross proceeds of the offering. In addition, the placement
      agent received warrants with the same terms as those issued to the subscribers
      exercisable for the purchase of 10% of the number of shares purchased in the
      offering.




Out
      of
      the gross proceeds received at the closings, the Company paid the placement
      agent commissions and expenses of approximately $366 and incurred legal and
      other costs of approximately $249. In addition, the Company issued to the
      placement agent warrants to purchase 120,001 shares of Common Stock on the
      same
      terms as those issued to the subscribers.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the warrants to purchase 120,001 shares of common stock of the Company, using
      a
      risk free interest rate of 5.1%, its contractual life of five years, an annual
      volatility of 102% and no expected dividends. The Company estimated the fair
      value of the warrants to be approximately $202.




**Note
      9: Stock Based Compensation**




(a) Stock
      Option Plans




The
      Company’s stock option plans provide for the grant to officers, directors and
      other key employees of options to purchase shares of common stock at not less
      than 85% of the market value of the Company’s common stock on the date of grant.
      The purchase price must be paid in cash. Each option is exercisable for one
      share of the Company’s common stock. All options expire within five to ten years
      from the date of the grant, and generally vest over a three-year period from
      the
      date of the grant. At September 30, 2006, no options or other equity instruments
      were available for grant under the various plans as the plans have expired,
      other than 335,000 shares available for grant under the 1994 Outside Director
      Stock plan.




-13-


A
      summary
      of stock option activity for the nine months ended September 30, 2006 is as
      follows:





Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Life
            
            Aggregate
                Intrinsic ValueOutstanding
                at December 31, 2005
            
            
            1,575,355
            
            $
            2.48Granted
                at market price
            
            
            100,000
            
            $
            2.71Granted
                at discount to market price
            
            
            650,000
            
            $
            2.14Exercised
            
            
            (72,133
            )
            $
            1.70
            
            
            
            
            $
            72Forfeited
                or expired
            
            
            (154,167
            )
            $
            4.98Outstanding
                at September 30, 2006
            
            
            2,099,035
            
            $
            2.42
            
            
            3.0
                years
            
            $
            2,635Exercisable
                at September 30, 2006
            
            
            1,801,522
            
            $
            2.51
            
            
            2.8
                years
            
            $
            2,209





The
      weighted average grant date fair value of 550,000 stock options granted to
      employees and directors during the first nine months of 2006 was $2.28 per
      share
      based on the assumptions below.




The
      fair
      value options granted to employees during the nine months ended September 30,
      2006 periods was estimated on the grant date using the Black-Scholes
      option-pricing model with the following weighted average
      assumptions:





Volatility
            
            
            106
            %Expected
                term (years)
            
            
            3.6
                yearsRisk
                free interest rate
            
            
            4.8
            %Expected
                dividend yield
            
            
            0.0
            %





The
      Company estimated volatility by considering historical stock volatility. The
      expected term of options granted is based on management’s estimate since the
      Company’s history of option exercises is too brief to have established
      historical rates. The risk-free interest rates are based on the U.S. Treasury
      yields for a period consistent with the expected term. Additionally, the Company
      expects no dividends to be paid. The Company believes that the valuation
      technique and the approach utilized to develop the underlying assumptions are
      appropriate in determining the estimated fair value of the Company’s stock
      options granted in the nine months ended September 30, 2006. Estimates of fair
      value are not intended to predict actual future events or the value ultimately
      realized by persons who receive equity awards .




In
      connection with the stock option exercises during the nine months ended
      September 30, 2006, the Company received proceeds of $120. Of the 72,133 shares
      issued as a result of stock option exercises in the nine months ended September
      30, 2006, 43,333 were issued from treasury stock and 28,800 were newly issued
      shares. During the nine months ended September 30, 2006, the Company recorded
      an
      increase of $160 to its accumulated deficit with respect to the treasury shares
      issued from option exercises.




-14-




Stock-based
      compensation expense included in the Company’s statements of operations was:





Nine
                months ended September 30, 2006
            
            Three
                months ended September 30, 2006Cost
                of sales
            
            $
            22
            
            $
            1Selling,
                marketing, general and administrative expenses
            
            
            1,203
            
            
            763Loss
                on sale of discontinued operations and contract settlement
            
            
            315
            
            
            —Total
                stock based compensation expense
            
            $
            1,540
            
            $
            764





As
      at
      September 30, 2006, the Company had a total of approximately $335 of
      compensation expense not yet recognized with respect to employee stock options
      to be recognized over a period of approximately two years.




(b)
      Restricted Stock




In
      August
      2004, the CEO of Databit received
      a restricted stock grant of 95,000 shares of common stock of the Company, which
      were to vest one third on each of the second, third and fourth anniversaries
      of
      the grant. The Company recognized deferred compensation of $68 with respect
      to
      the restricted stock grant which was to be amortized as
      compensation expense on a straight-line basis over the vesting period of the
      grant. At January 1, 2006, $36 of deferred compensation remained to be
      amortized. As a result of the sale of Databit, all the restricted shares
      immediately vested and all remaining deferred compensation was recognized as
      expense. During the three months ended September 30, 2006, the Company
      recognized $5 of deferred compensation expense in selling, marketing, general
      and administrative expenses and $31 as part of the loss on the sale of
      discontinued operations and contract settlement.





As
      of
      September 30, 2006, the Company had no remaining unrecognized compensation
      costs
      related to non-vested restricted stock.




(c)
      Other
      services




In
      July
      2006, the Company entered into an agreement with an investor relations firm
      for
      investor relation and strategic planning services. In exchange for these
      services, the Company agreed to pay an annual fee of $138 for a period of one
      year and to provide the investor relations firm an option for the purchase
      of
      120,000 shares of the Company’s Common Stock. The option vested with respect to
      40,000 shares immediately upon the grant, with the balance vesting at a rate
      of
      5,000 per month. The options have an exercise price of $2.80 and expire after
      five years.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the option to purchase the 40,000 shares immediately vesting and the 10,000
      shares vesting over the period from the date of the agreement through September
      30, 2006. The Company used a risk free interest rate of 5.0%, an expected life
      of four years, an annual volatility of 109% and no expected dividends to
      determine the value the options granted. The Company estimated the fair value
      of
      the options granted to be approximately $115 and recorded that amount to
      selling, marketing, general and administrative expenses with respect to the
      option granted to the investor relations firm in the nine months ended September
      30, 2006. As each additional tranche of 5,000 options vests, the Company will
      record additional selling, marketing, general and administrative expense based
      on an updated calculated Black-Scholes calculation for each
      tranche.




In
      August 2006,
      as
      part of the Company’s acquisition of Paketeria (see Note 6), the Company granted
      the founder and managing director of Paketeria an option to purchase 150,000
      shares of the Company’s Common Stock. The option has an exercise price of $2.80,
      a contractual life of five years and vests one-third upon the achievment of
      each
      of the milestones described above in Note 6.




-15-




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the options to purchase the 150,000 shares of Common Stock of the Company,
      using
      a risk free interest rate of 5.0%, an expected life of four years, an annual
      volatility of 109% and no expected dividends. At September 30, 2006, the Company
      estimated the fair value of the options to be approximately $381. During the
      nine months ended September 30, 2006, the Company recorded $199 to selling,
      marketing, general and administrative expenses with respect to the option
      granted to the founder and managing director of Paketeria based on performance
      towards the milestones described above in Note 6.




In
      September 2006, the Company agreed to provide a warrant to purchase 50,000
      shares of the Company’s Common Stock to two individuals who provided and in the
      future will provide financial advisory services. The warrants vest immediately
      upon the grant, have an exercise price of $3.00 and expire after five
      years.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the warrant to purchase the 50,000 shares of Common Stock of the Company, using
      a risk free interest rate of 5.0%, an expected life of four years, an annual
      volatility of 109% and no expected dividends. The Company estimated the fair
      value of the option to be approximately $121. During the nine months ended
      September 30, 2006, the Company recorded the $121 to selling, marketing, general
      and administrative expenses with respect to the warrants granted to two the
      individuals.




**Note
      10: Warranty Provision**




The
      Company grants its customers one-year product warranty. No provision was made
      in
      respect of warranties based on the Company’s previous history.




**Note
      11: Bank Settlement Agreement**




In
      March
      2006, the Company reached a settlement agreement with an Israeli Bank (the
      “Bank”) with respect to its claims against the Bank and the Bank’s
      counterclaims. The Bank agreed to return to the Company attorney fees and court
      costs, plus interest and CPI adjustments, of approximately $94. As a result
      of
      the settlement agreement, the accrued loss for contingent performance of bank
      guarantees of $410 was reversed and the $247 collateralized portion of these
      guarantees (shown as restricted cash at December 31, 2005) are no longer
      classified as restricted cash. The Company recorded other income of $330 in
      the
      first quarter of 2006 as a result of the settlement agreement.





**Note
      12: Segment Information**




As
      a
      result of the sale of Databit and the change in management of the Company,
      the
      Company has redefined its reported operating segments. The Company’s current
      operations are based upon two operating segments, which operate in the Company’s
      dsIT subsidiary:





·
            RT
                Solutions whose activities are focused on two areas - naval solutions
                and
                other real-time and embedded hardware & software
                development.





·
            IT
                Solutions whose activities are comprised of the Company’s OncoProTM
                solution state of the art chemotherapy package for oncology and hematology
                departments and EasyBillTM, an easy-to-use, end-to-end, modular customer
                care and billing system designed especially for small and medium-sized
                enterprises with large and expanding customer
                bases.






-16-





Prior
      year segment disclosures have been conformed to the new segment
      presentation.





**RT
                Solutions**
            
            **IT
                Solutions**
            
            **Other****(*)**
            
            **Total**Nine
                months ended September 30, 2006:Revenues
                from external customers
            
            $
            1,983
            
            $
            713
            
            $
            190
            
            $
            2,886Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            718
            
            
            75
            
            
            56
            
            
            849Segment
                income (loss)
            
            
            (88
            )
            
            (281
            )
            
            18
            
            
            (351
            )Nine
                months ended September 30, 2005:Revenues
                from external customers
            
            $
            2,106
            
            $
            860
            
            $
            24
            
            $
            2,990Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            619
            
            
            139
            
            
            24
            
            
            782Segment
                income (loss)
            
            
            (46
            )
            
            (146
            )
            
            17
            
            
            (175
            )Three
                months ended September 30, 2006:Revenues
                from external customers
            
            $
            649
            
            $
            198
            
            $
            76
            
            $
            923Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            221
            
            
            18
            
            
            37
            
            
            276Segment
                income (loss)
            
            
            (43
            )
            
            (112
            )
            
            22
            
            
            (133
            )Three
                months ended September 30, 2005:Revenues
                from external customers
            
            $
            548
            
            $
            231
            
            $
            3
            
            $
            782Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            118
            
            
            31
            
            
            3
            
            
            152Segment
                income (loss)
            
            
            (117
            )
            
            (52
            )
            
            1
            
            
            (168
            )




(*)  Represents
      operations in Israel that did not meet the quantitative thresholds of SFAS
      No.
      131.




**Reconciliation
      of Segment Income (Loss) to Consolidated Net Loss**





Nine
                months ended
              September
                30,
            
            Three
                months ended
              September
                30,2005
            
            2006
            
            2005
            
            2006Total
                loss for reportable segments
            
            $
            (192
            )
            $
            (369
            )
            $
            (169
            )
            $
            (155
            )Other
                operational segment income
            
            
            17
            
            
            18
            
            
            1
            
            
            22Total
                operating loss
            
            
            (175
            )
            
            (351
            )
            
            (168
            )
            
            (133
            )Minority
                interests
            
            
            (73
            )
            
            —
            
            
            (14
            )
            
            —Share
                of losses in Comverge
            
            
            (380
            )
            
            (210
            )
            
            —
            
            
            —Share
                of losses in Paketeria
            
            
            —
            
            
            (52
            )
            
            —
            
            
            (52
            )Net
                loss of corporate headquarters and other unallocated costs
            
            
            (1,988
            )
            
            (2,420
            )
            
            (672
            )
            
            (1,466
            )Net
                loss from continuing operations
            
            
            (2,616
            )
            
            (3,033
            )
            
            (854
            )
            
            (1,651
            )Discontinued
                operations
            
            
            936
            
            
            78
            
            
            185
            
            
            —Gain
                on sale of dsIT Technologies
            
            
            542
            
            
            —
            
            
            542
            
            
            —Loss
                on sale of discontinued operations and contract settlement
            
            
            —
            
            
            (2,298
            )
            
            —
            
            
            —Total
                consolidated net loss
            
            $
            (1,138
            )
            $
            (5,253
            )
            $
            (127
            )
            $
            (1,651
            )






-17-




**Note
      13: Subsequent Events**





(a)
      Additional investment in Paketeria





On
      October 30, 2006 the Company increased its ownership in Paketeria from 23%
      to
      approximately 33%. The increase was accomplished through (i) the purchase and
      conversion into 2,850 Paketeria shares pursuant to a Purchase Notice Conversion
      and Accession Agreement of €326 ($419), representing two-thirds (plus accrued
      interest) of a Promissory Note originally issued to Paketeria’s founder and
      managing director and (ii) an additional investment by the Company of
      approximately €183 ($235) for the purchase of an additional 3,000 Paketeria
      shares.





(b) Subsidiary
      stock option plan





In
      October 2006, the Company adopted a Key Employee Stock Option Plan (the “Plan”)
      for its dsIT Solutions Ltd. subsidiary. Under the Plan, a committee of board
      members of dsIT, to initially be comprised of the entire board of directors
      of
      dsIT, shall be created for its administration.





The
      exercise price and the manner of exercise of the options to be granted under
      the
      Plan shall be determined by the committee on the date of grant. Unless otherwise
      provided by the committee, the right to exercise all vested options shall
      terminate (i) one year following the date of optionee’s termination, if such
      termination was by optionee, (ii) eighteen months following the date or
      optionee’s termination, if the termination was by dsIT, or (iii) immediately, if
      optionee is terminated by dsIT for cause, as such term is defined in the
      Plan.





If
      all
      options under the Plan were granted and exercised, Company holdings in dsIT
      could be diluted from its current holdings of approximately 80% to approximately
      50%.




-18-




**ACORN
      FACTOR, INC.**


**Management’s
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**





**Item
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**




The
      following discussion includes statements that are forward-looking in nature.
      Whether such statements ultimately prove to be accurate depends upon a variety
      of factors that may affect our business and operations. Certain of these factors
      are discussed in this report and in our Annual Report on Form 10-K as
      amended, for the year ended December 31, 2005.




**Overview
      and Trend Information**




In
      October 2006, following our August 2006 investment in Paketeria in which we
      purchased an approximately 23% interest in Paketeria GmbH for approximately
      $863,000 (including transaction costs), we increased our holdings in Paketeria
      from 23% to approximately 33% by making an additional investment of
      approximately €326,000 ($419,000). Paketeria is a company registered in Germany
      that owns and franchises stores which provide a variety of services, including
      eBay drop shop, post and parcels, office supplies, photo processing, photocopy
      and printer cartridge refilling services in Germany. We continue to maintain
      the
      right to acquire the remaining portion of a promissory note convertible into
      Paketeria stock as well as an option to purchase other shareholders’ stock,
      which, if exercised, together with our current holdings, would give us a
      controlling interest in Paketeria.





In
      July
      2006, we completed a private placement of our Common Stock, par value $.01
      per
      share, resulting in the issuance of 1,200,003 shares of Common Stock. In
      connection with the closing, we entered into subscription agreements with
      certain accredited investors for the purchase of the shares at a purchase price
      of $2.65 per share, resulting in gross proceeds $3,180,000. By the terms of
      the
      subscription agreements, each subscriber, in addition to the Common Stock
      purchased, received a warrant exercisable for the purchase of 25% of the number
      of shares purchased, resulting in the issuance of warrants to purchase 300,005
      shares. The warrants are exercisable for shares of our Common Stock for a period
      of five years at an exercise price of $2.78 per share and are redeemable by
      us
      in certain circumstances.




In
      connection with the offering, we retained a registered broker-dealer to serve
      as
      placement agent. In accordance with the terms of the agreement, the placement
      agent received a 7% selling commission, 3% management fee, and 1% advisory
      fee
      of the gross proceeds of the offering.




Out
      of
      the gross proceeds received at the closings, we paid the placement agent
      commissions and expenses of approximately $366,000 and incurred legal and other
      costs in connection with the registration of the shares of approximately
      $249,000. In addition, we issued to the placement agent warrants to purchase
      120,001 shares of Common Stock on the same terms as those issued to the
      subscribers.




In
      March
      2006, we sold our Databit computer hardware sales company to Shlomie
      Morgenstern, President of Databit and our former Vice President, in exchange
      for
      the release of the Company from obligations relating to our former CEO’s
      consulting agreement and various lease obligations. As part of the agreement,
      we
      agreed to pay our former CEO $600,000 at closing and pay certain costs for
      Databit. In addition, cash, which had previously been restricted with respect
      to
      our former CEO’s employment agreement, is no longer restricted. As a result of
      the transaction, we recorded a loss of approximately $2.3 million. Subsequent
      to
      the first quarter of 2006, we no longer have any activity in our computer
      hardware segment.




During
      the periods included in this report, we operated in two reportable segments:
      RT
      Solutions and IT Solutions. The following analysis should be read together
      with
      the segment information provided in Note 10 to the interim unaudited
      consolidated financial statements included in this quarterly report, which
      information is hereby incorporated by reference into this Item 2.




-19-




*RT
      Solutions*




Segment
      revenues decreased slightly in the third quarter of 2006 as compared to the
      second quarter of 2006. The decrease in revenues was combined with a decrease
      in
      our gross profit margin, which was the result of the near completion during
      the
      second quarter of a number of relatively high margin projects. We are uncertain
      if we can maintain these high margins during the coming quarters as these
      projects are completed. We are continuing our discussions for a possible
      strategic investor or a strategic alliance for marketing our sonar solutions.
      We
      believe that sonar technology solutions, and our Port Security Solutions in
      particular will be the primary source of this segment’s future growth and
      profitability. We are awaiting a response for a number of significant proposals
      for sonar solutions projects. We do not expect to see significant revenues
      from
      a new sonar technology solutions project prior to early 2007.




*IT
      Solutions*




Both
      segment revenues and gross profit margins continued to decreased in the third
      quarter of 2006 as compared to the second quarter of 2006 continuing a trend
      from the first quarter of 2006 as we continue to invest resources in adapting
      our OncoProTM product to the U.S. market. We expect to conclude an agreement for
      an OncoProTM beta-site in the US in the near future. In addition, we are
      continuing our discussions to establish strategic alliances for marketing and
      to
      obtain additional investments for our OncoProTM solutions. We believe that
      OncoProTM solutions will be the primary source of this segment’s future growth
      and profitability.




*Comverge*




Although
      we no longer control Comverge, we have invested in it significantly and it
      continues to have a material effect on our strategic planning. During the first
      quarter of 2006, Comverge completed an additional round of private equity
      financing. As a result of the most recent financing round in which we
      participated at a cost of $210,000, we currently own approximately 7% of
      Comverge’s preferred shares and 76% of its common shares, representing
      approximately 24% of its total equity.




In
      October 2006, Comverge filed a registration statement on Form S-1 with the
      Securities and Exchange Commission for an initial public offering of shares
      of
      its common stock. If and when offered in accordance with the registration
      statement, the offered shares will be sold by Comverge and, if the underwriters
      exercise their over-allotment option, by certain selling stockholders. Comverge
      plans to use the net proceeds from the offering to finance current and future
      capital requirements of its VPCTM contracts, to finance research and development,
      to repay indebtedness, to fund any cash consideration for future acquisitions
      and for other general corporate purposes. The registration statement relating
      to
      the offering has been filed with the Securities and Exchange Commission but
      has
      not yet become effective. The securities covered by the registration statement
      may not be sold nor may offers to buy be accepted prior to the time the
      registration statement becomes effective.




Also
      in
      October 2006, Comverge formed a strategic partnership with Itron Inc. (NASDAQ:
      ITRI), to provide demand response and load control components to Itron's OpenWay
      Advanced Metering Infrastructure (AMI) platform.




The
      agreement, which has been in place for several months, establishes Comverge
      as
      the principal provider of demand response technology, such as “smart”
thermostats and load control switches, for use with Itron’s OpenWay AMI
      solution.





*Corporate*




During
      the first quarter of 2006, we sold our Databit computer hardware company,
      settled our long-term employment contract with our former CEO by making a
      one-time settlement payment and appointed a new CEO. As such, we have reduced
      contractual corporate cash expenses in our current corporate structure.




In
      July
      2006, we concluded a private placement of our Common Stock, which raised
      approximately $2.6 million, net of transaction costs. We expect to use the
      remaining proceeds from our private placement to finance our corporate expenses
      and to allow us to explore possible acquisitions or other strategic
      transactions. We will need additional funds to finance our corporate expenses,
      acquisitions and strategic transaction over the near and long term. We are
      evaluating ways to raise such funds.




-20-




**New
      Accounting Standards**




On
      January 1, 2006, we adopted SFAS No.123 (revised 2004), Share-Based Payment
      (“SFAS 123R”), which requires the measurement and recognition of compensation
      expense for all share-based payment awards made to employees and directors,
      including employee stock options and employee stock purchases under the Employee
      Stock Purchase Plan, based on estimated fair values. We elected to use the
      modified prospective transition method; therefore prior periods have not been
      restated to reflect, and do not include, the impact of SFAS 123R. In March
      2005,
      the Securities and Exchange Commission issued Staff Accounting Bulletin
      No. 107 (“SAB 107”), which provides supplemental implementation guidance
      for SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption
      of SFAS 123R.




As
      a
      result of adopting SFAS 123R on January 1, 2006, our net loss for the nine
      and
      three month periods ended September 30, 2006, is $1,516,000 and $739,000,
      respectively, greater than had we continued to account for stock-based
      compensation under APB No. 25.




The
      following table sets forth a comparison of the per share effect of our adoption
      of SFAS 123R for the nine and three month periods ended September 30, 2005
      and
      2006.





**Nine
                months ended**
              **September
                30,**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Basic
                and diluted net income (loss) per share as reported:Loss
                per share from continuing operations
            
            $
            (0.32
            )
            $
            (0.37
            )
            $
            (0.11
            )
            $
            (0.20
            )Discontinued
                operations
            
            
            0.18
            
            
            (0.27
            )
            
            0.09
            
            
            —Net
                income (loss) per share - basic and diluted
            
            $
            (0.14
            )
            $
            (0.64
            )
            $
            (0.02
            )
            $
            (0.20
            )Basic
                and diluted net income (loss) per share had we not adopted SFAS
                123R:Loss
                per share from continuing operations
            
            $
            (0.32
            )
            $
            (0.22
            )
            $
            (0.11
            )
            $
            (0.11
            )Discontinued
                operations
            
            
            0.18
            
            
            (0.23
            )
            
            0.09
            
            
            —Net
                income (loss) per share - basic and diluted
            
            $
            (0.14
            )
            $
            (0.45
            )
            $
            (0.02
            )
            $
            (0.11
            )




In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 155, “Accounting for Certain Hybrid Financial Instruments — an
      Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS
      No. 155 allows financial instruments that contain an embedded derivative
      and that otherwise would require bifurcation to be accounted for as a whole
      on a
      fair value basis, at the holders’ election. SFAS No. 155 also clarifies and
      amends certain other provisions of SFAS No. 133 and SFAS No. 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006 (January 1, 2007 for the
      Company). The adoption of SFAS No. 155 is not expected to have a material
      impact on our consolidated financial condition or results of
      operations.




In
      June
      2006, the FASB issued FASB Interpretation No. 48 ( FIN 48), Accounting for
      Uncertainty in Income Taxes, an Interpretation of SFAS No. 109. FIN 48 clarifies
      the accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS No. 109, Accounting for Income
      Taxes, by prescribing a recognition threshold and measurement attribute for
      the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. Under FIN 48, the financial statement
      effects of a tax position should initially be recognized when it is more likely
      than not, based on the technical merits, that the position will be sustained
      upon examination. A tax position that meets the more-likely-than-not recognition
      threshold should initially and subsequently be measured as the largest amount
      of
      tax benefit that has a greater than fifty percent likelihood of being realized
      upon ultimate settlement with a taxing authority. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The cumulative effect, if any, of
      applying the provisions of FIN 48 will be reported as an adjustment to the
      opening balance of retained earnings in the period adopted. We are currently
      evaluating the impact that the adoption of FIN 48 will have on the our
      consolidated financial position, results of operations, and
      liquidity.




-21-




In
      September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (“SAB 108”). SAB 108 addresses the diversity in practice of
      quantifying financial statement misstatements resulting in the potential build
      up of improper amounts on the balance sheet. SAB 108 provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a current year misstatement.
      The SEC staff believes that registrants should quantify errors using both a
      balance sheet and an income statement approach and evaluate whether either
      approach results in quantifying a misstatement that, when all relevant
      quantitive and qualitative factors are considered, is material. SAB 108 is
      effective for companies with fiscal years ending after November 15, 2006. SAB
      108 allows a one-time transitional cumulative effect adjustment to beginning
      retained earnings, in the first year of adoption, for errors that were not
      previously deemed material, but are material under the guidance in SAB 108.
      We
      are currently assessing the impact of SAB 108 on our consolidated financial
      statements and results of operations.




In
      September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
      Measurements”, which defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. This Statement applies in conjunction
      with other accounting pronouncements that require or permit fair value
      measurements. This Statement shall be effective for financial statements issued
      for fiscal years beginning after November 15, 2007. We are currently evaluating
      the impact that the adoption of SFAS 157 will have on the our consolidated
      financial position and results of operations.




-22-




**Results
      of Operations**




The
      following table sets forth certain information with respect to the consolidated
      results of operations of the Company for the three months ended September 30,
      2005 and 2006, including the percentage of total revenues during each period
      attributable to selected components of the operations statement data and for
      the
      period to period percentage changes in such components. Since we sold our
      Databit business in March 2006, the activity in this business has been
      reclassified and consolidated on one line as net income from discontinued
      operations, after tax.




Nine
                months ended September 30,
            
            Three
                months ended September 30,2005
            
            2006
            
            Change
            
            2005
            
            2006
            
            Change($,000)
            
            %
                of
                sales
            
            ($,000)
            
            %
                of
                sales
            
            %
                of
                2005
            
            ($,000)
            
            %
                of
                sales
            
            ($,000)
            
            %
                of
                sales
            
            %
                of
                2005Sales
            
            $
            2,990
            
            
            *100*
            *%*
            $
            2,886
            
            
            *100*
            *%*
            
            *(3*
            *)%*
            $
            782
            
            
            *100*
            *%*
            $
            923
            
            
            *100*
            *%*
            
            *18*
            *%*Cost
                of sales
            
            
            2,208
            
            
            *74*
            
            
            2,037
            
            
            *71*
            
            
            *(8*
            *)*
            
            630
            
            
            *81*
            
            
            647
            
            
            *70*
            
            
            *3*Gross
                profit
            
            
            782
            
            
            *26*
            
            
            849
            
            
            *29*
            
            
            *9*
            
            
            152
            
            
            *19*
            
            
            276
            
            
            *30*
            
            
            *82*R&D
                expenses
            
            
            42
            
            
            *1*
            
            
            184
            
            
            *6*
            
            
            *338*
            
            
            16
            
            
            *2*
            
            
            87
            
            
            *9*
            
            
            *444*SMG&A
                expenses
            
            
            2,939
            
            
            *98*
            
            
            3,735
            
            
            *129*
            
            
            *27*
            
            
            996
            
            
            *127*
            
            
            1,769
            
            
            *192*
            
            
            *78*Operating
                income (loss)
            
            
            (2,199
            )
            
            *(74*
            *)*
            
            (3,070
            )
            
            *(106*
            *)*
            
            *40*
            
            
            (860
            )
            
            *(110*
            *)*
            
            (1,580
            )
            
            *(171*
            *)*
            
            *84*Finance
                expense, net
            
            
            (13
            )
            
            *0*
            
            
            (23
            )
            
            *(1*
            *)*
            
            *77*
            
            
            (23
            )
            
            *(3*
            *)*
            
            (17
            )
            
            *(2*
            *)*
            
            *(26*
            *)*Other
                income
            
            
            —
            
            
            *—*
            
            
            330
            
            
            *11*
            
            
            
            
            
            —
            
            
            *—*
            
            
            —
            
            
            *—*
            
            
            *—*Loss
                before taxes on income
            
            
            (2,212
            )
            
            *(74*
            *)*
            
            (2,763
            )
            
            *(96*
            *)*
            
            *25*
            
            
            (883
            )
            
            *(113*
            *)*
            
            (1,597
            )
            
            *(173*
            *)*
            
            *81*Taxes
                on income
            
            
            49
            
            
            *2*
            
            
            (8
            )
            
            *0*
            
            
            *(116*
            *)*
            
            43
            
            
            *5*
            
            
            (2
            )
            
            *0*
            
            
            *(105*
            *)*Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (2,163
            )
            
            *(72*
            *)*
            
            (2,771
            )
            
            *(96*
            *)*
            
            *28*
            
            
            (840
            )
            
            *(107*
            *)*
            
            (1,599
            )
            
            *(173*
            *)*
            
            *90*Share
                in losses of Comverge
            
            
            (380
            )
            
            *(13*
            *)*
            
            (210
            )
            
            *(7*
            *)*
            
            *(45*
            *)*
            
            —
            
            
            *—*
            
            
            —
            
            
            *—*Share
                in losses of Paketeria
            
            
            —
            
            
            *—*
            
            
            (52
            )
            
            *(2*
            *)*
            
            
            
            
            —
            
            
            *—*
            
            
            (52
            )
            
            *(6*
            *)*Minority
                interests
            
            
            (73
            )
            
            *(2*
            *)*
            
            —
            
            
            *—*
            
            
            *(100*
            *)*
            
            (14
            )
            
            *(2*
            *)*
            
            —
            
            
            *—*
            
            
            *(100*
            *)*Net
                loss from continuing operations
            
            
            (2,616
            )
            
            *(87*
            *)*
            
            (3,033
            )
            
            *(105*
            *)*
            
            *16*
            
            
            (854
            )
            
            *(109*
            *)*
            
            (1,651
            )
            
            *(179*
            *)*
            
            *93*Net
                income from discontinued operations, net of tax
            
            
            936
            
            
            *31*
            
            
            78
            
            
            *3*
            
            
            *(95*
            *)*
            
            185
            
            
            *24*
            
            
            —
            
            
            *—*
            
            
            *(100*
            *)*Gain
                on sale of dsIT Technologies, net of tax
            
            
            542
            
            
            *18*
            
            
            —
            
            
            *—*
            
            
            *(100*
            *)*
            
            542
            
            
            *69*
            
            
            —
            
            
            *—*
            
            
            *(100*
            *)*Loss
                on sale of discontinued operations and contract settlement
            
            
            —
            
            
            *—*
            
            
            (2,298
            )
            
            *(80*
            *)*
            
            
            
            
            —
            
            
            *—*
            
            
            —
            
            
            *—*
            
            
            *—*Net
                income (loss)
            
            $
            (1,138
            )
            
            *(38*
            *)%*
            $
            (5,253
            )
            
            *(182*
            *)*
            
            *362*
            *%*
            $
            (127
            )
            
            *(16*
            *)%*
            $
            (1,651
            )
            
            *(179*
            *)%*
            
            *1,200*
            *%*




*Sales.* Sales in
      the first nine months of 2006 decreased by $0.1 million, from $3.0 million
      in
      the first nine months of 2005, to $2.9 million in 2006. This decrease was due
      to
      decreased sales in both our segments. Sales in the third quarter of 2006
      increased by $0.1 million, in comparison to those in the third quarter of 2005.
      The increase in sales in the third quarter reflects increased RT Solutions
      sales
      and other non-segment sales partially offset by a decrease in IT Solutions
      sales.




*Gross
      profit.*  Gross
      profit in the
      first nine months of 2006 increased slightly, compared to the first nine months
      of 2005, due to increased gross profit in our RT Solutions segment, which more
      than offset the decreased gross profit in our IT Solutions segment.  The
      increase in our RT Solutions segment gross profit was primarily attributable
      to
      specific projects with particularly high profit margins, which offset the
      reduction in sales. The decrease in our IT Solutions segment gross profits
      was
      attributable to a combination of both reduced sales and reduced profit
      margins.  Gross
      profit in the third quarter of 2006 increased as a result of increased gross
      profit in our RT Solutions segment.  The
      decrease in IT Solutions gross profit during the quarter was offset by an almost
      comparable increase in other non-segment gross profit.




*Selling,
      marketing, general and administrative expenses (“SMG&A).* SMG&A
      in the first nine months
      of
      2006 increased by $0.8 million compared to the first nine months of 2005 and
      also increased by $0.8 million in the third quarter of 2006 as compared to
      the
      third quarter of 2005. SMG&A expenses have significantly decreased in our
      dsIT subsidiary, however this decrease has been offset by increases in corporate
      SMG&A expense, which arose from stock option compensation recorded in 2006.
      Corporate SMG&A expense in 2006 includes $1.2 million of stock option
      compensation expense ($0.8 million recorded in the third quarter) with respect
      to SFAS 123R stock compensation expense. In 2005, we did not record any stock
      option compensation expense with respect to SFAS 123R.




-23-




*Other
      income.* In
      the
      first quarter of 2006, we reached a settlement agreement with an Israeli bank
      with respect to our claims against the bank and the bank’s counterclaim against
      us. As a result of the settlement agreement, we recorded income of $0.3 million,
      net of legal expenses.




*Share
      of losses in Comverge.* In
      the
      first quarter of 2006, the carrying value of our investment in Comverge's common
      stock and preferred stock was reduced to zero. As such, Comverge had no effect
      on our results in the second quarter of 2006. ** Our
      share
      of Comverge's net losses in the first nine months of 2006 was $0.2 million.
      In
      the future, when Comverge begins to show profit, after it has reached the level
      of equity at which we ceased recording equity losses, we will record 7% of
      that
      income as equity income to our preferred investment up to our original $3.9
      million preferred share investment in Comverge, and thereafter to our investment
      in Comverge’s common shares, of which we currently own approximately
      76%.




*Share
      of losses in Paketeria.* In
      the
      third quarter of 2006, we acquired 23% of Paketeria. Our share of Paketeria’s
      net losses plus amortization of the purchase price allocated to intangibles
      during the period since our acquisition was $0.1 million.




*Net
      income from discontinued operations, net of tax.*  Under
      applicable accounting principles, as a result of our sale of Databit in the
      first quarter of 2006, the results of Databit have been reclassified in the
      current period and for all prior periods as a discontinued operation. The
      condensed results of this business are presented in each of the current and
      comparative period as net income from discontinued operations.




The
      results for the first nine months of 2005 include the condensed results of
      Databit as well as the condensed results of the Company’s outsourcing consulting
      services business in Israel, which was sold in August 2005. The decrease in
      net
      income from discontinued operations in the 2006 period as compared to the 2005
      period was primarily due to the inclusion in the 2005 period of the results
      of
      the outsourcing consulting services business.




*Loss
      on sale of discontinued operations and contract settlement, net of tax.* This
      loss
      resulted from the sale of our Databit computer hardware company and contract
      settlement with our former CEO during the first quarter of 2006.




**Liquidity
      and Capital Resources** ****




As
      of
      September 30, 2006, we had working capital of $1.1 million, including $1.8
      million of cash and cash equivalents. Net cash provided in the first nine months
      of 2006 was $0.9 million. Net cash of $1.1 million was used in operating
      activities during the first nine months of 2006. Our net loss of $5.3 million
      for the nine-month period ended September 30, 2006 was primarily due to the
      $2.3
      million loss on our sale of our Databit computer hardware company, the contract
      settlement with our former CEO, and corporate expenses of $2.4 million, of
      which
      $1.2 million was related to stock option compensation. The primary use of cash
      in operating activities was $0.2 million of cash used by Databit, prior to
      its
      sale, and net corporate general and administrative expenditures of $1.2 million.
      Net cash of $0.6 million was used in investing activities. The use of cash
      in
      investing activities was primarily for the contract settlement with our former
      CEO and associated sale of our Databit computer hardware company totaling $0.9
      million, and our investments in Paketeria ($0.9 million) and Comverge ($0.2
      million). These cash expenditures were partially offset by the release of
      previously restricted cash balances of $1.6 million. Additional cash of $2.6
      million was provided by financing activities, the private placement of our
      Common Stock.




Of
      our
      $1.1 million working capital, on September 30, 2006, $0.6 million was in our
      majority owned dsIT subsidiary. Due to Israeli tax and company law constraints
      as well as dsIT’s own working capital requirements, such working capital and
      cash flows from dsIT’s operations are not readily available to finance U.S.
      corporate activities.




As
      of
      September 30, 2006, our dsIT subsidiary is in technical violation of its
      covenant with one of its banks though the bank is continuing to provide funding
      to dsIT despite the technical violation. dsIT is working towards remedying
      the
      technical violation.




In
      July
      2006, we concluded a private placement of our Common Stock, which raised
      approximately $2.6 million, net of transaction costs. We have significantly
      reduced our corporate overhead costs as a result of the sale of Databit and
      the
      contract settlement with our former CEO.  However,
      our available cash is not expected to be sufficient to fund our US based
      corporate activities for the next 12 months as we continue to invest in
      Paketeria and search for additional strategic investments. We are exploring
      possible financing transactions to raise additional funds to finance our US
      activities. Our
      CEO
      has agreed to provide to us up to $300 of financing over the next year to fund
      our US activities to the extent that we are not able to raise that amount from
      other sources.




-24-




As
      of
      November 1, 2006 our wholly owned US operations (i.e., excluding dsIT and
      Comverge) had an aggregate of $1.7 million in cash and cash equivalents,
      reflecting a $0.8 million increase from the balance as of December 31, 2005.
      The
      balance at November 1, 2006 does not include the transfer of $0.4 million made
      with respect to our additional investment in Paketeria .




**Contractual
      Obligations and Commitments**




Our
      contractual obligations and commitments at September 30, 2006, excluding certain
      severance arrangements described below, principally include obligations
      associated with our outstanding indebtedness, future minimum operating lease
      obligations and potential severance obligations to Israeli employees and are
      set
      forth in the table below.




Cash
                Payments Due During Year Ending September 30,(amounts
                in thousands)Contractual
                Obligations
            
            Total
            
            2007
            
            2008-2009
            
            2010-2011
            
            2012
                and thereafterLong-term
                debt
            
            $
            65
            
            $
            65
            
            $
            —
            
            $
            —
            
            $
            —Operating
                leases (1)
            
            
            1,297
            
            
            671
            
            
            626
            
            
            —
            
            
            —Investor
                relations
            
            
            115
            
            
            115
            
            
            —
            
            
            —
            
            
            —Buy-out
                of Paketeria loan (2)
            
            
            266
            
            
            266
            
            
            —
            
            
            —
            
            
            —Potential
                severance obligations to Israeli employees (3)
            
            
            2,452
            
            
            —
            
            
            —
            
            
            —
            
            
            2,452Total
                contractual cash obligations
            
            $
            4,195
            
            $
            1,117
            
            $
            626
            
            $
            —
            
            $
            2,452




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




(1)
      As
      part of the sale of our Databit computer hardware subsidiary, we assigned all
      of
      the US leases to Databit and after the first quarter of 2006 will no longer
      have
      rental expense for facilities in the US. However, the landlords of the
      properties have not yet consented to the assignments and we therefore continue
      to be contingently liable on these leases, which have an annual cost of
      approximately $120,000 until November 2008. Such costs are included in the
      table
      above. Databit has agreed to indemnify us for any liability in connection with
      these leases. Under the terms of the sale agreement with Databit, we continue
      to
      house certain corporate headquarter functions in Mahwah, New Jersey. Under
      a
      transition services arrangement, we have agreed to pay Databit $20,000 per
      year
      for the continued use of the Mahwah premises and various administrative
      services.




(2)
      As a
      part of our agreement to purchase 23% of Paketeria, we agreed to the purchase
      of
      a €210,000 principal promissory note issued by Paketeria to its founder and
      managing director. Under the terms of the agreement, we must purchase one-third
      of the note from the founder for a cash payment equal to one-third of the
      principal amount, plus accrued interest, upon Paketeria having achieved each
      of
      three franchise licensing milestones—the licensing of its 60th, 75th, and 115th
      franchises.  In
      October 2006, we purchased €140,000 of the note (see Overview and Trend
      Information). We expect to purchase the remaining €70,000 of the note within the
      next year, upon the achievement of the third and final milestone.




(3)
      Under
      Israeli law and labor agreements, dsIT is required to make severance payments
      to
      dismissed employees and to employees leaving employment under certain other
      circumstances. The obligation for severance pay benefits, as determined by
      the
      Israeli Severance Pay Law, is based upon length of service and ending salary.
      These obligations are substantially covered by regular deposits with recognized
      severance pay and pension funds and by the purchase of insurance policies.
      As of
      September 30, 2006, we accrued a total of $2.5 million for potential severance
      obligations of which approximately $1.5 million was funded with cash to
      insurance companies.




-25-




**Item
      3.**  **Quantitative
      and Qualitative Disclosures About Market Risk**




In
      the
      normal course of business, we are exposed to fluctuations in interest rates
      on
      lines-of-credit incurred to finance our operations in Israel. Additionally,
      our
      monetary assets and liabilities (net liability of approximately $0.2 million)
      in
      Israel are exposed to fluctuations in exchange rates. We are also exposed to
      fluctuations in exchange rates with respect to our investment our call and
      put
      options to acquire the €70,000 note in Paketeria as the note in denominated in
      Euros. In addition, our share of equity income or loss in Paketeria is
      translated from Euros. We do not employ specific strategies, such as the use
      of
      derivative instruments or hedging, to manage our interest rate or foreign
      currency exchange rate exposures.




**Item
      4.**  **Controls
      and Procedures**




**Evaluation
      of Controls and Procedures**




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including the
      Chief Executive Officer and the Chief Financial Officer, of the design and
      operation of our disclosure controls and procedures (as such term is defined
      in
      Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act’)). Based on this evaluation, our Chief Executive Officer and
      Chief Financial Officer concluded that our disclosure controls and procedures
      were effective at the reasonable assurance level at end of the period covered
      by
      this report to ensure that the information required to be disclosed by us in
      the
      reports we file or submit under the Exchange Act is (i) accumulated and
      communicated to our management (including our Chief Executive Officer and Chief
      Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and
      forms.




**Changes
      in Controls and Procedures**




There
      was
      no change in our internal controls over financial reporting (as such term is
      defined in Rule 13a-15(f) under the Exchange Act) during the period covered
      by
      this report that has materially affected, or is reasonably likely to materially
      affect, internal controls over financial reporting.




-26-




**PART
      II - OTHER INFORMATION**




**Item
      1.**  **Legal
      Proceedings**




None.




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




Our
      Annual Meeting of Stockholders was held on September 15, 2006. The only item
      on
      the agenda at the Annual Meeting was the election of the Board of Directors.
      The
      holders of 8,242,806 shares of common stock out of 9,385,027 shares of common
      stock were present either in person or by proxy and were entitled to vote for
      the election of six members to the Board of Directors. Holders of our common
      stock entitled to vote, voted as follows:




For
            
            WithheldJohn
                A. Moore
            
            
            8,151,015
            
            
            91,791George
                Morgenstern
            
            
            7,948,033
            
            
            294,773Richard
                J. Giacco
            
            
            8,229,715
            
            
            13,091Richard
                Rimer
            
            
            8,230,015
            
            
            12,791Kevin
                P. Wren
            
            
            8,229,715
            
            
            13,091Samuel
                M. Zentman
            
            
            8,184,215
            
            
            58,591




**Item
      5.**  **Other
      Information**




In
      October 2006, we adopted a Key Employee Stock Option Plan (the “Plan”) for our
      dsIT Solutions Ltd. subsidiary. Under the Plan, a committee of board members
      of
      dsIT, to initially be comprised of the entire board of directors of dsIT, shall
      be created for its administration.




The
      exercise price and the manner of exercise of the options to be granted under
      the
      Plan shall be determined by the committee on the date of grant. Unless otherwise
      provided by the committee, the right to exercise all vested options shall
      terminate (i) one year following the date of optionee’s termination, if such
      termination was by optionee, (ii) eighteen months following the date or
      optionee’s termination, if the termination was by dsIT, or (iii) immediately, if
      optionee is terminated by dsIT for cause, as such term is defined in the
      Plan.




If
      all
      options under the Plan were granted and exercised, our holdings in dsIT could
      be
      diluted from its current holdings of approximately 80% to approximately
      50%.




-27-




**Item
      6.**  **Exhibits**





4.1
            Form
                of Warrant (incorporated herein by reference to Exhibit 4.1 to the
                Company’s Quarterly Report on Form 10-Q for the period ended June 30,2006,
                filed on August 11, 2006 (the “June 2006 10-Q”)).10.1
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                10.1 to the June 2006 10-Q).10.2
            Placement
                Agent Agreement between the Company and First Montauk Securities
                Corp.
                dated June 13, 2006 (incorporated herein by reference to Exhibit
                10.1 to
                the June 2006 10-Q).10.3
            Form
                of Common Stock Purchase Agreement (incorporated herein by reference
                to
                Exhibit 10.1 to the Registrants Current Report on Form 8-K dated
                August
                17, 2006 ( the “August 2006 8-K“)).10.4
            Form
                of Note Purchase Agreement with Form of Convertible Promissory Note
                attached (incorporated herein by reference to Exhibit 10.2 to the
                August
                2006 8-K).10.5
            Form
                of Stock Purchase Agreement (incorporated herein by reference to
                Exhibit
                10.3 to the August 2006 8-K).10.6
            Form
                of Investors’ Rights Agreement (incorporated herein by reference to
                Exhibit 10.4 to the August 2006 8-K).10.7
            Form
                of Non-Plan Option Agreement (incorporated herein by reference to
                Exhibit
                10.5 to the August 2006 8-K).31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.32.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.







-28-


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by its Principal Financial
      Officer thereunto duly authorized.


**ACORN
              FACTOR INC.**Dated: November 20, 2006
            By:
            **/s/**Michael
              BarthMichael
              BarthChief Financial
              Officer





-29-