**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**March
                31, 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 May 15, 2007Common
                Stock, $0.01 par value per share
            
            9,586,534
                shares














**ACORN
      FACTOR, INC.**


**Quarterly
      Report on Form 10-Q**


**for
      the Quarterly Period Ended March 31, 2007**





**TABLE
      OF CONTENTS**


**PART
                  I. Financial Information**Item
                  1.
              
              Financial
                  StatementsUnaudited
                  Consolidated Financial Statements:Consolidated
                  Balance Sheets as
                  of December 31, 2006 and March 31, 2007
              1Consolidated
                  Statements of Operations for
                  the three month periods ended March 31, 2006 and
                  2007
              2Consolidated
                  Statement of Changes in Shareholders’ Equity for
                  the three month period ended March 31, 2007
              3Consolidated
                  Statements of Cash Flows for
                  the three month periods ended March 31, 2006 and
                  2007
              4Notes
                  to Consolidated Financial Statements
              6Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of Operations
              14Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              20Item
                  4.
              
              Controls
                  and Procedures
              20**PART
                  II. Other Information**Item
                  1.
              
              Legal
                  Proceedings
              21Item
                  1A.
              
              Risk
                  Factors
              21Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item
                  6.
              
              Exhibits
              22**Signatures**
              
              
              23




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 March 31, 2007**(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            1,521
            
            $
            4,275Accounts
                receivable, net
            
            
            1,373
            
            
            1,192Unbilled
                work-in-process
            
            
            393
            
            
            554Other
                current assets
            
            
            316
            
            
            512Total
                current assets
            
            
            3,603
            
            
            6,533Property
                and equipment, net
            
            
            445
            
            
            504Investment
                in Paketeria
            
            
            1,212
            
            
            1,051Other
                assets
            
            
            285
            
            
            282Funds
                in respect of employee termination benefits
            
            
            1,568
            
            
            1,541Goodwill
            
            
            97
            
            
            96Other
                intangible assets, net
            
            
            48
            
            
            42Total
                assets
            
            $
            7,258
            
            $
            10,049LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Short-term
                bank credit
            
            $
            462
            
            $
            160Current
                maturities of long-term debt
            
            
            26
            
            
            100Note
                payable - related party
            
            
            300
            
            
            300Trade
                accounts payable
            
            
            378
            
            
            378Accrued
                payroll, payroll taxes and social benefits
            
            
            478
            
            
            524Other
                current liabilities
            
            
            1,700
            
            
            1,931Total
                current liabilities
            
            
            3,344
            
            
            3,393Long-term
                liabilities:Investment
                in Comverge, net
            
            
            1,824
            
            
            1,824Convertible
                debt, net of discounts
            
            
            --
            
            
            2,388Liability
                for employee termination benefits
            
            
            2,545
            
            
            2,293Other
                liabilities
            
            
            6
            
            
            4Total
                long-term liabilities
            
            
            4,375
            
            
            6,509Shareholders’
                equity:Common
                stock - $0.01 par value per share:Authorized
                - 20,000,000 shares; Issued -10,276,030 shares and 10,334,530at
                December 31, 2006 and March 31, 2007
            
            
            102
            
            
            103Additional
                paid-in capital
            
            
            43,987
            
            
            46,111Warrants
            
            
            888
            
            
            1,359Accumulated
                deficit
            
            
            (41,904
            )
            
            (43,906
            )Treasury
                stock, at cost - 777,371 shares for December 31, 2006 andMarch
                31, 2007, respectively
            
            
            (3,592
            )
            
            (3,592
            )Accumulated
                other comprehensive income
            
            
            58
            
            
            72Total
                shareholders’ equity (deficit)
            
            
            (461
            )
            
            147Total
                liabilities and shareholders’ equity
            
            $
            7,258
            
            $
            10,049




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)




**Three
                months ended March 31,****2006**
            
            **2007**SalesProjects
            
            $
            730
            
            $
            812Services
            
            
            237
            
            
            206Other
            
            
            6
            
            
            21973
            
            
            1,039Cost
                of salesProjects
            
            
            539
            
            
            581Services
            
            
            206
            
            
            173Other
            
            
            —
            
            
            —745
            
            
            754Gross
                profit
            
            
            228
            
            
            285Operating
                expenses:Research
                and development expenses
            
            
            26
            
            
            130Selling,
                marketing, general and administrative expenses
            
            
            922
            
            
            810Total
                operating expenses
            
            
            948
            
            
            940Operating
                loss
            
            
            (720
            )
            
            (655
            )Finance
                income (expense), net
            
            
            14
            
            
            (853
            )Other
                income, net
            
            
            330
            
            
            —Loss
                before taxes on income
            
            
            (376
            )
            
            (1,508
            )Taxes
                on income
            
            
            (2
            )
            
            (2
            )Loss
                from operations of the Company and its consolidated
                subsidiaries
            
            
            (378
            )
            
            (1,510
            )Share
                in losses of Comverge
            
            
            (210
            )
            
            —Share
                in losses of Paketeria
            
            
            —
            
            
            (187
            )Net
                loss from continuing operations
            
            
            (588
            )
            
            (1,697
            )Net
                income from discontinued operations, net of tax
            
            
            78
            
            
            —Loss
                on sale of discontinued operations and contract settlement, net of
                tax
            
            
            (2,298
            )
            
            —Net
                loss
            
            $
            (2,808
            )
            $
            (1,697
            )Basic
                and diluted income (loss) per share:Loss
                per share from continuing operations
            
            $
            (0.07
            )
            $
            (0.18
            )Discontinued
                operations
            
            
            (0.27
            )
            
            —Net
                loss per share - basic and diluted
            
            $
            (0.34
            )
            $
            (0.18
            )Weighted
                average number of shares outstanding - basic and diluted
            
            
            8,160
            
            
            9,507




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
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,697
            )
            
            —
            
            
            —
            
            
            (1,697
            )Differences
                from translation of financial statements of subsidiaries
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            14
            
            
            14Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,683
            )FIN
                48 adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (305
            )
            
            —
            
            
            —
            
            
            (305
            )Exercise
                of options
            
            
            59
            
            
            1
            
            
            113
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            114Adjustment
                of transaction costs of prior year private placement
            
            
            —
            
            
            —
            
            
            68
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            68Warrants
                issued to placement agent with respect to private placement of
                Debentures
            
            
            —
            
            
            —
            
            
            —
            
            
            135
            
            
            —
            
            
            —
            
            
            —
            
            
            135Warrants
                issued with respect to private placement of Debentures
            
            
            —
            
            
            —
            
            
            —
            
            
            336
            
            
            —
            
            
            —
            
            
            —
            
            
            336Beneficial
                conversion feature with respect to private placement of
                Debentures
            
            
            —
            
            
            —
            
            
            1,654
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,654Stock
                option compensation
            
            
            —
            
            
            —
            
            
            289
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            289Balances
                as ofMarch
                31, 2007
            
            
            10,335
            
            $
            103
            
            $
            46,111
            
            $
            1,359
            
            $
            (43,906
            )
            $
            (3,592
            )
            
            72
            
            $
            147




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)





**Three
                months ended**
              **March
                31,****2006**
            
            **2007**Cash
                flows provided by (used in) operating activities:Net
                loss
            
            $
            (2,808
            )
            $
            (1,697
            )Adjustments
                to reconcile net loss to net cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            59
            
            
            32Share
                in losses of Comverge
            
            
            210
            
            
            —Share
                in losses of Paketeria
            
            
            —
            
            
            168Decrease
                in liability for employee termination benefits
            
            
            (128
            )
            
            (252
            )Amortization
                of stock-based deferred compensation
            
            
            136
            
            
            289Loss
                on sale of Databit and contract settlement
            
            
            2,298
            
            
            —Amortization
                of beneficial conversion feature in private placement of
                Debentures
            
            
            —
            
            
            827Other
            
            
            (3
            )
            
            1Change
                in operating assets and liabilities:Decrease
                (increase) in accounts receivable, unbilled work-in process and other
                current and other assets
            
            
            425
            
            
            (172
            )Increase
                in inventory
            
            
            (18
            )
            
            —Increase
                (decrease) in accounts payable and other liabilities
            
            
            (719
            )
            
            38Net
                cash used in operating activities
            
            
            (548
            )
            
            (766
            )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
            )
            
            —Amounts
                funded for employee termination benefits
            
            
            123
            
            
            73Utilization
                of employee termination benefits
            
            
            (38
            )
            
            (46
            )Acquisitions
                of property and equipment
            
            
            (42
            )
            
            (76
            )Sale
                of Databit Inc. - Appendix A
            
            
            (911
            )
            
            —Net
                cash provided by (used in) investing activities
            
            
            519
            
            
            (49
            )Cash
                flows provided by (used in) financing activities:Short-term
                debt repayments, net
            
            
            (52
            )
            
            (302
            )Proceeds
                from long-term debt
            
            
            —
            
            
            107Proceeds
                from convertible debentures with warrants net of transaction
                costs
            
            
            —
            
            
            3,685Repayments
                of long-term debt
            
            
            (38
            )
            
            (35
            )Proceeds
                from employee stock option exercises
            
            
            40
            
            
            114Net
                cash provided by (used in) financing activities
            
            
            (50
            )
            
            3,569Net
                increase (decrease) in cash and cash equivalents
            
            
            (79
            )
            
            2,754Cash
                and cash equivalents at beginning of period
            
            
            913
            
            
            1,521Cash
                and cash equivalents at end of period
            
            $
            834
            
            $
            4,275





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




4




Non-cash
                financing itemsValue
                of beneficial conversion feature and related warrants on issuance
                of
                convertible debentures
            
            
            
            
            $
            2,125Adjustment
                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 three-month period ended March 31,
      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
      March
      30, 2007, the Company completed the first closing of its private placement
      of
      10% Convertible Redeemable Subordinated Debentures (the “Debentures”) (see Note
      8) raising approximately $4.3 million (approximately $3.7 million net of
      commissions and expenses).




On
      April
      11, 2007, the Company completed the second and final closing of its private
      placement of the Debentures raising an additional $2.6 million (approximately
      $2.3 million net of commissions and expenses) (see Note 12(a)).




The
      $3,140 of working capital at March 31, 2007, includes approximately $405 in
      the
      Company’s 58% owned dsIT Solutions Ltd. subsidiary (“dsIT”). Due to Israeli tax
      and company law constraints, as well as dsIT’s own cash flow requirements, such
      working capital and cash flows from dsIT’s operations are not readily available
      to finance US based corporate activities.




dsIT
      was
      utilizing $160 of its approximate $400 lines of credit as of March 31, 2007.
      dsIT's lines of credit are denominated in NIS and bear a weighted average
      interest rate of the Israeli prime rate
      plus
      2.07% per annum.
      The Israeli prime rate fluctuates and as of March 31, 2007 is 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 income (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)**




As
      the
      Company’s share of losses attributable to its Comverge preferred stock has
      equaled its investment in Comverge’s preferred stock, the Company ceased
      recording equity losses in Comverge.




On
      April
      18, 2007, Comverge announced the completion of its initial public offering
      of
      6,095,000 shares of its common stock, at a price of $18.00 a share-see Note
      12(b).




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




Paketeria’s
      summary results of operations for the three-month period ended March 31, 2007
      is
      as follows:


Three
                  months ended March 31, 2007Sales
              
              $
              574Gross
                  loss
              
              $
              (107
              )Net
                  loss
              
              $
              (403
              )




7




The
      Company currently owns approximately 33% of Paketeria’s outstanding shares and
      accordingly, records 33% of Paketeria’s losses as equity loss in Paketeria. In
      addition to the equity loss of $133, the Company recorded amortization expense
      of $35 associated with acquired non-compete and franchise agreements and stock
      compensation expense of $19 with respect to options granted to Paketeria’s
      founder and managing director in “Share of losses in Paketeria”.




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




Investment
                balance as of December 31, 2006
            
            $
            1,212Amortization
                of acquired non-compete and franchise agreements
            
            
            (35
            )Cumulative
                translation adjustment
            
            
            7Company’s
                share of Paketeria losses - period from January 1, 2007 to March
                31,
                2007
            
            
            (133
            )Investment
                balance as of March 31, 2007
            
            $
            1,051




In
      January 2007, the Company lent Paketeria €75 ($99, based upon the then current
      exchange rate) for a period of three months on a note payable. The note bears
      interest at the rate of 8.0%. The note is immediately due and payable to the
      extent net proceeds are raised by Paketeria through any equity and/or debt
      financing. In March 2007, the Company lent Paketeria an additional €75 ($101,
      based upon the then current exchange rate) for a period of three months on
      a
      note payable under similar terms as the previous note except that the note
      bears
      interest at the rate of 10.0%. The Note receivable balances are included in
      Other Current Assets in the Consolidated Balance Sheets.




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




There
      were no acquisitions or impairments of goodwill recorded during the three-month
      period ended March 31, 2007. All the goodwill is related to the OncoProTM segment
      in dsIT.




The
      Company’s amortizable intangible assets consisted of software licenses, with a
      gross carrying amount of $224 and accumulated amortization of $176 and $182,
      as
      of December 31, 2006 and March 31, 2007, respectively. All intangibles assets
      are being amortized over their estimated useful lives, which averaged five
      years
      and the a mortization
      expense for each of the three months ended March 31, 2006 and 2007 amounted
      to
      $10 and $6, respectively. Amortization expense of the remaining balance of
      these
      assets, for the years ending March 31, 2008, 2009 and 2010, is estimated to
      be
      $21 $8, $8 and $5, respectively.




**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.




8




From
      the
      date of issuance of the Debentures to and including, the first anniversary
      of
      the initial 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 initial closing, the Debentures
      are convertible up to the entire principal amount then outstanding. In
      connection with the convertible feature embedded in the Debentures, the Company
      has determined the beneficial conversion feature to be $1,654. In according
      with
      applicable accounting principles, one-half ($827) was immediately charged to
      finance expense, net, due to the ability to convert one-half of the Debentures
      at issuance. The remaining balance of the beneficial conversion feature ($827)
      is reflected as a discount to the total Debenture amount and will be charged
      to
      interest expense over a one-year period (the period after which the remaining
      one-half of the Debentures may be converted).




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 at the initial closing
      of
      Warrants to purchase 281,656 shares. 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 $336 to the value of the warrants based
      on a
      valuation performed by an independent consultant who utilized the Call Cap
      Option Pricing Model 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.




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 at the initial closing, the Company paid the placement
      agent commissions and expenses of $596 and issued to the placement agent
      warrants to purchase 112,658 shares of Common Stock. The value of the warrants
      issued to the placement agent was determined to be $134 based upon the valuation
      performed by the independent consultant mentioned above. In addition, the
      Company paid various other transaction costs of $596. The total debt origination
      costs of $730 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.




On
      April
      11, 2007, the Company conducted a second and final closing and completed its
      $6.9 million private placement of the Debentures (see Note 12(a)).




9




**Note
      9: Stock Options and Warrants**




(a)
      Acorn
      Stock Options





A
      summary
      of stock option activity for the three months ended March 31, 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
            
            
            (58,500
            )
            $
            1.95
            
            
            
            
            $
            131Forfeited
                or expired
            
            
            (79,000
            )
            $
            3.50Outstanding
                at March 31, 2007
            
            
            2,180,335
            
            $
            2.63
            
            
            3.1
                years
            
            $
            5,261Exercisable
                at March 31, 2007
            
            
            1,638,658
            
            $
            2.54
            
            
            2.4
                years
            
            $
            4,132




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%




Total
      stock-based compensation expense included in the Company’s statements of
      operations for the three months ended March 31, 2006 and 2007, respectively,
      was:





Three
                months ended March 31, 2006
            
            Three
                months ended March 31, 2007Cost
                of sales
            
            $
            19
            
            $
            21Selling,
                marketing, general and administrative expenses
            
            
            116
            
            
            249Share
                of losses in Paketeria
            
            
            —
            
            
            19Loss
                on sale of discontinued operations and contract settlement
            
            
            315
            
            
            —Total
                stock based compensation expense
            
            $
            450
            
            $
            289




10




(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 three months ended March 31, 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
            
            
            394,314
            
            $
            4.50
            
            
            5.0
                yearsExercised
            
            
            —
            
            
            —Forfeited
                or expired
            
            
            —
            
            
            —Outstanding
                at March 31, 2007
            
            
            1,008,353
            
            $
            3.46
            
            
            3.9
                yearsExercisable
                at March 31, 2007
            
            
            1,008,353
            
            $
            3.46
            
            
            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.




**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.




11




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




**RT
                Solutions**
            
            **OncoProTM**
            
            **Other****(*)**
            
            **Total**Three
                months ended March 31, 2007:Revenues
                from external customers
            
            $
            679
            
            $
            172
            
            $
            188
            
            $
            1,039Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            175
            
            
            96
            
            
            14
            
            
            285Segment
                income (loss)
            
            
            36
            
            
            (62
            )
            
            —
            
            
            (26
            )Three
                months ended March 31, 2006:Revenues
                from external customers
            
            $
            555
            
            $
            171
            
            $
            247
            
            $
            973Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            160
            
            
            42
            
            
            26
            
            
            228Segment
                income (loss)
            
            
            (49
            )
            
            (37
            )
            
            (31
            )
            
            (117
            )





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




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




Three
                months ended March 31,2006
            
            2007Total
                loss for reportable segments
            
            $
            (86
            )
            $
            (26
            )Other
                operational segment income (loss)
            
            
            (31
            )
            
            —Total
                operating income (loss)
            
            
            (117
            )
            
            (26
            )Share
                of losses in Paketeria
            
            
            —
            
            
            (187
            )Share
                of losses in Comverge
            
            
            (210
            )
            
            —Net
                loss of corporate headquarters and other unallocated costs
            
            
            (261
            )
            
            (1,484)*Net
                loss from continuing operations
            
            
            (588
            )
            
            (1,697
            )Discontinued
                operations
            
            
            78
            
            
            —Loss
                on sale of discontinued operations and contract settlement
            
            
            (2,298
            )
            
            —Total
                consolidated net loss
            
            $
            (2,808
            )
            $
            (1,697
            )




*
      Includes $827 of interest expense with respect to the beneficial conversion
      feature in the private placement of Debentures (see Note 8).




**Note
      12: Subsequent Events**




(a)
      Private Placement of Convertible Redeemable Subordinated Debentures




On
      April
      11, 2007, the Company completed the second and final closing of the private
      placement of its Debentures described in Note 8. At the final closing the
      Company issued $2,605 principal amount of the Debentures, at par, and received
      gross proceeds in the same amount. The Debentures issued at the final closing
      have the same terms as those issued at the initial closing described in Note
      8.
      In addition to the Debentures, at the final closing subscribers received a
      warrant exercisable for the purchase of a number of shares equal to 25% of
      the
      principal amount of the Debentures purchased divided by the conversion price
      of
      $3.80, resulting in the issuance at the final closing of Warrants to purchase
      171,391 shares. 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 in certain circumstances. Warrants to issue a total of 453,047
      shares of Common Stock were issued to subscribers in the first and second
      closings.




12




Out
      of
      the gross proceeds received at the final closing, the Company paid to the
      placement agent for the offering commissions and expenses of approximately
      $325.
      In addition, in connection with the final closing, the Company issued to the
      placement agent warrants to purchase an additional 68,553 shares of Common
      Stock
      on the same terms as those issued to the subscribers. The total of placement
      agent commissions and expenses paid in connection with the offering was $864
      and
      the total number of warrants issued to the placement agent was
      181,211.




(b)
      Comverge IPO




On
      April
      18, 2007, Comverge announced the completion of 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 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.




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 the Company’s average
      carrying amount per share, the Company recognizes a non-cash gain or loss on
      the
      issuance. This non-cash gain or loss, net of any deferred taxes, is recognized
      in the Company’s net income in the period the change of ownership interest
      occurs. As a result of the Comverge IPO, the Company expects to record a
      non-cash gain of approximately $15.5 million. Subsequent to the offering, the
      Company will no longer be accounting for its investment in Comverge under the
      equity method and will account for its Comverge investment under the cost
      method.




13


**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. 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 announced the completion of 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 15.9%
      of
      the issued and outstanding capital stock of Comverge following the
      offering.


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.




14





***Paketeria***




In
      April
      2007, we provided Paketeria with an additional short-term loan (three-months)
      of
      am amount in euros equal to approximately $165,000 in order to provide it with
      additional short-term financing to help it support its current expansion and
      operating activities until it raises funds from a debt or equity
      offering.




**Overview
      and Trend Information**





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 marginal decrease in the first quarter of 2007 as compared
      to the fourth quarter of 2006, but showed a significant increase over first
      quarter 2006 revenues. Segment gross profits decreased slightly reflecting
      the
      marginal decrease in sales and were also due to reduced profit margins. We
      are
      continuing our discussions for strategic alliances for marketing our sonar
      solutions. We believe that sonar technology solutions will be the primary source
      of this segment’s future growth and profitability. We expect that we will begin
      to see increased revenues from our sonar technologies solutions in the coming
      quarters.




*OncoProTM*




Segment
      revenues and gross profit margins decreased significantly in the first quarter
      of 2007 as compared to the fourth quarter of 2006. We continue to invest
      significant resources to adapt our OncoProTM  solutions
      software to the US market. We are also continuing our discussions for a
      beta-site in the US and strategic alliances for marketing and obtaining
      additional investment for our OncoProTM  solutions.


Segment
      revenues decreased somewhat in the first quarter of 2007 as compared to the
      fourth quarter of 2006, but were stable as compared to the first quarter of
      2006. Segment gross profit and gross margins both decreased in the first quarter
      of 2007 as compared to the fourth quarter of 2007, but increased compared to
      the
      first quarter of 2006.




We
      hope
      to successfully complete our beta-site work in the second half of 2007 and
      begin
      sales of OncoProTM in the United States in the second half of 2007. . We also
      anticipate higher development costs associated with the beta-site work and
      do
      not expect this segment to reach profitability before 2008.




*Comverge*





As
      described above under “Recent Developments”, on April 18, 2007 Comverge
      announced the completion of 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.




15




*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.




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 planning to continue 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. In addition, Paketeria will be seeking additional capital investment
      to help fund its activities and expansion.




In
      2007,
      we have lent Paketeria approximately $365,000 to help it finance its ongoing
      activities and expansion. Paketeria is currently looking 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.


16




**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 March 31, 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.




Three
                months ended March 31,
            
            Change
                from
              2006
                to2006
            
            2007
            
            2007($,000)
            
            %
                of sales
            
            ($,000)
            
            %
                of sales
            
            %Sales
            
            $
            973
            
            
            *100*
            *%*
            
            1,039
            
            
            *100*
            *%*
            
            *7*Cost
                of sales
            
            
            745
            
            
            *77*
            
            
            754
            
            
            *73*
            
            
            *1*Gross
                profit
            
            
            228
            
            
            *23*
            
            
            285
            
            
            *27*
            
            
            *25*R&D
                expenses
            
            
            26
            
            
            *3*
            
            
            130
            
            
            *13*
            
            
            *400*SMG&A
                expenses
            
            
            922
            
            
            *95*
            
            
            810
            
            
            *78*
            
            
            *(12*
            *)*Operating
                loss
            
            
            (720
            )
            
            *(74*
            *)*
            
            (655
            )
            
            *(63*
            *)*
            
            *(9*
            *)*Finance
                income (expense), net
            
            
            14
            
            
            *(1*
            *)*
            
            (853
            )
            
            *(82*
            *)*
            
            *(6,193*
            *)*Other
                income , net
            
            
            330
            
            
            *34*
            
            
            --
            
            
            
            
            
            *(100*
            *)*Loss
                before taxes on income
            
            
            (376
            )
            
            *(39*
            *)*
            
            (1,508
            )
            
            *(145*
            *)*
            
            *301*Taxes
                on income
            
            
            2
            
            
            *0*
            
            
            2
            
            
            *0*
            
            
            *0*Loss
                from operations of the Company and its consolidated
                subsidiaries
            
            
            (378
            )
            
            *(39*
            *)*
            
            (1,510
            )
            
            *(145*
            *)*
            
            *299*Share
                in losses of Comverge
            
            
            (210
            )
            
            *(22*
            *)*
            
            --
            
            
            
            
            
            *(100*
            *)*Share
                in losses of Paketeria
            
            
            --
            
            
            *--*
            
            
            (187
            )
            
            *(18*
            *)*Net
                loss from continuing operations
            
            
            (588
            )
            
            *(60*
            *)*
            
            (1,697
            )
            
            *(163*
            *)*
            
            *189*Net
                income from discontinued operations, net of tax
            
            
            78
            
            
            *8*
            
            
            --
            
            
            
            
            
            *(100*
            *)*Loss
                on sale of discontinued operations and contract settlement
            
            
            (2,298
            )
            
            *(236*
            *)*
            
            --
            
            
            
            
            
            *(100*
            *)*Net
                loss
            
            $
            (2,808
            )
            
            *(289*
            *)*
            $
            (1,697
            )
            
            *(163*
            *)*
            
            *(40*
            *)*




*Sales.* Sales in
      the first three months of 2007 increased by $66,000 or 7% from $973,000 in
      the
      first quarter of 2006 to $1,039,000 in the first quarter of 2007. The increase
      was primarily attributable to an increase in RT Solutions segment sales
      partially offset by a decrease in other non-segment sales.




*Gross
      profit.* Gross
      profits in the first three months of 2007 increased by $57,000 or 25% as
      compared to the first quarter of 2006. The increase was due to increases in
      both
      gross profit in both of our RT Solutions and our OncoPro TM operating segments. The increase in RT Solutions gross profit was due to
      increased sales whereas the increase in OncoPro TM gross
      profit was due to an increase in the gross margin.




*Selling,
      marketing, general and administrative expenses (“SMG&A”).* SMG&A
      in the first three months
      of
      2007 decreased by $112,000 or 12% as compared to the first three months of
      2006.
      This decrease was due primarily to a waiver of certain liabilities by senior
      management in our dsIT subsidiary in order to shore up its results and maintain
      its working relationship with its banks. This reduction was partially offset
      by
      a $133,000 increase in stock option compensation expense recorded with respect
      to SFAS 123R.




*Finance
      income (expense), net.* The
      increase in finance expense in the first three months of 2007 compared with
      the
      first three months of 2006 is due primarily to the interest expense of $827,000
      recorded with respect to the beneficial conversion feature associated with
      the
      recent private placement of our Debentures.




17




*Other
      income (expense), net.* In
      the
      first quarter of 2006, we reached
      a settlement agreement with an Israeli bank with respect to our claims against
      the bank and the bank’s counterclaim against us. As a result of the settlement
      agreement, we recorded income of $330,000, net of legal expenses.




*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 quarter of 2007, we recognized $133,000 representing our approximately
      33%
      share of Paketeria’s losses for the period. In addition, we also recognized
      additional losses totaling $54,000 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.




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




As
      of
      March 31, 2007, we had working capital of $3.1 million, including $4.3 million
      of cash and cash equivalents. Net cash provided in the first quarter of 2007
      was
      $2.8 million. Net cash of $0.8 million was used in operating activities during
      the first quarter of 2007. The primary use of cash in operating activities
      during the first quarter of 2007 was our corporate expenses of $0.6 million
      and
      the net increase in our accounts receivables of $0.2 million. Net cash of $3.6
      million was provided from financing activities, primarily from the proceeds
      of
      our private placement of debentures and warrants net of related discounts ($3.7
      million, net).




Of
      our
      total working capital, on March 31, 2007, $0.4 million was in our majority
      owned
      dsIT subsidiary. Due to Israeli tax and company law constraints as well as
      dsIT’s own working capital requirements, such working capital and cash flows
      from dsIT’s operations are not readily available to finance U.S. corporate
      activities.




As
      of
      April 30, 2007 the Company’s wholly owned US operations (i.e., excluding dsIT)
      had an aggregate of approximately $6.0 million in cash and cash equivalents,
      reflecting a $4.5 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 March 31, 2007, dsIT was utilizing approximately $160,000
      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 2.07% per annum. The Israeli prime rate fluctuates and as of
      March 31, 2007 was approximately 5.5%. In February 2007, dsIT and one of its
      banks agreed to convert NIS 450,000 (or approximately $107,000) of its lines
      of
      credit to a term loan to be paid over a period of one-year with the terms of
      the
      remaining balance in the line of credit to be revisited in June 2007. At March
      31, 2007, dsIT was in technical violation of covenants under its line of credit
      with its other bank. 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.




18




**Contractual
      Obligations and Commitments**




Our
      contractual obligations and commitments at March 31, 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 March 31,(amounts
                in thousands)Contractual
                Obligations
            
            Total
            
            2008
            
            2009-2010
            
            2011-2012
            
            2013
                and thereafterLong-term
                debt
            
            $
            4,381
            
            $
            100
            
            $
            —
            
            $
            4,281*
            
            $
            —Operating
                leases (1)
            
            
            1,055
            
            
            561
            
            
            494
            
            
            —
            
            
            —Potential
                severance obligations to Israeli employees (2)
            
            
            2,293
            
            
            —
            
            
            —
            
            
            —
            
            
            2,293Investor
                relations
            
            
            —
            
            
            46
            
            
            —
            
            
            —
            
            
            —Buy-out
                of Paketeria loan (3)
            
            
            93
            
            
            93
            
            
            —
            
            
            —
            
            
            —Total
                contractual cash obligations
            
            $
            7,868
            
            $
            800
            
            $
            494
            
            $
            4,281
            
            $
            2,293




*
      The
      long-term debt due in the period 2011-2012 does not include the $2.6 million
      due
      as a result of the completion of the private placement of our Debentures in
      April 2007 (see Overview and Trend Information).




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




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




(2)
      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
      March 31, 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 ($280,000) 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. We expect to purchase the
      remaining €70,000 ($93,000) of the note within the next year, upon the
      achievement of the third and final milestone.




19




**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 $160,000. Additionally, our monetary assets and liabilities (net
      liability of approximately $0.3 million) in Israel are exposed to fluctuations
      in exchange rates. We do not employ specific strategies, such as the use of
      derivative instruments or hedging, to manage our interest rate or foreign
      currency exchange rate exposures.




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




**Evaluation
      of Controls and Procedures**




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




**Changes
      in Controls and Procedures**




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




20




**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.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**




None.




21




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





4.1
            
            Form
                of Convertible Debenture (incorporated herein by reference to Exhibit
                4.9
                to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2006, (the “2006 10-K”).4.2
            
            Form
                of Warrant (incorporated herein by reference to Exhibit 4.10 to the
                2006
                10-K).#4.3
            
            Form
                of Agent Warrant.10.1
            
            Acorn
                Factor, Inc. 2006 Stock Option Plan for Non-Employee Directors
                (incorporated herein by reference to Exhibit 10.1 to the Registrant’s
                Current Report on Form 8-K dated February 8, 2007 (the “February 2007
                8-K”).*10.2
            
            Acorn
                Factor, Inc. 2006 Stock Incentive Plan (incorporated herein by reference
                to Exhibit 10.2 to the February 2007 8-K).*10.3
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                10.47 to the 2006 10-K).10.4
            
            Placement
                Agent Agreement between First Montauk Securities Corp. and the Registrant
                dated March 8, 2007(incorporated herein by reference to Exhibit 10.48
                to
                the 2006 10-K) .#31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.#31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.#32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.#32.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.







# 
      This Exhibit is filed herewith.




22




**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:
                May 16, 2007
            By:
            **/s/**Michael
                BarthMichael
                BarthChief
                Financial Officer




23