**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**June
                30, 2007**





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.


Yes x  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
      filer x




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


Yes  ̈  No x





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 August 14, 2007Common
                Stock, $0.01 par value per share
            
            10,117,943
                shares
















**ACORN
      FACTOR, INC.**


**Quarterly
      Report on Form 10-Q**


**for
      the Quarterly Period Ended June 30, 2007**





**TABLE
      OF CONTENTS**




**PART
                I.****Financial
                Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Financial Statements:Consolidated
                Balance Sheets as of December 31, 2006 and June 30, 2007
            1Consolidated
                Statements of Operations for the three and six month periods ended
                June
                30, 2006 and 2007
            2Consolidated
                Statement of Changes in Shareholders’ Equity for the six month period
                ended June 30, 2007
            3Consolidated
                Statements of Cash Flows for the three and six month periods ended
                June
                30, 2006 and 2007
            4Notes
                to Consolidated Financial Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            23Item
                4T.
            Controls
                and Procedures
            23**PART
                II.****Other
                Information**Item
                1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item
                6.
            Exhibits
            26**Signatures**
            
            27




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,**
              **2006**
            
            **As
                of**
              **June
                30,**
              **2007**(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            1,521
            
            $
            5,127Accounts
                receivable, net
            
            
            1,373
            
            
            830Unbilled
                work-in-process
            
            
            393
            
            
            494Other
                current assets
            
            
            316
            
            
            1,686Total
                current assets
            
            
            3,603
            
            
            8,137Property
                and equipment, net
            
            
            445
            
            
            551Investment
                in Comverge
            
            
            —
            
            
            28,387Investment
                in Paketeria
            
            
            1,212
            
            
            875Funds
                in respect of employee termination benefits
            
            
            1,568
            
            
            1,360Goodwill
            
            
            97
            
            
            95Other
                intangible assets, net
            
            
            48
            
            
            9Other
                assets
            
            
            285
            
            
            170Total
                assets
            
            $
            7,258
            
            $
            39,584LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Short-term
                bank credit
            
            $
            462
            
            $
            166Current
                maturities of long-term debt
            
            
            26
            
            
            71Note
                payable - related party
            
            
            300
            
            
            —Trade
                accounts payable
            
            
            378
            
            
            430Accrued
                payroll, payroll taxes and social benefits
            
            
            478
            
            
            863Other
                current liabilities
            
            
            1,700
            
            
            2,125Total
                current liabilities
            
            
            3,344
            
            
            3,655Long-term
                liabilities:Investment
                in Comverge, net
            
            
            1,824
            
            
            —Convertible
                debt, net of discounts
            
            
            —
            
            
            4,470Liability
                for employee termination benefits
            
            
            2,545
            
            
            1,968Other
                liabilities
            
            
            6
            
            
            3Total
                long-term liabilities
            
            
            4,375
            
            
            6,441Shareholders’
                equity:Common
                stock - $0.01 par value per share:Authorized
                - 20,000,000 shares; Issued -10,276,030 shares and 10,451,905
              at
                December 31, 2006 and June 30, 2007
            
            
            102
            
            
            104Additional
                paid-in capital
            
            
            43,987
            
            
            47,535Warrants
            
            
            888
            
            
            1,629Accumulated
                deficit
            
            
            (41,904
            )
            
            (30,295
            )Treasury
                stock, at cost - 777,371 shares for December 31, 2006 and
              June
                30, 2007, respectively
            
            
            (3,592
            )
            
            (3,592
            )Accumulated
                other comprehensive income
            
            
            58
            
            
            14,107Total
                shareholders’ equity (deficit)
            
            
            (461
            )
            
            29,488Total
                liabilities and shareholders’ equity
            
            $
            7,258
            
            $
            39,584




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)




**Six
                months ended**
              **June
                30,**
            
            **Three
                months ended**
              **June
                30,****2006**
            
            **2007**
            
            **2006**
            
            **2007**Sales:Projects
            
            $
            1,521
            
            
            1,287
            
            $
            791
            
            $
            475Services
            
            
            434
            
            
            403
            
            
            197
            
            
            197Other
            
            
            8
            
            
            30
            
            
            2
            
            
            9Total
                sales
            
            
            1,963
            
            
            1,720
            
            
            990
            
            
            681Cost
                of sales:Projects
            
            
            1,021
            
            
            1,042
            
            
            482
            
            
            461Services
            
            
            369
            
            
            337
            
            
            163
            
            
            164Other
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                cost of sales
            
            
            1,390
            
            
            1,379
            
            
            645
            
            
            625Gross
                profit
            
            
            573
            
            
            341
            
            
            345
            
            
            56Operating
                expenses:Research
                and development expenses
            
            
            97
            
            
            233
            
            
            71
            
            
            103Selling,
                marketing, general and administrative expenses
            
            
            1,966
            
            
            1,859
            
            
            1,044
            
            
            1,049Total
                operating expenses
            
            
            2,063
            
            
            2,092
            
            
            1,115
            
            
            1,152Operating
                loss
            
            
            (1,490
            )
            
            (1,751
            )
            
            (770
            )
            
            (1,096
            )Finance
                expense, net
            
            
            (6
            )
            
            (2,111
            )
            
            (20
            )
            
            (1,258
            )Gain
                on public offering of Comverge
            
            
            —
            
            
            16,169
            
            
            —
            
            
            16,169Other
                income, net
            
            
            330
            
            
            —
            
            
            —
            
            
            —Income
                (loss) before taxes on income
            
            
            (1,166
            )
            
            12,307
            
            
            (790
            )
            
            13,815Taxes
                on income
            
            
            (6
            )
            
            (5
            )
            
            (4
            )
            
            (3
            )Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (1,172
            )
            
            12,302
            
            
            (794
            )
            
            13,812Share
                of losses in Comverge
            
            
            (210
            )
            
            —
            
            
            —
            
            
            —Share
                of losses in Paketeria
            
            
            —
            
            
            (388
            )
            
            —
            
            
            (201
            )Net
                income (loss) from continuing operations
            
            
            (1,382
            )
            
            11,914
            
            
            (794
            )
            
            13,611Net
                income from discontinued operations, net of tax
            
            
            78
            
            
            —
            
            
            —
            
            
            —Loss
                on sale of discontinued operations and contract settlement, net of
                tax
            
            
            (2,298
            )
            
            —
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            (3,602
            )
            $
            11,914
            
            $
            (794
            )
            $
            13,611Basic
                net income (loss) per share:Income
                (loss) per share from continuing operations
            
            $
            (0.17
            )
            $
            1.25
            
            $
            (0.10
            )
            $
            1.42Discontinued
                operations
            
            
            (0.27
            )
            
            —
            
            
            —
            
            
            —Net
                income (loss) per share - basic
            
            $
            (0.44
            )
            $
            1.25
            
            $
            (0.10
            )
            $
            1.42Diluted
                net income (loss) per share:Income
                (loss) per share from continuing operations
            
            $
            (0.17
            )
            $
            1.05
            
            $
            (0.10
            )
            $
            1.11Discontinued
                operations
            
            
            (0.27
            )
            
            —
            
            
            —
            
            
            —Net
                income (loss) per share -diluted
            
            $
            (0.44
            )
            $
            1.05
            
            $
            (0.10
            )
            $
            1.11Weighted
                average number of shares outstanding -Basic
            
            
            8,152
            
            
            9,549
            
            
            8,161
            
            
            9,583Diluted
            
            
            8,152
            
            
            11,560
            
            
            8,161
            
            
            12,463




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
            
            Accumulated
                Deficit
            
            Treasury
                Stock
            
            Accumulated
                Other Comprehensive Income
            
            TotalBalances
                as ofDecember
                31, 2006
            
            
            10,276
            
            $
            102
            
            $
            43,987
            
            $
            888
            
            $
            (41,904
            )
            $
            (3,592
            )
            $
            58
            
            $
            (461
            )Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            11,914
            
            
            —
            
            
            —
            
            
            11,914FAS
                115 adjustment on Comverge shares, net of deferred taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            14,043
            
            
            14,043Differences
                from translation of financial statements of subsidiaries
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            6
            
            
            6Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            25,963FIN
                48 adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (305
            )
            
            —
            
            
            —
            
            
            (305
            )Exercise
                of options and warrants
            
            
            176
            
            
            2
            
            
            504
            
            
            (3
            )
            
            —
            
            
            —
            
            
            —
            
            
            503Adjustment
                of transaction costs of prior year private placement
            
            
            —
            
            
            —
            
            
            68
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            68Warrants
                issued to placement agent with respect to private placement of
                Debentures
            
            
            —
            
            
            —
            
            
            —
            
            
            213
            
            
            —
            
            
            —
            
            
            —
            
            
            213Warrants
                issued with respect to private placement of Debentures
            
            
            —
            
            
            —
            
            
            —
            
            
            531
            
            
            —
            
            
            —
            
            
            —
            
            
            531Beneficial
                conversion feature with respect to private placement of
                Debentures
            
            
            —
            
            
            —
            
            
            2,570
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,570Stock
                option compensation
            
            
            —
            
            
            —
            
            
            406
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            406Balances
                as ofJune
                30, 2007
            
            
            10,452
            
            $
            104
            
            $
            47,535
            
            $
            1,629
            
            $
            (30,295
            )
            $
            (3,592
            )
            $
            14,107
            
            $
            29,488






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)





**Six
                months ended**
              **June
                30,****2006**
            
            **2007**Cash
                flows provided by (used in) operating activities:Net
                income (loss)
            
            $
            (3,602
            )
            $
            11,914Adjustments
                to reconcile net income (loss) to net cash
              provided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            112
            
            
            67Impairment
                of software license
            
            
            —
            
            
            23Share
                in losses of Comverge
            
            
            210
            
            
            —Share
                in losses of Paketeria
            
            
            —
            
            
            356Decrease
                in liability for employee termination benefits
            
            
            (25
            )
            
            (250
            )Amortization
                of stock-based deferred compensation
            
            
            462
            
            
            406Loss
                on sale of Databit and contract settlement
            
            
            2,298
            
            
            —Amortization
                of beneficial conversion feature, debt origination costs and value
                of
                warrants in private placement of Debentures
            
            
            —
            
            
            1,945Gain
                on public offering of investment in Comverge
            
            
            —
            
            
            (16,169
            )Other
            
            
            3
            
            
            (1
            )Change
                in operating assets and liabilities:Decrease
                in accounts receivable, unbilled work-in process and other current
                and
                other assets
            
            
            68
            
            
            417Increase
                in inventory
            
            
            (18
            )
            
            —Increase
                (decrease) in accounts payable and other liabilities
            
            
            (656
            )
            
            295Net
                cash used in operating activities
            
            
            (1,148
            )
            
            (997
            )Cash
                flows provided by (used in) investing activities:Release
                of restricted cash
            
            
            247
            
            
            —Release
                of restricted cash (under agreement with a related party)
            
            
            1,350
            
            
            —Investment
                in Comverge
            
            
            (210
            )
            
            —Short-term
                loans provided to Paketeria
            
            
            —
            
            
            (733
            )Amounts
                funded for employee termination benefits
            
            
            (82
            )
            
            (26
            )Utilization
                of employee termination benefits
            
            
            97
            
            
            62Acquisitions
                of property and equipment
            
            
            (78
            )
            
            (167
            )Sale
                of Databit Inc. - Appendix A
            
            
            (911
            )
            
            —Net
                cash provided by (used in) investing activities
            
            
            413
            
            
            (864
            )Cash
                flows provided by (used in) financing activities:Short-term
                debt repayments, net
            
            
            22
            
            
            (296
            )Proceeds
                from long-term debt
            
            
            —
            
            
            107Proceeds
                from convertible debentures with warrants net of transaction
                costs
            
            
            —
            
            
            5,840Repayments
                of long-term debt
            
            
            (74
            )
            
            (62
            )Repayment
                of related party note payable
            
            
            —
            
            
            (300
            )Proceeds
                from employee stock option and warrant exercises
            
            
            44
            
            
            178Net
                cash provided by (used in) financing activities
            
            
            (8
            )
            
            5,467Net
                increase (decrease) in cash and cash equivalents
            
            
            (743
            )
            
            3,606Cash
                and cash equivalents at beginning of period
            
            
            913
            
            
            1,521Cash
                and cash equivalents at end of period
            
            $
            170
            
            $
            5,127







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




4




**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


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


(dollars
      in thousands)




Non-cash
                financing and investing itemsValue
                of beneficial conversion feature upon issuance of convertible
                debentures
            
            
            
            
            $
            2,570Unrealized
                gain from Comverge shares
            
            
            
            
            $
            14,043Amount
                due from broker on account of options exercised
            
            
            
            
            $
            325Adjustment
                of retained earnings and other current liabilities with respect to
                the
                adoption of FIN 48
            
            
            
            
            $
            305**Appendix
                A**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.
      (“AFI”) 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 six-month period ended June 30, 2007
      are not necessarily indicative of the results that may be expected for the
      year
      ending December 31, 2007. 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 for the
      year ended December 31, 2006. **** 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. ****




**Note
      2: Financing of Operations**




On
      April
      11, 2007, the Company completed the second and final closing of its private
      placement of 10% Convertible Redeemable Subordinated Debentures (the
“Debentures”) (see Note 8) raising approximately $6.9 million (approximately
      $5.8 million net of agent’s commissions and expenses and other transaction
      costs).




dsIT
      was
      utilizing $166 of its approximate $400 lines of credit as of June 30, 2007.
      dsIT's lines of credit are denominated in NIS and bear a weighted average
      interest rate of the Israeli prime rate plus 2.08% per annum. The Israeli prime
      rate fluctuates and as of June 30, 2007 was 5.50%.




**Note
      3: Accounting Change**




Prior
      to
      January 1, 2007, the Company recognized income tax accruals with respect to
      uncertain tax positions based upon Statement of Financial Accounting Standards
      (SFAS) No. 5, “Accounting for Contingencies.” Under SFAS No. 5,
      the Company recorded a liability associated with an uncertain tax position
      if
      the liability was both probable and estimable. Our liability under SFAS
      No. 5 included interest and penalties, which were recognized as incurred
      within “Finance expense, net” in the Consolidated Condensed Statements of
      Operations.




Effective
      January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting
      for uncertainty in income taxes recognized in financial statements in accordance
      with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes 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. FIN 48 requires that the Company determine whether the benefits
      of
      our tax positions are more likely than not of being sustained upon audit based
      on the technical merits of the tax position. For tax positions that are more
      likely than not of being sustained upon audit, the Company recognizes the
      largest amount of the benefit that is more likely than not of being sustained
      in
      our consolidated financial statements. For tax positions that are not more
      likely than not of being sustained upon audit, the Company does not recognize
      any portion of the benefit in our consolidated financial statements. The
      provisions of FIN 48 also provide guidance on de-recognition, classification,
      interest and penalties, accounting in interim periods, and disclosure.




6




The
      cumulative effect of the adoption of the recognition and measurement provisions
      of FIN 48 resulted in a $305 reduction to the January 1, 2007 balance of
      retained earnings. Results of prior periods have not been restated. The
      Company’s policy for interest and penalties related to income tax exposures was
      not impacted as a result of the adoption of the recognition and measurement
      provisions of FIN 48. Therefore, the Company continues to recognize interest
      and
      penalties as incurred within “Finance income (expense), net” in the Consolidated
      Statements of Operations.




The
      Company is subject to U.S. federal income tax as well as state income tax and
      Israeli income tax.  The Company is no longer subject to examination by
      U.S. Federal taxing authorities for years before 2003 and for years before
      2002
      for state and Israeli income taxes.




**Note
      4: New Accounting Standards**




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
      Measurements.” SFAS No. 157 creates a single definition of fair value,
      along with a conceptual framework to measure fair value, and to increase the
      consistency and the comparability in fair value measurements and in financial
      statement disclosures.




In
      February 2007, the FASB issued SFAS No. 159, “Fair Value Option for
      Financial Assets and Liabilities - Including an Amendment to FASB Statement
      No. 115.” SFAS No. 159 improves financial reporting by giving entities
      the opportunity to mitigate earnings volatility by electing to measure related
      financial assets and liabilities at fair value rather than using different
      measurement attributes. Unrealized gains and losses on items for which the
      fair
      value option has been elected should be reported in earnings. Upon initial
      adoption, differences between the fair value and carrying amount should be
      included as a cumulative-effect adjustment to beginning retained earnings.




SFAS
      Nos.
      157 and 159 are effective as of the beginning of the first fiscal year that
      begins after November 15, 2007. Earlier application is permitted as of the
      beginning of the fiscal year that begins on or before November 15, 2007.
      The Company will not early adopt SFAS Nos. 157 and 159 and is currently
      assessing the impact of implementing SFAS Nos. 157 and 159 on its financial
      position and results of operations.





**Note
      5: Investment in Comverge Inc. (Comverge)**




On
      April
      18, 2007, Comverge completed its initial public offering of 6,095,000 shares
      of
      common stock at a price of $18.00 a share, including 795,000 shares sold
      pursuant to the exercise by the underwriters of their over-allotment option
      granted to them by certain selling stockholders. The shares are listed on the
      Nasdaq Global Market under the symbol "COMV". The Company did not sell any
      of
      its shares of Comverge common stock in the offering.




Immediately
      prior to the closing of the Comverge offering on April 18, 2007, all shares
      of
      preferred stock of Comverge were converted to common stock of Comverge and
      the
      Company currently owns 2,786,021 shares of Comverge common stock, representing
      15.9% of the issued and outstanding capital stock of Comverge following the
      offering.




In
      connection with the offering, the Company (and all of Comverge’s executive
      officers, directors and certain of other major stockholders of Comverge),
      entered into a lock-up agreement under which the Company agreed, subject to
      limited exceptions, not to transfer or otherwise dispose of any shares of
      Comverge common stock for a period of at least 180 days from the date of
      effectiveness of the offering without the prior written consent of the lead
      manager of the offering.




Prior
      to
      the public offering, the Company accounted for its Comverge investment on the
      equity method. However, since the Company’s share of losses attributable to its
      Comverge preferred stock equaled its investment in Comverge’s preferred stock,
      the Company ceased recording equity losses in Comverge.




7




When
      an
      equity method investee such as Comverge issues additional shares to third
      parties, the percentage ownership interest in the investee decreases. In the
      event the issuance price per share is higher or lower than an equity method
      investor’s average carrying amount per share, the investor recognizes a non-cash
      gain or loss on the issuance. This non-cash gain or loss is recognized in the
      investor’s net income in the period the change of ownership interest occurs. As
      a result of the Comverge offering, the Company recorded an increase in its
      investment in Comverge and recorded a non-cash gain of $16,169 in “Gain on
      public offering of Comverge”. Subsequent to the offering, the Company no longer
      accounts for its investment in Comverge under the equity method and accounts
      for
      its Comverge investment under the cost method.




Due
      to
      certain restrictions relating to the shares of Comverge’s common stock owned by
      the Company, not all of the Company’s 2,786,021 Comverge shares can be
      considered “available-for-sale” under SFAS 115 “Accounting for Certain
      Investments in Debt and Equity Securities”. The Company’s management has
      determined that at June 30, 2007, approximately 543,000 shares of Comverge’s
      common stock can be considered unrestricted under the provisions of SFAS 115,
      and accordingly recorded an increase in its investment balance by $14,043 and
      recorded a deferred tax liability of $5,035 (and an offsetting deferred tax
      asset of $5,035 with respect to the utilization of the Company’s NOL’s) to
      Accumulated Other Comprehensive Income with respect to the recording those
      shares at fair market value.




**Note
      6—Paketeria GmbH (Paketeria)**




Paketeria’s
      summary results of operations for the six and three-month periods ended June
      30,
      2007 is as follows:




Six
                months
              ended
                June 30, 2007
            
            Three
                months
              ended
                June 30, 2007Sales
            
            $
            1,514
            
            $
            939Gross
                loss
            
            $
            (190
            )
            $
            (83
            )Net
                loss
            
            $
            (895
            )
            $
            (492
            )






The
      Company currently owns approximately 33% of Paketeria’s outstanding shares and
      accordingly, records 33% of Paketeria’s losses as equity loss in Paketeria.




The
      Company’s Share of losses in Paketeria is comprised of the
      following:




Six
                months ended June 30, 2007
            
            Three
                months ended June 30, 2007Equity
                loss in Paketeria
            
            $
            (293
            )
            $
            (161
            )Amortization
                expense associated with acquired non-compete and franchise agreements
                and
                change in value of put option
            
            
            (63
            )
            
            (27
            )Stock
                compensation expense
            
            
            (32
            )
            
            (13
            )Share
                of losses in Paketeria
            
            $
            (388
            )
            $
            (201
            )




8




The
      activity in the Company’s investment in Paketeria is as follows:




Investment
                balance as of December 31, 2006
            
            $
            1,212Amortization
                of acquired non-compete and franchise agreements and change in value
                of
                put option
            
            
            (63
            )Cumulative
                translation adjustment
            
            
            19Company’s
                share of Paketeria losses - period from January 1, 2007 to June 30,
                2007
            
            
            (293
            )Investment
                balance as of June 30, 2007
            
            $
            875




During
      the six months ended June 30, 2007, the Company lent Paketeria a total of €545
      ($733, based upon the then current exchange rates) on a series of promissory
      notes. The notes bear interest at the rate of 10.0% and were each for a period
      of 90 days. Matured notes have not been repaid and continue to bear interest.
      The total note balances at June 30, 2007 of $745 (at current exchange rates)
      are
      included in Other Current Assets in the Consolidated Balance
      Sheets.




Subsequent
      to June 30, 2007, the Company lent Paketeria an additional €205 ($281, based on
      the then current exchange rates) and consolidated all the notes under a Bridge
      Loan Agreement. Under the terms of the Bridge Loan Agreement, the amounts lent
      to Paketeria bear interest at 10% and the entire principal amount plus accrued
      interest is to be converted to equity upon the successful private placement
      of
      Paketeria securities (see Note 12 - Subsequent Events). If the private placement
      is unsuccessful and Paketeria is unable to complete another transaction
      providing the necessary liquidity, Paketeria may not have sufficient funds
      to
      finance its activities and may not be able to continue to operate as a going
      concern.




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




There
      were no acquisitions or impairments of goodwill recorded during the three-month
      period ended June 30, 2007. All the goodwill is related to the OncoPro segment
      in dsIT.




The
      Company’s amortizable intangible assets consisted of software licenses, with a
      gross carrying amount of $224 and $201 as of December 31, 2006 and June 30,
      2007
      respectively and accumulated amortization of $176 and $191, as of December
      31,
      2006 and June 30, 2007, respectively. In the second quarter of 2007, the Company
      recognized an impairment of $23 with respect to software licenses associated
      with its Easybill product. All intangible assets are being amortized over their
      estimated useful lives, which averaged five years and the a mortization
      expense for each of the six months ended June 30, 2006 and 2007 amounted to
      $19
      and $13, respectively. Amortization expense of the remaining balance of these
      assets, for the year ending June 30, 2008 is estimated to be $9.




**Note
      8: Private Placement of Convertible Redeemable Subordinated Debentures**




On
      March
      30, 2007, the Company conducted an initial closing of a private placement of
      its
      Debentures. At the initial closing the Company issued $4,281 principal amount
      of
      the Debentures, at par, and received gross proceeds in the same amount. On
      April
      11, 2007, the Company conducted a second and final closing of a private
      placement of its Debentures. At the second closing the Company issued $2,605
      principal amount of the Debentures, at par, and received gross proceeds in
      the
      same amount.




9




From
      the
      date of issuance of the Debentures to and including, the first anniversary
      of
      the closing, 50% of the outstanding principal amount of the Debentures is
      convertible into shares of the Company’s Common Stock at a price of $3.80 per
      share. Following the first anniversary of the closing, the Debentures are
      convertible up to the entire principal amount then outstanding.




The
      Company determined the fair value of the beneficial conversion feature of the
      Debentures issued at the initial closing to be $1,654. In accordance with
      applicable accounting principles, one-half ($827) was immediately charged to
      interest expense, net in the first quarter of 2007, due to the ability to
      convert one-half of the Debentures at issuance. The remaining balance of the
      beneficial conversion feature ($827) was reflected as a discount to the total
      Debenture amount and is charged to interest expense over a one-year period
      (the
      period after which the remaining one-half of the Debentures may be converted).
      With respect to the initial closing, the Company recorded interest expense
      of
      $325 in the six months ended June 30, 2007 with respect to the aforementioned
      remaining balance of the beneficial conversion feature from the initial
      closing.




The
      Company determined the fair value of the beneficial conversion feature of the
      Debentures issued at the second closing to be $916. In accordance with
      applicable accounting principles, one-half ($458) was immediately charged to
      interest expense, net in the second quarter of 2007, due to the ability to
      convert one-half of the Debentures at issuance. The remaining balance of the
      beneficial conversion feature ($458) was reflected as a discount to the total
      Debenture amount and is charged to interest expense over a one-year period
      (the
      period after which the remaining one-half of the Debentures may be converted).
      With respect to the second closing, the Company recorded interest expense of
      $158 with respect to the aforementioned remaining balance of the beneficial
      conversion feature from the second closing.




By
      the
      terms of the offering, each subscriber, in addition to the Debentures, received
      a warrant exercisable for the purchase of a number of shares equal to 25% of
      the
      principal amount of the Debentures purchased by such subscriber, divided by
      the
      conversion price of $3.80, resulting in the issuance of Warrants to purchase
      281,656 shares at the initial closing and 171,391 shares at the second and
      final
      closing. The Warrants are exercisable for shares of the Company’s Common
      Stock for five years at an exercise price of $4.50 per share and are callable
      by
      the Company at any time after the effectiveness of the registration statement
      and provided that the registration statement has been effective during the
      period of notice and is effective at the time of the call, the Warrants are
      subject to call for cancellation, at the option of the Company, on 20 business
      days notice, upon the Common Stock having achieved a volume weighted average
      price of $6.00 or more for 20 consecutive trading days. The Company allocated
      $532 to the value of the warrants based on a valuation performed by an
      independent consultant who utilized the Black Scholes method and applied a
      discount reflecting the callable feature embedded in the warrant. The value
      allocated to the warrants has been reflected as a discount to the total
      Debenture amount and will be charged to interest expense over the five-year
      life
      of the warrants. In the six months ended June 30, 2007, the Company recorded
      interest expense of $45 with respect to these warrants.




The
      Debentures bear interest at the rate of 10% per annum, payable quarterly and
      mature on March 30, 2011. If the Company fails to redeem at least 50% of the
      total outstanding principal amount of the Debentures, together with interest
      accrued thereon, by the first anniversary of the initial closing, the annual
      rate of interest payable on the Debentures will be increased to
      12%.




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 2%
      non-accountable expense allowance, out of the gross proceeds of the offering.
      In
      addition, the placement agent was entitled to and received warrants on
      substantially the same terms as those issued to the subscribers, exercisable
      for
      the purchase of the number of shares equal to 10% of the total principal amount
      of the Debentures sold, divided by the conversion price of $3.80. Out of the
      gross proceeds received, the Company paid the placement agent commissions and
      expenses of $864 and issued to the placement agent warrants to purchase 181,211
      shares of Common Stock. The value of the warrants issued to the placement agent
      was determined to be $213 based upon the valuation performed by the independent
      consultant mentioned above. In addition, the Company paid various other
      transaction costs of $182. The total debt origination costs of $1,259 has been
      reflected as a discount against the total Debenture amount and are to be charged
      to interest expense over the four year life of the Debentures. In the six months
      ended June 30, 2007, the Company recorded interest expense of $132 with respect
      to these debt origination costs.




10




**Note
      9: Stock Options and Warrants**




(a)
      Acorn
      Stock Options





A
      summary
      of stock option activity for the six months ended June 30, 2007 is as
      follows:





Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Life
            
            Aggregate
                Intrinsic ValueOutstanding
                at December 31, 2006
            
            
            2,172,835
            
            $
            2.55Granted
                at market price
            
            
            66,000
            
            $
            4.53Granted
                at discount to market price
            
            
            79,000
            
            $
            3.50Exercised
            
            
            (173,500
            )
            $
            2.86
            
            
            
            
            $
            270Forfeited
                or expired
            
            
            (92,667
            )
            $
            3.64Outstanding
                at June 30, 2007
            
            
            2,051,668
            
            $
            2.58
            
            
            2.9
                years
            
            $
            5,595Exercisable
                at June 30, 2007
            
            
            1,563,334
            
            $
            2.43
            
            
            2.3
                years
            
            $
            4,515





The
      weighted average grant date fair value of 145,000 stock options granted during
      the first three months of 2007 was $1.14 per share. The fair value of the
      options granted was estimated on the grant date using the Black-Scholes
      option-pricing model with the following weighted average
      assumptions:





Volatility
            
            
            50
            %Expected
                term (years)
            
            
            1.0
                yearsRisk
                free interest rate
            
            
            5.0
            %Expected
                dividend yield
            
            
            0.0
            %




11




Total
      stock-based compensation expense included in the Company’s statements of
      operations for the six and three months ended June 30, 2006 and 2007,
      respectively, was:





Six
                months ended June 30, 2006
            
            Six
                months ended June 30, 2007
            
            Three
                months ended June 30, 2006
            
            Three
                months ended June 30, 2007Cost
                of sales
            
            $
            21
            
            $
            22
            
            $
            2
            
            $
            1Selling,
                marketing, general and administrative expenses
            
            
            441
            
            
            352
            
            
            325
            
            
            103Share
                of losses in Paketeria
            
            
            —
            
            
            32
            
            
            —
            
            
            13Loss
                on sale of discontinued operations and contract settlement
            
            
            315
            
            
            —
            
            
            —
            
            
            —Total
                stock based compensation expense
            
            $
            777
            
            $
            406
            
            $
            327
            
            $
            117




(b)
      dsIT
      Stock Option Plan




In
      February 2007, certain members of senior management and employees of dsIT
      exercised options under the dsIT Key Employee Stock Option Plan. As a result
      of
      the exercise of these options, the Company’s holdings in dsIT were diluted to
      58%.




(c)
      Warrants





As
      noted
      above in Note 8, the Company issued warrants in connection with its private
      placement of the Debentures.





A
      summary
      of stock warrants activity for the six months ended June 30, 2007 is as
      follows:





Number
                of Warrants (in shares)
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual LifeOutstanding
                at December 31, 2006
            
            
            614,039
            
            $
            2.79
            
            
            3.2
                yearsGranted
            
            
            746,916
            
            $
            4.50
            
            
            4.8
                yearsExercised
            
            
            (2,375
            )
            $
            2.78Forfeited
                or expired
            
            
            —
            
            
            —Outstanding
                at June 30, 2007
            
            
            1,358,580
            
            $
            3.73
            
            
            3.9
                yearsExercisable
                at June 30, 2007
            
            
            1,358,580
            
            $
            3.73
            
            
            3.9
                years







**Note
      10: Warranty Provision**




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




12




**Note
      11: Segment Information**




The
      Company has redefined its reported operating segments. The Company no longer
      considers its Easybill operations as part of its former IT Solutions segment
      (current consisting only of OncoProTM activities) as the Company has reduced its
      focus on those activities. Easybill activities are currently included in
“Other”. The Company’s current operations are based upon the following two
      operating segments:




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




·
            OncoProTM
                whose activities are comprised of the Company’s OncoProTM solution state of
                the art chemotherapy package for oncology and hematology
                departments.




Other
      operations include various operations in Israel that do not meet the
      quantitative thresholds of SFAS No. 131.




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




**RT
                Solutions**
            
            **OncoProTM**
            
            **Other****(*)**
            
            **Total**Six
                months ended June 30, 2007:Revenues
                from external customers
            
            $
            1,103
            
            $
            269
            
            $
            348
            
            $
            1,720Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit (loss)
            
            
            261
            
            
            108
            
            
            (28
            )
            
            341Segment
                loss
            
            
            (233
            )
            
            (219
            )
            
            (130
            )
            
            (582
            )Six
                months ended June 30, 2006:Revenues
                from external customers
            
            $
            1,334
            
            $
            315
            
            $
            314
            
            $
            1,963Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            487
            
            
            55
            
            
            31
            
            
            573Segment
                income (loss)
            
            
            (36
            )
            
            (114
            )
            
            (68
            )
            
            (218
            )Three
                months ended June 30, 2007:Revenues
                from external customers
            
            $
            424
            
            $
            97
            
            $
            160
            
            $
            681Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit (loss)
            
            
            86
            
            
            12
            
            
            (42
            )
            
            56Segment
                income (loss)
            
            
            (269
            )
            
            (157
            )
            
            (130
            )
            
            (556
            )Three
                months ended June 30, 2006:Revenues
                from external customers
            
            $
            702
            
            $
            144
            
            $
            144
            
            $
            990Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            327
            
            
            13
            
            
            5
            
            
            345Segment
                income (loss)
            
            
            13
            
            
            (77
            )
            
            (37
            )
            
            (101
            )







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




13




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





Six
                months ended June 30,
            
            Three
                months ended June 30,2006
            
            2007
            
            2006
            
            2007Total
                loss for reportable segments
            
            $
            (150
            )
            $
            (452
            )
            $
            (64
            )
            $
            (426
            )Other
                operational segment loss
            
            
            (68
            )
            
            (130
            )
            
            (37
            )
            
            (130
            )Total
                operating loss
            
            
            (218
            )
            
            (582
            )
            
            (101
            )
            
            (556
            )Share
                of losses in Paketeria
            
            
            —
            
            
            (388
            )
            
            —
            
            
            (201
            )Share
                of losses in Comverge
            
            
            (210
            )
            
            —
            
            
            —
            
            
            —Gain
                recorded on Comverge public offering
            
            
            —
            
            
            16,169
            
            
            —
            
            
            16,169Net
                loss of corporate headquarters and other unallocated costs
            
            
            (954
            )
            
            (3,285
            )
            
            (693
            )
            
            (1,801
            )Net
                loss from continuing operations
            
            
            (1,382
            )
            
            11,914
            
            
            (794
            )
            
            13,611Discontinued
                operations
            
            
            78
            
            
            —
            
            
            —
            
            
            —Loss
                on sale of discontinued operations and contract settlement
            
            
            (2,298
            )
            
            —
            
            
            —
            
            
            —Total
                consolidated net income (loss)
            
            $
            (3,602
            )
            $
            11,914
            
            $
            (794
            )
            $
            13,611




*
                Includes $1,946 and $1,119 of during the six and three months ended
                June
                30, 2007, respectively, of interest expense with respect to the private
                placement of Debentures (see Note
                8).




**Note
      12: Subsequent Events**




Paketeria
      Private Placement




In
      August
      2007, as part of a private placement, Paketeria has received subscription
      agreements to raise approximately €1,540 ($2,071) by way of a share issuance.
      Subscriptions are binding commitments once accepted by the Paketeria. Paketeria
      will accept the subscriptions once all funds have been received in an
      escrow account. As of August 17, 2007, €1,115 ($1,500) had been received in the
      escrow account. The shares will be issued by way of a capital increase against
      contribution of cash on the basis of a valuation of €133.33 per Euro share
      capital, representing a pre-money valuation of Paketeria of €8,000
      ($10,760).




In
      addition, concurrent with the private placement, the Company is to convert
      shareholder loans in the aggregate principal amount of €750 ($1,009) plus
      accrued interest, into shares of Paketeria on the same basis as the private
      placement. Additionally, exercised its option under the August 2006 investment
      agreement to acquire a convertible promissory note in the amount of €70 ($94)
      plus accrued interest. The Company intends to convert this balance into shares
      of Paketeria on the basis of an evaluation of € 50.70 loan/interest nominal
      value per Euro share capital (the valuation from the August 2006 investment
      agreement) upon the closing of the private placement.




After
      the
      private placement and related transactions described above, the Company will
      own
      approximately 32% of Paketeria.




14




**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 for the
      year
      ended December 31, 2006.





**Recent
      Developments**




***Private
      Placement of Debentures and Warrants***





On
      April
      11, 2007, we completed a private placement of $6.9 million of principal amount
      of 10% Convertible Redeemable Subordinated Debentures (the “Debentures”),
      resulting in gross proceeds of the same amount. The Debentures, subject to
      certain restrictions, are convertible into our common stock at a conversion
      price of $3.80 per share and mature on March 30, 2011.





In
      connection with the offering, we entered into subscription agreements with
      certain accredited investors. By the terms of the subscription agreements each
      subscriber in addition to the Debentures purchased, received a warrant
      exercisable for the purchase of 25% of the number of shares obtained by dividing
      the principal amount of a given Debenture by the conversion price of $3.80
      per
      share, resulting in the issuance of warrants to purchase 453,047 shares. The
      warrants are exercisable for shares of Common Stock for a period of five years
      at an exercise price of $4.50 per share. Both the Debentures and the warrants
      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 our agreement with the
      placement agent, the agent received a 7% selling commission, 3% management
      fee,
      and 2% non-accountable expense allowance out of the gross proceeds of the
      offering.




Out
      of
      the gross proceeds of the offering, we paid the placement agent commissions
      and
      expenses of approximately $0.9 million and other transaction costs of $0.2
      million. In addition, we issued to the placement agent warrants to purchase
      181,211 shares of common stock on substantially the same terms as those issued
      to the subscribers.




***Comverge
      IPO***




On
      April
      18, 2007, Comverge completed its initial public offering of 6,095,000 shares
      of
      common stock, including 795,000 shares sold pursuant to the exercise by the
      underwriters of the over-allotment option granted to them by certain selling
      stockholders. The shares are listed on the Nasdaq Global Market under the symbol
      "COMV". We did not sell any of our Comverge common stock in the
      offering.




Immediately
      prior to the closing of the Comverge offering on April 18, 2007, all shares
      of
      preferred stock of Comverge were converted to common stock of Comverge and
      we
      currently own 2,786,021 shares of Comverge common stock, representing
      approximately 14.3% of the issued and outstanding capital stock of
      Comverge.




15


In
      connection with the offering, we (and all of Comverge’s executive officers,
      directors and certain of other major stockholders of Comverge), entered into
      a
      lock-up agreement under which the we agreed, subject to limited exceptions,
      not
      to transfer or otherwise dispose of any shares of Comverge common stock for
      a
      period of at least 180 days from the date of effectiveness of the offering
      without the prior written consent of the lead manager of the
      offering.




As
      a
      result of the offering, we recorded a gain of approximately $16.2 million with
      respect to the adjustment of the balance recorded as our investment in Comverge
      to our share of Comverge’s equity subsequent to the offering. In addition, we
      have also recorded $14.0 million as comprehensive income (net of deferred
      taxes), the market value of those shares, which at June 30, 2007 we believed
      not
      to be restricted. The total market value of our Comverge investment of 2,786,021
      shares (comprised of restricted and unrestricted shares as determined under
      SFAS
      115) at June 30, 2007 was approximately $86.4 million based on the June 30,
      2007
      closing market price of $31.01 per share.





***Paketeria***




In
      the
      period from January to July 2007, we provided Paketeria with numerous short-term
      loans of an amount in euros equal to approximately $1.0 million in order to
      provide it with short-term financing to help it support its current expansion
      and operating activities until it raised funds from a debt or equity offering.
      In August 2007, Paketeria is in the process of completing a €1.5 million ($2.0
      million) private placement of its shares at an €8.0 million ($10.8 million)
      company value (pre-money). In the course of the private placement, we shall
      convert all of our note receivable balances (€750,000 or $1.0 million) and
      accumulated interest to equity in Paketeria. In addition, as part of the
      agreement, we are also to exercise our final option and acquired a €70,000
      ($94,000) note from Paketeria and convert it to equity as well. After the
      completion of the private placement and related transactions described above,
      we
      will own approximately 32% of Paketeria.





***dsIT
      Solutions***





In
      May
      2007, dsIT signed a contract to supply its AquaShield Diver Detection Sonar
      (DDS) system to a leading European oil terminal operator. The system is believed
      to be the first system in the world designed and operated to protect a strategic
      coastal energy installation. The DDS is dsIT’s state-of-the art underwater
      surveillance system, which supports automatic detection, tracking and
      classification of any moving underwater body or object. The DDS will monitor
      the
      waters surrounding the oil terminal in order to detect underwater intrusion
      and
      prevent sabotage.





In
      June
      2007, dsIT also received a $7.3 million order for a sonar and underwater
      acoustics system from the Israeli Ministry of Defense.





***Local
      Power***





In
      July
      2007, we acquired ten percent of Local Power (LPI), a California-based
      corporation formed recently by a pioneer in the restructuring of the $325
      Billion US retail electricity market. We will have the right, for 12 months,
      to
      purchase an additional 41 percent stake in LPI, bringing our potential total
      ownership position to 51 percent





LPI
      provides consultation services and energy intelligence tools to enable cities
      to
      develop renewable electricity resources on a massive scale while utilizing
      the
      local utility’s distribution infrastructure. LPI’s founder, Paul Fenn, created
      Community Choice Aggregation (CCA), a revolutionary method by which cities
      can
      dramatically accelerate deployment of local green power infrastructure in order
      to diversify their electric power away from fossil fuel to renewable energy
      and
      achieve more stable, competitive rates for their communities.




16




LPI
      is
      building a recurring revenue business with its highly scalable energy service
      bureau model, assisting cities to adopt, implement and manage CCA networks.
      CCA
      offers numerous benefits - city governments become strategic investors in
      renewable power, local jobs are promoted, rates are stabilized, and the service
      is popular with environmentally conscious politicians and voters.




***Corporate***





Under
      the
      Investment Company Act of 1940, as amended (the “Investment Company Act”), and
      the rules thereunder, we are, as of June 30, 2007 deemed to be an investment
      company as the “value” of “investment securities” we own accounts for more than
      40% of the total “value” of our assets, exclusive of “government securities,”
cash and certain cash items. The shares of Comverge common stock we own are
      investment securities” under the Act and account for significantly more than 40%
      of the value of our total assets.





We
      have
      availed ourselves of the provision under Rule 3a-2 under the Investment Company
      Act that exempts an issuer from investment company status for up to one year,
      so
      long as it has a bona fide intent to promptly (in any event within a one year
      period) be primarily engaged in a business other than that of investing,
      reinvesting, owning, holding or trading in securities.





Our
      management and Board of Directors are formulating plans for returning the
      Company to compliance with the numerical tests for exemption from investment
      company status as soon as possible and no later than June 30, 2008. These plans
      would likely include the acquisition of one or more wholly-owned,
      majority-owned, or primarily-controlled operating businesses. Steps in
      effectuating these plans may include the sale and or distribution to our
      shareholders of Comverge shares, and/or a merger or other acquisition
      transaction. We may find that we are not able to identify and acquire during
      the
      one-year period, a suitable operating business or businesses on terms acceptable
      to us. While we could request an order from the SEC to give us additional time
      beyond the one year period allowed by Rule 3a-2 to sell and/or distribute
      Comverge shares and take any other action necessary to come into compliance
      with
      the Investment Company Act, the Board of Directors has not determined to request
      such an order and there is no assurance that such an order would be
      granted.





If
      we are
      unable to come into compliance with the Investment Company Act before June
      30,
      2008 (or any later date to which that may be extended by the SEC), we may be
      in
      violation of the Investment Company Act. If we were deemed to be operating
      as an
      illegally unregistered investment company, the consequences could potentially
      be
      severe. Among other things, the Company would be prohibited from engaging in
      business in the United States (including non-investment company business) and
      all of its contracts would become voidable at the election of the
      counterparty.




**Overview
      and Trend Information**





Acorn
      Factor specializes in funding and accelerating the growth of emerging ventures
      that promise meaningful improvements in the economic and environmental
      efficiency of the energy sector.





We
      invest
      in promising companies led by what we believe to be great entrepreneurs. And
      we
      add value by helping our companies with branding, positioning, strategy, and
      business development guidance. Acorn is a global company with equity interests
      currently in three promising businesses. Comverge (14.3%) is a leading clean
      energy provider and Red Herring 100 Company. DSIT (58%) is a leader in
      underwater security systems for strategic coastal energy infrastructure. Local
      Power (10%) is the creator of community choice aggregation, a revolution in
      renewable power and retail markets for electricity. We also currently have
      a 33%
      investment in Paketeria, a German company which is the innovator of Germany's
      first "Super Service Market".





17




Consistent
      with our plans for returning to compliance for the test for exemption under
      the
      Investment Company Act, we
      seek
      opportunities in companies which will be majority owned or primarily-controlled
      operating businesses.





During
      the periods included in this report, we operated in two reportable segments:
      RT
      Solutions and OncoProTM. The following analysis should be read together with the
      segment information provided in Note 11 to the interim unaudited consolidated
      financial statements included in this quarterly report, which information is
      hereby incorporated by reference into this Item 2.





*RT
      Solutions*




Segment
      revenues reflected a significant decrease in the second quarter of 2007 as
      compared to the first quarter of 2007 as well as a significant decrease during
      the first six months of 2007 as compared to the first six months of 2006.
      Decreased revenues were the result of a reduction in the backlog of projects
      in
      the first and second quarters of 2007. Segment gross profits decreased
      significantly for both the second quarter of 2007 as compared to the first
      quarter of 2007 and the first six months of 2007 as compared to the first six
      months of 2006 reflecting the decrease in sales as well as reduced profit
      margins. We expect that we will begin to see significantly increased revenues,
      gross profits and gross margins in the coming quarters as a result of the
      increase in our backlog (to over $8 million) resulting primarily from the
      recently announced contracts received by dsIT (see “Recent Developments”). Both
      of these new contracts are in our sonar technologies solutions are of our RT
      Solutions segment. We believe that sonar technology solutions will be the
      primary source of this segment’s future growth and profitability.




*OncoPro* *TM*




Segment
      revenues reflected a significant decrease in the second quarter of 2007 as
      compared to the first quarter of 2007 as well as a significant decrease during
      the first six months of 2007 as compared to the first six months of 2006.
      Decreased revenues were the result of reduced hours approved for payment as
      well
      as the redirection of employees to perform development work with respect to
      a
      planned beta site in the United States. Segment gross profits decreased
      significantly for the second quarter of 2007 as compared to the first quarter
      of
      2007, but increased during the first six months of 2007 as compared to the
      first
      six months of 2006. The decrease in gross profits in the second quarter of
      2007
      as compared to the first quarter of 2007 was due to reduced billable hours
      performed by our OncoPro TM team.




We
      do not
      expect that we will see significantly increased revenues, gross profits or
      gross
      margins in the coming quarters.




We
      have
      effectively halted our beta-site development work as we continue our discussions
      and seek strategic alliances for marketing and obtaining additional investment
      for our OncoProTM solutions.




*Comverge*





As
      described above under “Recent Developments”, on April 18, 2007 Comverge
      completed its initial public offering. 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.




18




*Paketeria*





We
      account for our Paketeria investment the equity method and, as such, currently
      record approximately 33% of its income or loss in our consolidated results.
      As
      part of the currently in process private placement by Paketeria (see “Recent
      Developments”), it is in the process of raising approximately €1.5 million ($2.0
      million) and we are converting approximately $1 million of debt to equity in
      Paketeria. If the offering is completed as contemplated, our shareholdings
      will
      be reduced to approximately 32%.




Paketeria
      was established to take advantage of the privatization and subsequent
      substantial reduction in retail outlets of the German post office. Since the
      beginning of 2006, Paketeria has doubled in size to four company owned stores
      and 60 franchised stores. In 2007, Paketeria is continuing its expansion of
      stores. In addition, Paketeria is planning to add additional services to its
      unique “Super Services Market” format. Planned additions to its services menu
      include an Internet pharmacy and telecommunication services in cooperation
      with
      The Phone House, Europe’s largest independent mobile phone
      retailer.





Paketeria
      is continuing to look for additional outside equity or debt financing to assist
      it in its expansion.




*Corporate*




We
      have
      recently raised approximately $6.9 million in a private placement of our
      Convertible Redeemable Subordinated Debentures. We intend to use the funds
      raised for general working capital and to finance our search for additional
      strategic acquisitions and investments.




**New
      Accounting Standards**




Effective
      January 1, 2007, we adopted FASB Interpretation No. (FIN) 48,
“Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting
      for uncertainty in income taxes recognized in financial statements in accordance
      with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes 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. FIN 48 requires that we determine whether the benefits of our tax
      positions are more likely than not of being sustained upon audit based on the
      technical merits of the tax position. For tax positions that are more likely
      than not of being sustained upon audit, we recognize the largest amount of
      the
      benefit that is more likely than not of being sustained in our consolidated
      financial statements. For tax positions that are not more likely than not of
      being sustained upon audit, we do not recognize any portion of the benefit
      in
      our consolidated financial statements. The provisions of FIN 48 also provide
      guidance on de-recognition, classification, interest and penalties, accounting
      in interim periods, and disclosure.




The
      cumulative effect of the adoption of the recognition and measurement provisions
      of FIN 48 resulted in a $305,000 reduction to the January 1, 2007 balance
      of our retained earnings. Results of prior periods have not been restated.
      Our
      policy for interest and penalties related to income tax exposures was not
      impacted as a result of the adoption of the recognition and measurement
      provisions of FIN 48. Therefore, we continue to recognize interest and penalties
      as incurred within “Finance income (expense), net” in the Consolidated
      Statements of Operations.




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
      Measurements.” SFAS No. 157 creates a single definition of fair value,
      along with a conceptual framework to measure fair value, and to increase the
      consistency and the comparability in fair value measurements and in financial
      statement disclosures.




19




In
      February 2007, the FASB issued SFAS No. 159, “Fair Value Option for
      Financial Assets and Liabilities - Including an Amendment to FASB Statement
      No. 115.” SFAS No. 159 improves financial reporting by giving entities
      the opportunity to mitigate earnings volatility by electing to measure related
      financial assets and liabilities at fair value rather than using different
      measurement attributes. Unrealized gains and losses on items for which the
      fair
      value option has been elected should be reported in earnings. Upon initial
      adoption, differences between the fair value and carrying amount should be
      included as a cumulative-effect adjustment to beginning retained earnings.




SFAS
      Nos.
      157 and 159 are effective as of the beginning of the first fiscal year that
      begins after November 15, 2007. Earlier application is permitted as of the
      beginning of the fiscal year that begins on or before November 15, 2007. We
      are not planning to early adopt SFAS Nos. 157 and 159 and are currently
      assessing the impact of implementing SFAS Nos. 157 and 159 on our financial
      position and results of operations.




**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 June 30, 2006
      and 2007, 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.




Six
                months ended June 30,
            
            Three
                months ended June 30,2006
            
            2007
            
            Change
            
            2006
            
            2007
            
            Change($,000)
            
            %
                of sales
            
            ($,000)
            
            %
                of sales
            
            %
                of 2006
            
            ($,000)
            
            %
                of sales
            
            ($,000)
            
            %
                of sales
            
            %
                of 2006Sales
            
            $
            1,963
            
            
            *100*
            *%*
            $
            1,720
            
            
            *100*
            *%*
            
            *(12*
            *)*
            
            990
            
            
            *100*
            *%*
            $
            681
            
            
            *100*
            *%*
            
            *(31*
            *)*Cost
                of sales
            
            
            1,390
            
            
            *71*
            
            
            1,379
            
            
            *80*
            
            
            *(1*
            *)*
            
            645
            
            
            *65*
            
            
            625
            
            
            *92*
            
            
            *(3*
            *)*Gross
                profit
            
            
            573
            
            
            *29*
            
            
            341
            
            
            *20*
            
            
            *(40*
            *)*
            
            345
            
            
            *35*
            
            
            56
            
            
            *8*
            
            
            *(84*
            *)*R&D
                expenses
            
            
            97
            
            
            *5*
            
            
            233
            
            
            *14*
            
            
            *140*
            
            
            71
            
            
            *7*
            
            
            103
            
            
            *15*
            
            
            *45*SMG&A
                expenses
            
            
            1,966
            
            
            *100*
            
            
            1,859
            
            
            *108*
            
            
            *(5*
            *)*
            
            1,044
            
            
            *105*
            
            
            1,049
            
            
            *154*
            
            
            *0*Operating
                loss
            
            
            (1,490
            )
            
            *(76*
            *)*
            
            (1,751
            )
            
            *(102*
            *)*
            
            *18*
            
            
            (770
            )
            
            *(78*
            *)*
            
            (1,096
            )
            
            *(161*
            *)*
            
            *42*Finance
                expense, net
            
            
            (6
            )
            
            *0*
            
            
            (2,111
            )
            
            *(123*
            *)*
            
            *35,083*
            
            
            (20
            )
            
            *(2*
            *)*
            
            (1,258
            )
            
            *(185*
            *)*
            
            *6,290*Gain
                on public offering of Comverge
            
            
            —
            
            
            *—*
            
            
            16,169
            
            
            *940*
            
            
            
            
            
            —
            
            
            *—*
            
            
            16,169
            
            
            *2,374*Other
                income, net
            
            
            330
            
            
            *17*
            
            
            —
            
            
            *—*
            
            
            *(100*
            *)*
            
            —
            
            
            *—*
            
            
            —
            
            
            *—*Income
                (loss) before taxes on income
            
            
            (1,166
            )
            
            *(59*
            *)*
            
            12,307
            
            
            *716*
            
            
            *(1,155*
            *)*
            
            (790
            )
            
            *(80*
            *)*
            
            13,815
            
            
            *2,029*
            
            
            *(1,849*
            *)*Taxes
                on income
            
            
            (6
            )
            
            *0*
            
            
            (5
            )
            
            *0*
            
            
            *(17*
            *)*
            
            (4
            )
            
            *0*
            
            
            (3
            )
            
            *0*
            
            
            *(25*
            *)*Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (1,172
            )
            
            *(60*
            *)*
            
            12,302
            
            
            *715*
            
            
            *(1,150*
            *)*
            
            (794
            )
            
            *(80*
            *)*
            
            13,812
            
            
            *2,028*
            
            
            *(1,840*
            *)*Share
                in losses in Paketeria
            
            
            —
            
            
            *—*
            
            
            (388
            )
            
            *(23*
            *)*
            
            
            
            
            —
            
            
            *—*
            
            
            (201
            )
            
            *(30*
            *)*Share
                in losses in Comverge
            
            
            (210
            )
            
            *(11*
            *)*
            
            —
            
            
            
            
            
            *(100*
            *)*
            
            —
            
            
            *—*
            
            
            —
            
            
            *—*Net
                loss from continuing operations
            
            
            (1,382
            )
            
            *(70*
            *)*
            
            11,914
            
            
            *693*
            
            
            *(962*
            *)*
            
            (794
            )
            
            *(80*
            *)*
            
            13,611
            
            
            *1,999*
            
            
            *(1,814*
            *)*Net
                income from discontinued operations, net of tax
            
            
            78
            
            
            *4*
            
            
            —
            
            
            
            
            
            
            
            
            —
            
            
            *—*
            
            
            —Loss
                on sale of discontinued operations and contract settlement
            
            
            (2,298
            )
            
            *(117*
            *)*
            
            —
            
            
            
            
            
            
            
            
            —
            
            
            *—*
            
            
            —Net
                income (loss)
            
            $
            (3,602
            )
            
            *(183*
            *)*
            $
            11,914
            
            
            *693*
            
            
            *(431*
            *)*
            $
            (794
            )
            
            *(80*
            *)*
            $
            13,611
            
            
            *1,999*
            
            
            *(1,814*
            *)*




20




*Sales.* Sales in
      the first six months of 2007 decreased by $243,000, or 12%, from $2.0 million
      in
      the first six months of 2006 to $1.7 million in the first six months of 2007.
      Sales in the second quarter of 2007 reflected a decrease of $309,000, or 31%,
      from $1.0 million in the first quarter of 2007 to $0.7 million in the second
      quarter of 2007. The decreases for both periods were attributable to decreases
      in both RT Solutions and OncoPro TM segment
      sales due to reduced project backlogs, as well as an allocation of resources
      to
      adapt our OncoPro TM software
      product to the US market.





*Gross
      profit.* Gross
      profit in the
      first six months of 2007 decreased by $232,000 from $573,000 to $341,000,
      compared to the first six months of 2006. The decrease was primarily
      attributable to decreased gross profits in the RT Solutions segment due to
      both
      lower sales and lower margins due to the inclusion in 2006 periods of certain
      project sales with relatively high gross profit margins. Gross profit in the
      second quarter of 2007 decreased by $289,000 from $345,000 to $56,000, in
      comparison to the second quarter of 2006, primarily due to the decrease in
      RT
      Solutions sales and margins.




*Selling,
      marketing, general and administrative expenses (“SMG&A”).* Selling,
      marketing, general and administrative expenses (“SMG&A”) in the first six months
      of
      2007 decreased slightly ($107,000) from $2.0 million to $1.9 million compared
      to
      the first six months of 2006, and was stable at $1.0 million for both the second
      quarters of 2007 and 2006. SMG&A expenses have decreased in the Company’s
      dsIT subsidiary, however this decrease has been partially offset by increases
      in
      corporate SMG&A expense.





*Gain
      on public offering of Comverge.*  In
      April
      2007, Comverge completed its initial public offering. As
      a
      result of the Comverge offering, the Company recorded an increase in its
      investment in Comverge and recorded a non-cash gain of $16.2 million in “Gain on
      public offering of Comverge”. Subsequent to the offering, the Company no longer
      accounts for its investment in Comverge under the equity method and accounts
      for
      its Comverge investment under the cost method.




*Finance
      expense, net.* Finance
      expense, net, increased in the first six months of 2007 as compared to the
      first
      six months of 2006 from $6,000 to $2.1 million. Finance expense, net, also
      increased in the second quarter of 2007 as compared to the second quarter of
      2006 from $20,000 to $1.3 million. The increases are entirely attributable
      to
      the finance costs associated with our private placement of convertible debt
      in
      the first and second quarters of 2007.




*Share
      of losses in Comverge.* In
      the
      first quarter of 2006, we recognized $210,000 in previously unrecognized and
      current losses of our Comverge equity affiliate offsetting our additional
      investments during the quarter in that amount in Comverge preferred stock.
      As
      our investment in Comverge has been reduced to zero, we no longer recorded
      additional losses against our investment in Comverge.




*Share
      of losses in Paketeria.* In
      the
      first six months of 2007, we recognized losses of $356,000 representing our
      approximately 33% share of Paketeria’s losses for the period and amortization
      expense associated with acquired non-compete and franchise agreements and the
      change in value of a put option. In addition, we also recognized additional
      losses totaling $32,000 with respect to stock compensation expense associated
      with a previous option grant to Paketeria’s founder and managing director and
      amortization related to the acquired value of a non-compete agreement and
      franchises.




*Net
      income from discontinued operations, net of tax.* The
      results as reported reflect the net results of Databit prior to our sale in
      March of 2006.




*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.




21




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




As
      of
      June 30, 2007, we had working capital of $4.5 million, including $5.1 million
      of
      cash and cash equivalents. Net cash provided in the six months of 2007 was
      $3.6
      million. Net cash of $1.0 million was used in operating activities during the
      first six months of 2007. The primary use of cash in operating activities during
      the first six months of 2007 was our corporate cash expenses of $1.0 million.
      Net cash of $0.9 million was used in investing activities, primarily due to
      the
      $0.7 million of short-term loans provided to Paketeria. Net cash of $5.5 million
      was provided from financing activities, primarily from the proceeds of our
      private placement of debentures and warrants net of related discounts ($5.8
      million, net).




As
      of
      July 31, 2007 the Company’s wholly owned US operations (i.e., excluding dsIT)
      had an aggregate of approximately $5.3 million in cash and cash equivalents,
      reflecting a $3.8 million increase from the balance as of December 31, 2006.




We
      believe that the cash available will provide more than sufficient liquidity
      to
      finance Acorn’s activities for the foreseeable future and for the next 12 months
      in particular. As of June 30, 2007, dsIT was utilizing approximately $166,000
      of
      its approximate $400,000 lines of credit. dsIT's lines of credit are denominated
      in NIS and bear a weighted average interest rate of the Israeli prime rate
      plus
      2.08% per annum. The Israeli prime rate fluctuates and as of June 30, 2007
      was
      5.50%. At June 30, 2007, dsIT was in technical violation of covenants under
      its
      line of credit with one of its banks. This bank is continuing to provide funding
      to dsIT despite the technical violation and has not formally notified dsIT
      of
      any violation or any contemplated action. Acorn has agreed to be supportive
      of
      dsIT’s liquidity requirements over the next 12 months.




**Contractual
      Obligations and Commitments**




Our
      contractual obligations and commitments at June 30, 2007, 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 June 30,Contractual
                Obligations
            
            Total
            
            2008
            
            2009-2010
            
            2011-2012
            
            2013
                and thereafter(amounts
                in thousands)Long-term
                debt
            
            $
            6,886
            
            $
            —
            
            $
            —
            
            $
            6,886
            
            $
            —Operating
                leases (1)
            
            
            874
            
            
            487
            
            
            387
            
            
            —
            
            
            —Potential
                severance obligations to Israeli employees (2)
            
            
            2,295
            
            
            327
            
            
            —
            
            
            —
            
            
            1,968Investor
                relations
            
            
            12
            
            
            12
            
            
            —
            
            
            —
            
            
            —Buy-out
                of Paketeria loan (3)
            
            
            94
            
            
            94
            
            
            —
            
            
            —
            
            
            —Total
                contractual cash obligations
            
            $
            10,161
            
            $
            920
            
            $
            387
            
            $
            6,886
            
            $
            1,968




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.




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(2)
      Under
      Israeli law and labor agreements, dsIT is required to make severance payments
      to
      dismissed employees and to employees leaving employment under certain other
      circumstances. The obligation for severance pay benefits, as determined by
      the
      Israeli Severance Pay Law, is based upon length of service and 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
      June 30, 2007, we accrued a total of $2.3 million for potential severance
      obligations of which approximately $1.5 million was funded with cash to
      insurance companies.




(3)
      As a
      part of our initial agreement to invest in 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 2006, we purchased the first two-thirds of the €210,000
      ($280,000) principal promissory note. The remaining €70,000 ($94,000) of the
      note was acquired in August 2007.




**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, currently
      approximately $166,000. Additionally, our monetary assets and liabilities (net
      liability of approximately $0.6 million) in Israel are exposed to fluctuations
      in exchange rates. In addition, our notes receivable (and accrued interest)
      due
      from Paketeria of approximately $745,000 are denominated in Euros and are
      exposed to exchange rate fluctuations as well. In addition, $3.6 million, $0.4
      million and $0.1 million of our backlog of projects are contracts and orders
      that are linked to an Israeli Ministry of Defense Index, denominated
      in Euros and denominated in NIS, respectively. 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
      4T.**  **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.




23




**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.




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**PART
      II - OTHER INFORMATION**




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




None.




**Item
      1A. Risk Factors**




In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2006, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K are not the only risks facing our company.
      Additional risks and uncertainties not currently known to us or that we
      currently deem to be immaterial also may materially adversely affect our
      business, financial condition and/or operating results.




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




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.




26




**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:
              August 20, 2007
            By:
            /s/ MICHAEL
              BARTHMichael
              BarthChief
                Financial Officer


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