**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**




**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**


**For
                  the fiscal year ended December 31, 2007**
              **Commission
                  file number:**
              **0-19771**




**ACORN
      ENERGY, INC.**


**(Exact
      name of registrant as specified in charter)**


**Delaware**
              
              **22-2786081****(State
                  or other jurisdiction of incorporation or
                  organization)**
              
              **(I.R.S.
                  Employer Identification
                  No.)**




**4
                  West Rockland Road, Montchanin, Delaware**
              
              **19710****(Address
                  of principal executive offices)**
              
              **(Zip
                  Code)**




**(302-656-1707)**


**Registrant’s
      telephone number, including area code**









**Securities
      registered pursuant to Section 12(b) of the Act: None**




**Securities
      registered pursuant to Section 12(g) of the Act:**


**Common
      Stock, par value $.01 per share**


(Title
      of
      Class)




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes
o No x




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




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes
x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer o Smaller
      reporting company x




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


Yes
o No
x




As
      of
      last day of the second fiscal quarter of 2007, the aggregate market value of
      the
      registrant’s common stock held by non-affiliates of the registrant was approximately
      $48.0 million  based
      on
      the closing sale price on that date as reported on the Over-the-Counter Bulletin
      Board.




As of
      April
      14, 2008 there were 11,189,391 shares
      of  Common
      Stock, $0.01 par value per share, outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE:**


None.










**TABLE
        OF CONTENTS**


PART
                  I
              
              PAGEItem
                  1.
              Business
              1Item
                  1A.
              Risk
                  Factors
              15Item
                  1B.
              Unresolved
                  Staff Comments
              27Item
                  2.
              Properties
              27Item
                  3.
              Legal
                  Proceedings.
              27Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              27PART
                  IIItem
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder
                  Mattersand
                  Issuer Purchases of Equity Securities.
              28Item
                  6.
              Selected
                  Financial Data.
              28Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Conditionand
                  Results of Operations
              30Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              45Item
                  8.
              Financial
                  Statements and Supplementary Data.
              46Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting andFinancial
                  Disclosure
              46Item
                  9A.
              Controls
                  and Procedures
              46Item
                  9B.
              Other
                  Information
              46PART
                  IIIItem
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              47Item
                  11.
              Executive
                  Compensation
              49Item
                  12.
              Security
                  Ownership of Certain Beneficial Ownersand
                  Management and Related Stockholder Matters
              56Item
                  13.
              Certain
                  Relationships, Related Transactions and Director
                  Independence
              58Item
                  14.
              Principal
                  Accounting Fees and Services
              60Part
                  IVItem
                  15.
              Exhibits
                  and Financial Statement Schedules.
              61




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




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









**PART
      I**





**ITEM
              1.**
            **BUSINESS**




**OVERVIEW**




Acorn
      Energy is a holding company that specializes in acquiring and accelerating
      the
      growth of emerging ventures that promise improvement in the economic and
      environmental efficiency of the energy sector. We aim to acquire primarily
      controlling positions in companies led by promising entrepreneurs and we add
      value by supporting those companies with financing, branding, positioning,
      and
      strategy and business development.




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





·
            **RT
                Solutions**.
                Real time software consulting and development services, provided through
                our DSIT subsidiary, with a focus on port security for strategic
                energy
                installations.





·
            **SCR
                Catalyst and Management Services**for coal-fired power plants that use selective catalytic reduction
                (“SCR”)
                systems to reduce nitrogen oxide (“NOx”) emissions, provided through
                CoaLogix and its subsidiary SCR-Tech LLC. These services include
                SCR
                catalyst management, cleaning and regeneration as well as consulting
                services to help power plant operators to optimize efficiency and
                reduce
                overall NOx compliance costs.





Our
      equity affiliates and entities in which we own significant equity interests
      are
      engaged in the following activities:





·
            **Comverge
                Inc.**Energy intelligence solutions for utilities and energy companies
                through
                demand response by Comverge, Inc.





·
            **Paketeria
                AG**.
                Owner and franchiser of a full-service franchise chain in Germany
                that
                combines eight services (post and parcels, electricity, eBay dropshop,
                mobile telephones, copying, printing, photo processing and printer
                cartridge refilling) in one store.





·
            **Local
                Power, Inc**.
                Consultation services for Community Choice Aggregation, through Local
                Power, Inc.





·
            **GridSense
                Systems Inc.**Provides remote monitoring and control systems to electric utilities
                and
                industrial facilities worldwide.




During
      2007, we had operations in two reportable segments: providing
      catalyst regeneration technologies and management services for SCR systems and
      RT
      Solutions which is conducted through our DSIT subsidiary. We no longer consider
      OncoPro to be a reportable segment as management has intensified its focus
      on
      SCR and RT Solutions activities. In addition, OncoPro activities are no longer
      separately reviewed by the Chief Operating Decision Maker.




1




**SALES
      BY ACTIVITY**




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




2005
            
            
            2006
            
            
            2007Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %RT
                Solutions
            
            $
            2,873
            
            
            69
            
            $
            2,797
            
            
            68
            %
            $
            3,472
            
            
            61
            %SCR
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            797
            
            
            14Other
            
            
            1,314
            
            
            31
            
            
            1,320
            
            
            32
            
            
            1,391
            
            
            25Total
            
            $
            4,187
            
            
            100
            %
            $
            4,117
            
            
            100
            %
            $
            5,660
            
            
            100
            %




**SCR
      Catalyst and Management Services**




Through
      SCR-Tech, which is 100% owned by our 85% owned CoaLogix subsidiary, we offer
      a
      variety of services for coal-fired power plants that use SCR systems to reduce
      NOx emissions. These services include SCR catalyst management, cleaning and
      regeneration, as well as consulting services to help power plant operators
      optimize efficiency and reduce overall NOx compliance costs.  In
      March
      2008, CoaLogix announced its CoalVision 360o strategy and the addition of a
      strategic partner, EnerTech Capital III, which acquired a 15% interest in
      CoaLogix. We currently own 85% of CoaLogix following EnerTech’s investment.
      CoalVision 360o is CoaLogix’s strategy for creating value for its customers and
      shareholders while fulfilling our industry’s obligations to ever tightening
      clean air laws.




***Products
      and Services***




*Industry
      Background and Market Drivers*




Through
      SCR-Tech, we provide innovative products and services to address the growing
      emissions control market for coal-fired power plants. We foresee substantial
      and
      growing opportunities in this market, driven by a continued use of coal to
      meet
      ever increasing energy demand, combined with increasingly stringent air quality
      regulations, resulting in a rapidly developing demand for clean coal
      technologies and a substantial future market for innovative, cost-effective
      solutions for clean energy production. Coal-fired plants represent approximately
      50% of the nation’s power generating capacity, and we believe they will continue
      to play an important role in the U.S. electricity generation market in the
      years
      ahead. Department of Energy projections indicate that significant new coal-fired
      generating capacity will be added in the U.S. over the next 23 years to meet
      baseload electricity demand, increasing coal’s share of the U.S. power market to
      57% by 2030.




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




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




2






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




***Regulatory
      Drivers***




The
      1990
      Clean Air Act Amendments were implemented to improve air quality in the United
      States. This federal law covers the entire country and is enforced by the U.S.
      Environmental Protection Agency (“EPA”). Under the Clean Air Act, the EPA limits
      how much of a pollutant can be in the air anywhere in the United States, with
      each state responsible for developing individual state implementation plans
      (“SIPs”) describing how each state will meet the EPA’s set limits for various
      pollutants. Emissions of NOx are considered to be one of the principal
      contributors to secondary ground level ozone, or smog, and thus are included
      in
      the EPA’s criteria pollutants for which limits have been established. Energy
      producers and other industries operating large power plants, particularly in
      the
      Eastern half of the U.S., have been required to significantly reduce their
      NOx
      emissions. Increasingly stringent NOx reduction requirements are the primary
      driver of our SCR services business today. In addition, growing concerns over
      mercury and sulfur trioxide (“SO 3 ”)
      and
      new regulations to control these emissions are on the horizon, which we expect
      could present additional opportunities for our business.




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




·
            **NOx
                SIP Call -**The
                primary Clean Air Act program driving SCR-Tech’s business today is the
                EPA’s NOx SIP Call. This program was designed to mitigate the regional
                transport of ozone, which is contributing to the poor air quality
                of
                downwind states. The NOx SIP Call required energy producers and other
                industries operating large power plants in the Eastern half of the
                U.S. to
                reduce their NOx emissions by at least 85% by 2007. Implementation
                of the
                NOx SIP Call has required major NOx reductions during the five-month
                “ozone season” (May 1-September 30) in 19 Midwestern and Eastern
                states and the District of Columbia. Compliance with the NOx SIP
                Call has
                resulted in a dramatic increase in the number of SCR system installations
                at coal-fired power plants for the removal of
                NOx.





·
            **Clean
                Air Interstate Rule (CAIR) -**CAIR
                is a new air quality regulation soon to take effect that is designed
                to
                permanently cap and achieve substantial reductions in emissions ofsulfur
                dioxide (“SO2”)and NOx across 28 Eastern states and the District of Columbia that
                we
                believe will further increase the size of our addressable market.
                When
                fully implemented, CAIR is expected to significantly reduce SO2 and
                NOx
                emissions in these states from 2003 levels by 2015 utilizing a
                cap-and-trade approach. With respect to NOx, this rule builds on
                the NOx
                SIP Call with the objective of further mitigating air pollution moving
                across state boundaries, and proposes to cut NOx emissions from power
                generating facilities significantly by 2015. Over the next decade
                we
                expect the implementation of CAIR to increase NOx trading (resulting
                in an
                increase in the amount of SCR catalyst used to control NOx with the
                objective of generating NOx credits), further increase the number
                of SCR
                systems installed today, and also require year-round SCR system operation
                (with increased NOx reduction required during ozone season) beginning
                in
                2009 to meet the more stringent requirements. Currently, to comply
                with
                the NOx SIP Call, the majority of SCR systems are only required to
                operate
                during the five-month ozone season when the potential for ozone formation
                is at its highest. With year-round operation to comply with CAIR,
                the
                catalyst used in SCR systems will need to be replenished with new
                or
                regenerated catalyst on a much more frequent basis.





·
            **Clean
                Air Mercury Rule (CAMR) -**The
                EPA issued CAMR as the first program ever designed to permanently
                cap and
                reduce mercury emissions from coal-fired power plants. When fully
                implemented, CAMR is expected to reduce utility emissions of mercury
                significantly between 2010 and 2018. CAMR has the potential to impact
                SCR
                catalyst choices in the future. Oxidized mercury is more easily captured
                in a downstream wet flue gas desulphurization (“FGD”) system than
                elemental mercury. A recent Federal Appeals court ruling indicated
                that
                CAMR did not go far enough in the reduction of mercury and therefore
                new
                more stringent legislation is being discussed.




3




While
      our
      current service offerings do not specifically address a reduction in mercury
      emissions, we believe that the use of regenerated SCR catalyst could yield
      an
      incremental positive impact on the oxidation of mercury. We are currently in
      a
      program to further explore and validate this assertion. If we can demonstrate
      that regenerated catalyst
      does in fact increase the oxidation of mercury to make it more easily captured
      in downstream FGD systems, this could further compel customers to regenerate
      their catalyst.




·
            **SO****2****to SO****3****Conversion -**As
                a result of a growing industry desire to burn lower cost coal with
                higher
                sulfur content, increased attention is now being placed on the conversion
                of SO2to
                SO3as
                a byproduct of operating SCR systems. When emitted into the atmosphere,
                SO3results in the creation of a sulfuric acid mist, which is both
                environmentally damaging and costly to power plant operators.
                Environmental groups and the utility industry are now becoming
                increasingly concerned with destructive sulfuric acid emissions and
                their
                related corrosive effects.





Increasedconcern about SO2to
                SO3oxidation presents an added opportunity for our SCR services business.
                The
                use of regenerated catalyst can significantly lower SO2oxidation rates. In some cases, SO2oxidation rates were measured as low as the conversion rates achieved
                only
                through the use of more costly, ultra-low conversion catalyst.
                Importantly, the regenerated catalyst achieved significant reductions
                in
                SO2conversion while still maintaining original catalytic activity levels
                and
                NOx reduction performance.By
                offering a more cost-effective approach for restoring catalyst NOx
                reduction activity while simultaneously reducing SO2to
                SO3oxidation, we believe catalyst regeneration will present a compelling
                alternative to the purchase of ultra-low conversion
                catalyst.




***Customers
      and Markets***




*Market
      Opportunity*




The
      recent growth in SCR system installations driven by the NOx SIP Call has
      resulted in a large and growing market for SCR catalyst and management services.
      As the majority of SCR systems in the U.S. currently operate five months out
      of
      the year during the ozone season, and have an installed catalyst life of
      approximately 24,000 hours, many of the units that commenced operation at
      the beginning of the decade are now, or will soon be, in need of their first
      catalyst replenishment. Based upon the substantial number of SCR systems that
      commenced operation between 2000 and 2006, combined with the requirements for
      year-round operation beginning in 2009 as a result of CAIR, we expect the market
      for catalyst replenishment to increase dramatically within the next five
      years.




We
      expect
      the U.S. market for catalyst regeneration to more fully develop in the 2008-2009
      timeframe as a result of the following factors:




·
            Most
                SCR systems will have been running for four to six years during the
                five
                months of ozone season, and the initial catalyst installed in these
                systems will be approaching its 24,000-hour useful life and will
                need to
                be replenished.





·
            In
                anticipation of the onset of CAIR, power plant operators are now
                planning
                for increased NOx reduction requirements and year-round SCR operation
                beginning in January 2009. Accordingly, we expect that utilities
                will
                begin to contract for new or regenerated catalyst in 2008 to ensure
                they
                will have sufficient catalyst activity to comply with the more stringent
                standards.




4




·
            Some
                power plant operators have indicated they may commence year-round
                operation during 2008 to begin generating NOx credits in advance
                of the
                stringent regulations imposed by
                CAIR.





·
            A
                number of states, such as North Carolina, Ohio, Pennsylvania, and
                West
                Virginia, are providing incentives to power producers to achieve
                early
                compliance with CAIR.




We
      believe the impact of year-round SCR operation beginning in 2009, together
      with
      an increase in the amount of catalyst required to comply with tighter
      regulations and further growth in the number of SCR system installations, will
      further increase the frequency of catalyst replenishment, resulting in a total
      addressable market for catalyst cleaning and regeneration estimated in excess
      of
      $100 million by 2011.




By
      offering customers more economical ways to operate and maintain their SCR units,
      along with a lower cost regeneration alternative to purchasing new catalyst,
      we
      believe SCR-Tech has the potential to play a significant role in the growing
      U.S. market for SCR catalyst and management services.





**SCR-Tech’s
      Service Offerings**




***Catalyst
      Cleaning, Rejuvenation and Regeneration***




We
      offer
      proprietary and patented processes based on highly sophisticated and advanced
      technologies that can improve the NOx removal efficiency and restore the useful
      life of installed SCR catalyst, providing a compelling economic alternative
      to
      catalyst replacement. SCR-Tech’s processes are capable of not only physically
      cleaning and rejuvenating the most severely plugged, blinded or poisoned
      catalyst, but of also chemically reactivating deactivated catalyst. Depending
      upon the state of the installed catalyst, SCR-Tech offers several alternatives
      for restoring its NOx removal efficiency and extending its life.




For
      lightly plugged or blinded catalyst that has not yet fully deactivated from
      catalyst poisons, SCR-Tech offers an “in-situ” cleaning process that can be
      performed on catalyst at the customer’s plant site without requiring removal of
      the catalyst from the SCR unit. For severely plugged or blinded catalyst that
      may have limited deactivation from catalyst poisons, SCR-Tech offers an off-site
      cleaning and rejuvenation process that is performed at SCR-Tech’s regeneration
      facility. In this process, the customer removes the catalyst modules from the
      SCR unit and ships them to SCR-Tech. The cleaning process physically removes
      the
      materials plugging the catalyst to improve its NOx removal efficiency while
      the
      rejuvenation process removes catalyst poisons to extend its useful
      life.




For
      catalyst that has significantly deactivated and that may also be severely
      plugged or blinded, SCR-Tech offers an off-site regeneration process that
      restores deactivated SCR catalyst back to its original specifications and
      catalytic activity, often to activity levels at or greater than its original
      specifications. SCR-Tech’s regeneration process involves removing the
      deactivated catalyst modules from the SCR unit and shipping them to SCR-Tech’s
      regeneration facility where the catalyst is both cleaned and chemically
      reactivated.




The
      regeneration process at SCR-Tech consists primarily of four individual steps:
      ultrasonic deep cleaning to remove physical and microscopic particle
      ash; soaking
      and washing with chemicals to remove poisons that have contributed to
      catalyst deactivation; regeneration of catalyst activity through chemical
      reactivation; and heat treatment to seal in the newly added
      activity.




Once
      cleaned and regenerated, SCR-Tech returns the catalyst modules to the customer
      for reinstallation in the SCR unit. Upon reinstallation, the regenerated
      catalyst demonstrates the same level or an increased level of performance and
      deactivation rate as the original catalyst.




5




***SCR
      and Catalyst Management***




The
      most
      effective way to operate an SCR system is through a comprehensive catalyst
      management program. Catalyst management is often viewed as developing a plan
      for
      a given SCR system to maintain sufficient catalyst activity necessary to achieve
      the required NOx reduction with an acceptable margin to avoid inadvertent NOx
      or
      ammonia slip excursions beyond allowable limits.




We
      provide a broad array of customized SCR and catalyst management services,
      including guidance on effective SCR and catalyst management strategies, with
      the
      objective of assisting plant operators in optimizing the operation and
      performance of their SCR systems while reducing their operation and maintenance
      costs and achieving cost-effective NOx compliance. These services include
      ammonia inspection grid inspection and tuning; fuel reviews; flow distribution;
      test plans; catalyst specification, selection and initial performance testing
      for guarantee verification; catalyst life cycle forecasting through advanced
      computer simulation; SCR reactor inspection and catalyst sampling; catalyst
      activity testing and determination of SO 2 /SO 3 conversion rate in a bench-scale reactor; and development of catalyst exchange
      strategies.




As
      part
      of its catalyst management program, SCR-Tech offers customized catalyst
      regeneration plans scheduled around planned outages. SCR-Tech provides SCR
      and
      catalyst management services for individual plants, on a multi-plant basis,
      or
      under a fleet-wide blanket agreement. All SCR and catalyst management services
      are offered as either a complete package or “a la carte,” allowing the
      flexibility to select and combine various services on an as-needed basis
      tailored to the individual SCR system.




**Experience**




SCR-Tech’s
      catalyst regeneration technology has been successfully applied in Germany since
      1997 by its former parent company and since 2003 in the United States. We have
      cleaned/regenerated large quantities of SCR catalyst of all types on a worldwide
      basis to date for all major catalyst manufacturers. This extensive experience
      has validated our technology’s ability to achieve maximum NOx reduction
      performance while reducing overall NOx compliance costs for the power generating
      facility.




**Quality
      Control**




We
      maintain a comprehensive quality assurance/quality control program for each
      step
      in our SCR catalyst and management process including SCR reactor inspection,
      catalyst sampling, testing, chemical analysis, development of a custom cleaning,
      rejuvenation and regeneration process, and catalyst treatment, packing and
      shipping.




Our
      supervisory personnel in the office, on-site, in the lab and in the production
      facility seek to ensure that each step in the process is executed under the
      highest of standards and in compliance with contractual requirements. All of
      our
      on-site SCR reactor inspections are performed by a team of experienced
      professionals with years of experience working on SCR systems.




Our
      testing, inspection, and laboratory services all complement each other and
      allow
      us to provide our customers with a complete picture of their SCR reactor and
      its
      operating effects on the balance of the plant.




The
      combined results of this effort are used to monitor and forecast SCR system
      and
      catalyst performance and to accurately forecast the development of the installed
      NOx reduction potential. By comparing the forecast with the required minimum
      NOx
      reduction potential, the point in time for the need for catalyst regeneration
      or
      replacement can be identified allowing for the necessary outage planning well
      in
      advance of the actual occurrence.




6




**Customers**




Our
      SCR
      Catalyst and Management Services business currently serves the U.S. coal-fired
      power generation market. Our customer base ranges from large investor-owned
      utilities and independent power producers to smaller municipal power
      generators.




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




For
      the
      full year of 2007 (including the period prior to our acquisition of SCR-Tech),
      five customers represented approximately 90% SCR-Tech’s revenue. As part of an
      ongoing growth and revenue diversification strategy, SCR-Tech continues to
      actively target SCR operators throughout the United States, and the Eastern
      U.S.
      in particular, to further expand its customer base and broaden its reach in
      the
      marketplace.




**Competitive
      Advantage**




SCR-Tech
      presently is the only company in North America offering a regeneration process
      capable of restoring SCR catalyst activity back to at least its original
      specifications. Our regeneration process currently competes only against new
      catalyst sales when a replenishment of catalyst activity is
      required.




SCR-Tech’s
      regeneration process has several advantages over purchasing new catalyst by
      (i)
      offering cost savings, (ii) eliminating or reducing disposal issues, (iii)
      enhancing catalyst activity and (iv) reducing SO 2 conversion





***Cost
      Savings***




SCR-Tech
      offers catalyst regeneration for significantly less cost than purchasing new
      catalyst. As part of our regular course of business, we continuously work on
      various programs aimed at streamlining our production costs. We believe the
      outcome of these programs will enable us to achieve sufficient flexibility
      in
      our pricing to maintain our cost advantage while remaining competitive with
      any
      reductions in new catalyst pricing or with any future regeneration competition
      that may arise. We believe that the savings that can be generated through
      regeneration will become increasingly important to cost-conscious power
      generating companies once SCR units commence year-round operation beginning
      in
      2009, and catalyst replenishment will be required on a more frequent
      basis.




***Elimination/Reduction
      of Disposal Issues***




Catalyst
      regeneration not only provides SCR operators a significantly lower cost
      alternative to catalyst replacement, but also eliminates the costs and
      environmental liabilities associated with disposing of deactivated catalyst,
      which must be shipped to a disposal site and may be considered hazardous waste.
      Even though our cleaning and regeneration services involve the removal of
      hazardous wastes from catalyst and the use of significant chemical materials,
      we
      do not face the same environmental risks or liabilities as a result of the
      waste
      water treatment plant serving our production facility, which provides for the
      appropriate treatment and disposal of all such waste. The shipping costs
      associated with regenerating catalyst are comparable to those of replacing
      catalyst. However, the added cost of placing the spent catalyst in a landfill
      or
      disposal site can be significant. In addition, avoiding landfill costs can
      also
      reduce or eliminate future liabilities associated with hazardous
      waste.




7




***Enhanced
      Activity***




Aging
      of
      the catalyst reduces the useful activity through channel plugging by ash, and
      by
      the blinding of the active sites on a microscopic scale by fuel constituents
      and
      other fuel-related poisons that attach to active sites, chemically deactivating
      or sealing them and rendering these sites impotent. These deteriorating factors
      reduce the catalyst activity until the useful life has been depleted. At that
      time, the catalyst must be replenished, either through the purchase of new
      replacement catalyst or through regeneration. Replacement is a more costly
      alternative and results in disposing of the basic activity still left in the
      catalyst. Regeneration, on the other hand, fully restores the useful activity
      of
      the spent catalyst, while still taking full advantage of all the basic activity,
      for significantly less cost than replacement. By increasing the number of
      catalytic sites available for reaction, SCR-Tech’s process has even been
      demonstrated in certain cases to increase catalytic activity beyond the original
      level by as much as 25%, providing the potential for significant economic
      value.




***Reduced
      SO*** ***2*** ***Conversion***




The
      use
      of regenerated catalyst has also been demonstrated to significantly lower
      SO 2 oxidation rates when compared with the conversion rates of new catalyst.
      Importantly, the regenerated catalyst achieved significant reductions in
      SO 2 conversion while still maintaining original catalytic activity levels and NOx
      reduction performance.




**Competition**




SCR-Tech
      is presently the only company in North America offering a catalyst regeneration
      process for the North American marketplace that can chemically reactivate and
      fully restore SCR catalyst activity and NOx reduction performance back to
      original specifications.




Currently,
      new catalyst remains the primary competition for SCR-Tech’s regeneration process
      when a replenishment of catalyst activity is necessary. While we believe that
      SCR-Tech’s regeneration process offers significant cost and performance
      advantages over the purchase of replacement catalyst and essentially eliminates
      the costs and environmental concerns associated with land filling spent
      catalyst, it is possible that the leading SCR catalyst suppliers and others
      could eventually develop a solution that may compete with ours. We cannot fully
      anticipate how catalyst manufacturers may react to growing competitive pressure
      and increased penetration of regeneration in the U.S. catalyst replacement
      market. While we know of no catalyst supplier with definitive plans to launch
      U.S.-based regeneration services in the near-term, we expect some future tactics
      or market entry by these companies to better compete with SCR-Tech’s
      regeneration process. Furthermore, we are aware of certain companies, including
      Cormetech and Hitachi, that have indicated an interest in offering catalyst
      cleaning and regeneration.




We
      are
      aware of one company, STEAG LLC (“Steag”), which is entering the U.S. catalyst
      regeneration market and has announced plans to offer regeneration services
      beginning in 2008. Steag is currently building a regeneration facility in North
      Carolina. Steag, based in Charlotte, North Carolina, is a subsidiary of a large
      German power producer, STEAG GmbH.




We
      believe the combination of our intellectual property and patent protection,
      practical experience required to successfully engage in catalyst regeneration,
      the investment required for a production facility, and the total size of the
      market create a barrier for a significant number of new entrants to the market.
      In addition, we believe that our first mover advantage in the regeneration
      marketplace, combined with our solid reputation as a market leader, established
      customer base, substantial regeneration experience, and recent technological
      advances will help us maintain our leading market position as the first company
      in North America to offer a technically feasible and economically viable
      regeneration process for SCR catalyst.




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




8




With
      respect to cleaning and rejuvenation, we expect SCR-Tech’s processes to compete
      with alternative cleaning and rejuvenation approaches currently in the
      marketplace. We are aware of at least one company, that offers an on-site SCR
      catalyst cleaning and washing process that requires the removal of the catalyst
      from the SCR system. We believe that SCR-Tech’s patent-protected cleaning
      process offers several competitive advantages, including both an off-site
      process and an “in-situ” process that does not require the removal of the
      catalyst from the SCR system.




**Production
      and Laboratory Facilities**




SCR-Tech’s
      business operations are located in Charlotte, North Carolina in a
      98,000 square feet production facility for the cleaning and regeneration of
      SCR catalyst.




We
      expect
      the capacity of our existing production facility to be sufficient to meet market
      demand through mid-2008. This production facility is designed to allow for
      a
      significant increase of its current capacity. We believe that through the
      implementation of additional shifts and a capital investment of approximately
      $1.0 million to $1.5 million, we can expand our production
      capabilities to meet our near-term needs. We expect to make this investment
      in
      2008 to accommodate anticipated market growth.




Over
      the long-term, we expect market demand to increase and we believe a further
      expansion of our production facility is likely to be required. To accommodate
      further expansion, we anticipate building a second production facility at our
      existing site or a new facility at a different location. The timing associated
      with investing in such a facility expansion will be a function of market growth,
      and could be as early as late 2008 or 2009. We estimate the cost of such a
      facility would be approximately $5.0 million.




One
      of the most important features of our current site is the existence of a waste
      water treatment plant serving our production facility. While our cleaning and
      regeneration services involve the removal of hazardous wastes from catalyst
      and
      the use of significant chemical materials, our on-site North Carolina and
      EPA-approved waste water treatment plant ensures that our operations are in
      full
      environmental compliance. Chemicals required for catalyst cleaning and
      regeneration are widely available through numerous sources.




We
      maintain an on-site laboratory and we have the opportunity to use various
      certified laboratories in Europe if necessary. These labs optimize the catalyst
      cleaning/ regeneration process that is verified independently by third party
      testing in accordance with VGB Guideline for the Testing of DeNOx Catalyst,
      the
      international standard for catalyst testing.




**Intellectual
      Property**




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




We
      use a
      combination of patents (owned or licensed), trade secrets, contracts with our
      employees, suppliers, partners and customers, copyrights and trademarks to
      protect the proprietary aspects of our core technologies, technological advances
      and innovations and know-how. We work actively to maintain protection of our
      proprietary technologies and processes over time through follow-on patent
      filings associated with technology and process improvements that we continually
      develop.


9




**DSIT
      Solutions Ltd.**




DSIT
      Solutions is a globally-oriented high tech company with top-tier expertise
      in acoustics and underwater electronics and development capabilities in the
      areas of Real-Time and Embedded systems. Based on these capabilities, we offer
      a
      full range of sonar and acoustic-related solutions to strategic energy
      installations as well as defense and homeland security markets. In addition,
      based on our expertise in fields such as signal acquisition and processing
      applications, communication technologies and command, computerized vision for
      the semiconductor industry and command, control and communication management
      (“C 3” )
      we
      provide wide ranging solutions to both military and commercial
      customers.




**RT
      SOLUTIONS**




*Products
      and Services*




DSIT’s
      RT
      Solutions activities are focused on two areas - naval solutions and other
      real-time and embedded hardware and software development.




*Naval
      Solutions.* Our
      naval
      solutions include a full range of sonar and acoustic-related solutions to the
      strategic energy installation, defense and homeland security markets. These
      solutions include:




·
            AquaShieldTMDiver Detection Sonar (“DDS”) - The ongoing threat of terror attacks since
                9/11 has produced an awareness of the need to protect critical marine
                and
                coastal infrastructures that has become a growing priority for
                governments and the private sector alike. Current marine surveillance
                solutions often ignore the areas of underwater surveillance and underwater
                site security, tracking above-water activity only, and leaving the
                area
                under water vulnerable to intrusion by divers and Swimmer Delivery
                Vehicles (“SDVs”). Building on our technical and operational experience in
                sonar and underwater acoustic systems for naval applications, we
                have
                developed an innovative, cost-effective Diver Detection Sonar system,
                the
                AquaShield**TM**,
                that provides critical coastal and offshore protection of sites through
                detecting, tracking, and warning of unauthorized divers and SDVs
                for
                effective response. Our AquaShield**TM**DDS
                system is comprised of a command center staffed by one person. Underwater
                sonar units or “nodes” are strategically placed to provide maximum
                security with up to 360o coverage. The number and configuration of nodes
                are customized to meet each site’s unique requirements and topology.
                AquaShield**TM**DDS
                systems operate in all weather and water conditions. The system’s
                flexibility enables rapid deployment and adjustment to specific site
                conditions. The DDS sensors can be integrated with other sensors
                into a
                comprehensive command and control (“C&C”) system to provide a complete
                tactical picture both above and below the water for more intelligent
                evaluation of and effective response to
                threats.




·
            Harbor
                Surveillance System (“HSS”) - We have developed an integrated HSS that
                incorporates DDS sensors with above-water surveillance sensors to
                create a
                comprehensive above and below water security system. The system protects
                coastal and offshore sites such as energy terminals, offshore rigs,
                nuclear power plants and ports. The systemreliably detects, intercepts, and warns of intruders such as
                divers,swimmers,
                SDVs, submersibles, small surface vessels andmines.
                The HSS can include sonar, radar, and electro-optical devices.The
                system is fully operable in shallow or deep water, daytime or nighttime
                and in all weather conditions. The system features a high probability
                of
                detection, a low false alarm rate and ease of operation and control.




·
            Mobile
                Acoustic Range (“MAR”) - Based on their radiated noise, submarines and
                surface vessels can be detected by passive sonar systems. The MAR
                accurately measures a vessel’s radiated noise; thus enabling navies and
                shipyards to monitor and control the radiated noise and to silence
                their
                ships and submarines. By continuously tracking the measured vessel
                and
                transmitting the data to a measurement ship, the MAR system enables
                real
                time radiated noise processing, analysis and display. The system
                also
                includes a platform database for measurement results management and
                provides playback and post analysis capability. The MAR’s flexibility
                enables rapid deployment and saves the maintenance costs involved
                in
                operating a fixed acoustic range. The MAR is a cost-effective solution
                for
                measuring the radiated noise of any naval platform. We have sold
                the
                system to leading navies and shipyards around the
                world.




10




·
            Generic
                Sonar Simulator (“GSS”) -We have developed a GSS for the rapid and
                comprehensive training of anti-submarine warfare (“ASW”), submarine, and
                mine detection sonar operators.This
                advanced, low cost, PC-based training simulator is designed for all
                levels
                of sonar operators from beginners to the most experienced, including
                ship ASW/attack teams.The
                simulator includes all aspects of sonar operation, with emphasis
                on
                training in weak target detection in the presence of noise and
                reverberation, torpedo detection, audio listening and
                classification.




The
      GSS
      operating principles are designed for ease-of-use, simulation accuracy, and
      simplified instruction. The system offers a range of sophisticated features.
      The
      GSS can be easily adapted to simulate any sonar system. The benefits of the
      GSS
      include:




·
            its
                low cost which enables the purchase of multiple
                systems




·
            allowing
                on-site training at navy bases and schools and eliminating the need
                for
                actual sonar system units




·
            trainees
                experiencing video and audio that are identical to actual environments
                with real  targets




·
            the
                system can be extended to include two platforms, each having its
                own sonar
                team,




or  several
      sonar systems and teams onboard the platform




·
            Underwater
                Acoustic Signal Analysis system - DSIT’s Underwater Acoustic Signal
                Analysis system processes and analyzes all types of acoustic signals
                radiated by various sources and received by naval sonar systems
                (submarine, surface and air platforms, fixed bottom moored sonar
                systems,
                etc.).





*Other
      Real-Time and Embedded Solutions*




Additional
      areas of development and production in real-time and embedded hardware and
      software include:




·
            C
                & C applications - DSIT specializes in Weapon/ C&C Operating
                Consoles for unique air and naval applications, designed through
                synergistic interaction with the end-user. Weapon/C&C Consoles utilize
                Human-Machine Interface (“HMI”) prototyping supported on a variety of
                platforms as an integral part of the HMI definition and refinement
                process. Weapon/C&C Console specific applications driven by HMI
                include signal processing and data fusion and
                tracking.




·
            Computerized
                vision for the semiconductor industry - The semiconductor industry
                employs
                optical inspection systems in order to detect defects that occur
                during
                wafer manufacture. These optical systems are based on a wide range
                of
                sophisticated algorithms that utilize image and signal processing
                techniques in order to detect defects of different types. DSIT has
                been
                cooperating with global leaders of state-of-the-art wafer inspection
                systems in developing cutting edge technologies for almost a decade.
                We
                develop and manufacture hardware and embedded software for computerized
                vision systems and we supply this multi-disciplinary field in the
                integration of digital and analog technologies, image processing
                and
                intricate FPGA logic development.




11




·
            Modems
                and data links - DSIT's PCMCIA Soft Modem card is a state of the
                art modem
                and an example of the advanced technology we have achieved in performance
                and miniaturization of complex technologies. The design simplicity
                and
                flexibility allows customers to easily define and create a range
                of
                applications, and to design the card into a variety of OEM products,
                using
                the same, or slightly modified, hardware. The on-board processor
                enables
                and manages transfer of data over radio networks using different
                radio
                systems.




·
            Bluetooth
                solutions - Bluetooth is a powerful, low cost, wireless technology
                that is
                revolutionizing the personal connectivity market. It enables short-range
                wireless links that seamlessly connect all types of mobile and other
                devices offering anywhere/anytime connectivity between devices, and
                with
                the Internet. We offer Bluetooth wireless data and voice solutions
                for
                OEMs, including hardware and software development, integration and
                production




·
            VOIP/ROIP
                applications - VoIP/RoIP technology converts voice or radio signals
                to
                digital format, thus allowing transmission of the digital data over
                the IP
                networks. DSIT has developed and produced advanced Radio over IP
                gateways,
                including hardware and embedded software for tactical military system
                communications. We have also developed VoIP gateway software for
                a
                pioneering VoIP system developer.




DSIT
      has
      initiated discussions towards strategic alliances for marketing its sonar
      technology. We hope some of these discussions will come to fruition before
      the
      end of 2008.




*Customers
      and Markets*




All
      of
      this segment’s operations in 2005, 2006 and 2007 and most of its sales took
      place in Israel. We expect to generate significant revenues from naval solutions
      outside of Israel in 2008. We have created significant relationships with some
      of Israel’s largest companies in its defense and electronics industries. DSIT is
      continuing to invest considerable effort to penetrate European, Asian and other
      markets in order to broaden its geographic sales base with respect to our sonar
      technology solutions. In 2007, we had our first sale of our
      AquaShield TM DDS.
      This sale is believed to be the first in the world of a system designed and
      operated to protect a strategic coastal energy installation. We believe that
      in
      2008 and 2009, increased awareness as to the susceptibility of strategic coastal
      energy installations worldwide will result in increased sales of our
      AquaShield TM DDS.
      Three customers accounted for 74% of segment sales in 2007 (39%, 19% and 16%,
      respectively) while in 2006 two customers accounted for 61% (31%, and 30%,
      respectively) of segment sales. (See Risks Related to the RT Solutions segments
      - “We Are Substantially Dependent On A Small Number Of Customers And The Loss
      Of
      One Or More Of These Customers May Cause Revenues And Cash Flow To Decline” for
      more information.)




*Competitive
      Advantage*




DSIT’s
      staff includes some of the top authorities in the field of sonar and acoustics.
      We believe that their knowledge, expertise and experience as well as our long
      track record of cooperation and delivery of high quality sonar solutions to
      the
      Israeli Navy and other customers world-wide combined with our agility and
      flexibility as a small company to tailor solutions to the unique requirements
      of
      the customer provides us with an advantage over our competitors.




*Competition*




Our
      RT
      Solutions activity faces competition from numerous competitors, large and small,
      operating in the Israeli and worldwide markets, some with substantially greater
      financial and marketing resources. We believe that our wide range of experience
      and long-term relationships with large businesses as well as the strategic
      partnerships that we are developing will enable us to compete successfully
      and
      obtain future business.




12




*Facilities*




Our
      DSIT
      activities are conducted in approximately 18,000 square feet of office space
      in
      the Tel Aviv metropolitan area under a lease that expires in August 2009. We
      believe that DSIT’s current premises are sufficient to handle the anticipated
      increase in sales for the near future.




**DEMAND
      RESPONSE SOLUTIONS - COMVERGE INC.**




We
      own
      approximately 8.1% of Comverge Inc., a Nasdaq listed company, engaged in the
      business of providing demand response solutions




Comverge
      is a clean energy company providing peaking and base load capacity to electric
      utilities, grid operators and associated electricity markets. As an alternative
      to the traditional method of providing capacity by building a new power plant,
      Comverge delivers their capacity through implementation of demand management
      solutions that decrease energy consumption. The capacity Comverge delivers
      is
      more environmentally friendly and less expensive than conventional alternatives
      and has the benefit of increasing overall system reliability. Comverge’s
      solutions are designed, built and operated for the benefit of their customers,
      which include electric utilities and grid operators that serve residential,
      commercial and industrial consumers. Comverge provides capacity to its customers
      either through long-term contracts where it actively manage electrical demand
      or
      by selling their demand response systems to utilities that operate them.
      Comverge owned or managed approximately 1,324 megawatts of capacity as of
      December 31, 2007.




Comverge’s
      clean energy solutions enable their electric utility industry customers to
      address issues they confront on a daily basis, such as rising demand, decreasing
      supply, higher commodity prices, greater emphasis on the reduction of green
      house gases and emerging mandates to use energy efficiency solutions to address
      these issues. Comverge’s solutions provide their customers with benefits beyond
      those relating to environmental and pricing concerns. Comverge’s energy
      efficiency offerings allow utilities to reduce base load capacity which helps
      to
      improve system reliability. Comverge’s demand response solutions enable their
      customers to reduce demand for electricity during peak hours, when strain on
      the
      system is greatest.




We
      currently remain Comverge’s single largest stockholder, even after our recent
      sale of Comverge shares. We own 1,763,665 shares of Comverge’s common stock with
      a market value at December 31, 2007 of approximately $55.5 million. As at April
      9, 2008, the market value of our shares in Comverge was approximately $19.7
      million.




**GRIDSENSE
      SYSTEMS INC.**




On
      January 2, 2008, we completed a transaction in which we acquired 15,714,285
      shares and 15,714,285 warrants for $1.1 million in GridSense Systems Inc.
      (“GridSense”). The 15,714,285 shares acquired by us represent 24.52% of
      GridSense's issued and outstanding shares. If we exercise all of the 15,714,285
      warrants acquired in the placement, we will own 31,428,570 GridSense common
      shares, representing 39.37% of GridSense's issued and outstanding shares.




GridSense
      is an industry leader in providing remote monitoring and control systems to
      electric utilities and industrial facilities worldwide. GridSense's offerings,
      developed in collaboration with utilities, provide superior power
      quality/reliability monitoring and demand-side management capabilities. Electric
      companies deploy these systems primarily in metropolitan, suburban, and rural
      electricity grids for the detection, prevention, and mitigation of disturbances
      and irregularities in the supply of electricity. Through its wholly owned
      subsidiaries in Australia, CHK GridSense Pty Ltd. and GridSense Inc in the
      U.S.,
      GridSense has been serving a growing base of customers for over 25 years, in
      Australasia, North America, and Western Europe. GridSense is a reporting issuer
      in British Columbia and Alberta and trades on the TSX Venture Exchange under
      the
      symbol "GSN". As of March 20, 2008, the market value of our shares in GridSense
      was approximately C$1.3 million.




13




**LOCAL
      POWER INC.**




On
      July
      31, 2007, we acquired ten percent of Local Power Inc. (“LPI”), a
      California-based, full-service
      energy services bureau that helps American cities and counties accelerate the
      development of competitively-priced, utility-scale, privately-operated clean
      energy projects. LPI was formed
      recently by a pioneer in the restructuring of the $325 billion U.S. retail
      electricity market. We also have the right, until January 31, 2009, to purchase
      an additional 41% 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. There are
      approximately one million consumers currently benefiting from low cost
      electricity delivered under CCA laws in two states. The two major markets,
      the
      Cape Light Compact on Cape Cod and the Northeast Ohio Public Energy Council
      in
      Greater Cleveland, are widely considered to be the only exceptions to the
      failure of electricity deregulation in the US. In 2002, Fenn authored a CCA
      law
      in California, where San Francisco now leads a major movement among
      municipalities and counties to implement CCA.




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.




**SUPER
      SERVICES MARKET - PAKETERIA AG**





We
      own a
      31% equity interest in Paketeria AG, a company registered in Germany and
      headquartered in Berlin that innovated the “Super Services Market”, a retail
      concept that promotes savings in logistics and transport, two of the largest
      consumers of fuel worldwide. Paketeria’s stores and franchises are located
      throughout Germany with a concentration in the area in and around Berlin. We
      initially invested in Paketeria in August 2006, followed by a second investment
      in October 2006. In September 2007, in conjunction with a private placement
      by
      Paketeria in which it raised approximately $2.5 million, we converted
      approximately $1.2 million of debt and accrued interest due to us from Paketeria
      into equity in the company. During the first quarter of 2008 we advanced
      approximately $750,000 to Paketeria for working capital purposes. These advances
      are to be repaid by December 31, 2008.





Paketeria’s
      network of owned and franchised stores has doubled since our initial investment
      in August 2006. Paketeria provides green services by delivering mail by bicycle
      and offering recycling services such as eBay merchandising and toner cartridge
      refilling. The stores also provide office supplies, photo processing, photocopy,
      and Internet pharmacy services in Germany. Paketeria was established to take
      advantage of the privatization and subsequent substantial reduction in retail
      outlets of the German post office, which has stranded many communities without
      convenient access to postal services.




On
      December 21, 2007, Paketeria’s shares were listed under the symbol “AOSTYL” on
      the Open Market (Freiverkehr) of the Frankfurt Stock Exchange and became
      eligible for trading. In connection with the listing, all the Paketeria
      shareholders (including the Company) placed in escrow and authorized a German
      investment bank to sell up to 10% of their shares (129,600 shares) for a period
      of six months following the initial listing date at an initial minimum ask
      price
      of €77.00 per share. The proceeds of any sales of shares by the investment bank
      are to be held in escrow under the terms of an escrow agreement for a period
      up
      to six months from the listing date after which the bank is to transfer 50%
      of
      the proceeds (net of transaction fees and commissions) of the sale of the shares
      of the shareholders (a minimum of €2.5 million) to the shareholders and the
      remaining 50% the proceeds of the sale of the shares (a minimum of €2.5 million)
      are to be used to subscribe for new shares of the company. In connection with
      the listing and the escrow arrangements the Paketeria shareholders agreed to
      lock up certain of their shares for up to one year from the listing date. Under
      the lock-up agreement, shareholders may not offer, pledge, allot, sell or
      otherwise transfer or dispose of directly or indirectly any shares of Paketeria.




14





There
      is
      currently a limited market for Paketeria’s shares on this market. From the
      listing date to March 20 2008, 884 shares of Paketeria were sold by the German
      investment bank responsible for the initial listing.




**BACKLOG**




As
      of
      December 31, 2007, total our backlog of work to be completed was $9.1 million,
      of which $7.1 million of which related to our RT Solutions segment and $2.0
      million which relates to our SCR segment. We estimate that we will perform
      approximately $5.7 million of our backlog in 2008 ($3.7 million from our RT
      Solutions segment and $2.0 million from our SCR segment).




**EMPLOYEES**




At
      December 31, 2007, we employed a total of 86 people. Our employees are located
      in the United States (23 employees of whom 20 are employed at SCR-Tech and
      three
      of whom are employed at Acorn) and in Israel (63 employees at DSIT). We have
      60
      employees in production, engineering and technical support (12 employees in
      SCR
      Tech and 48 employees in DSIT), three employees in marketing and sales (one
      employee in SCR-Tech and two employees in DSIT), and 23 employees in management,
      administration and finance (five employees in SCR-Tech, 23 employees in Israel
      and three employees in Acorn). We consider our relationship with our employees
      to be satisfactory.




We
      have
      no collective bargaining agreements with any of our employees. However, with
      regard to our Israeli activities, certain provisions of the collective
      bargaining agreements between the Israeli Histadrut (General Federation of
      Labor
      in Israel) and the Israeli Coordination Bureau of Economic Organizations
      (including the Industrialists Association) are applicable by order of the
      Israeli Ministry of Labor. These provisions mainly concern the length of the
      workday, contributions to a pension fund, insurance for work-related accidents,
      procedures for dismissing employees, determination of severance pay and other
      conditions of employment. We generally provide our Israeli employees with
      benefits and working conditions beyond the required minimums. Israeli law
      generally requires severance pay upon the retirement or death of an employee
      or
      termination of employment without due cause. Furthermore, Israeli employees
      and
      employers are required to pay specified amounts to the National Insurance
      Institute, which administers Israel’s social security programs. The payments to
      the National Insurance Institute include health tax and are approximately 5%
      of
      wages (up to a specified amount), of which the employee contributes
      approximately 70% and the employer approximately 30%.




**SEGMENT
      INFORMATION**




For
      additional financial information regarding our operating segments, foreign
      and
      domestic operations and sales, see “Item 7. Management’s Discussion and Analysis
      of Financial Condition and Results of Operations” and Note 20 to our
      Consolidated Financial Statements included in this Annual Report.





**ITEM
              1A.**
            **RISK
                FACTORS**




We
      may
      from time to time make written or oral statements that contain forward-looking
      information. However, our actual results may differ materially from our
      expectations, statements or projections. The following risks and uncertainties
      could cause actual results to differ from our expectations, statements or
      projections.




15




**GENERAL
      FACTORS**




*We
      have a history of operating losses and have used increasing amounts of cash
      available for operations.*




We
      have a
      history of operating losses, and have used increasing amounts of cash to fund
      our operating activities over the years. In 2005, 2006 and 2007, we had
      operating losses of $2.3 million, $3.6 million and $4.4 million, respectively.
      Cash used in operations in 2005, 2006 and 2007 was $1.7 million, $1.6 million
      and $2.6 million, respectively.




Despite
      selling a significant portion of our Comverge investment in December 2007 and
      receiving proceeds (net of transaction costs) of approximately $28.4 million
      and
      raising approximately $6.9 million (approximately $6.0 million net of
      transaction costs) in 2007 from the private placement of our Convertible
      Debentures, we have utilized a significant portion of those funds in our recent
      acquisition and investment activity.




As
      described under the caption “Recent Developments” in “Item 7. Management’s
      Discussion and Analysis of Financial Condition and Results of Operations,” the
      market value of our investment in Comverge has fallen significantly since
      December 31, 2007 (to approximately $21.9 million as of March 20, 2008). In
      addition, we continue to aggressively pursue additional investments. While
      we
      currently have enough cash on hand to fund our operations for the next 12
      months, we may need additional funds to fund the investment and acquisition
      activity we wish to undertake. We do not know if such funds will be available
      if
      needed on terms that we consider acceptable. Should the market value of our
      Comverge shares remain at their depressed level or continue to drop, we may
      have
      to limit or adjust our investment/acquisition strategy or sell some of our
      Comverge shares or other assets in order to continue to pursue our corporate
      goals.




*We
      depend on key management for the success of our business.*




Our
      success is largely dependent on the skills, experience and efforts of our senior
      management team and other key personnel. In particular, our success depends
      on
      the continued efforts of John A. Moore, our CEO, William J. McMahon, CEO of
      CoaLogix/SCR-Tech, Benny Sela, CEO of DSIT and other key employees. The loss
      of
      the services of any key employee could materially harm our business, financial
      condition, future results and cash flow. Although to date we have been
      successful in retaining the services of senior management and have entered
      into
      employment agreements with them, members of our senior management may terminate
      their employment agreements without cause and with notice periods ranging up
      to
      90 days. We may also not be able to locate or employ on acceptable terms
      qualified replacements for our senior management or key employees if their
      services were no longer available.




*Loss
      of the services of a few key employees could harm our operations.*




We
      depend
      on our key management, technical employees and sales personnel. The loss of
      certain managers could diminish our ability to develop and maintain
      relationships with customers and potential customers. The loss of certain
      technical personnel could harm our ability to meet development and
      implementation schedules. The loss of key sales personnel could have a negative
      effect on sales to certain current customers. Most of our significant employees
      are bound by confidentiality and non-competition agreements . Our
      future success also depends on our continuing ability to identify, hire, train
      and retain other highly qualified technical and managerial personnel. If we
      fail
      to attract or retain highly qualified technical and managerial personnel in
      the
      future, our business could be disrupted.




*A
      failure to integrate our new management may adversely affect
      us.*




In
      November 2007, we acquired SCR-Tech and its entire management team. Any failure
      to effectively integrate SCR-Tech’s new management into our controls, systems
      and procedures could materially adversely affect our business, results of
      operations and financial condition.




16




*Compliance
      with changing regulation of corporate governance, public disclosure and
      financial accounting standards may result in additional expenses and affect
      our
      reported results of operations.*




Keeping
      informed of, and in compliance with, changing laws, regulations and standards
      relating to corporate governance, public disclosure and accounting standards,
      including the Sarbanes-Oxley Act, as well as new and proposed SEC regulations
      and accounting standards, has required an increased amount of management
      attention and external resources. Compliance with such requirements may result
      in increased general and administrative expenses and an increased allocation
      of
      management time and attention to compliance activities.




*We
      may not be able to successfully integrate companies which we may invest in
      or
      acquire in the future, which could materially and adversely affect our business,
      financial condition, future results and cash flow.*




Our
      strategy is to continue to expand in the future, including through acquisitions.
      Integrating acquisitions is often costly, and we may not be able to successfully
      integrate our acquired companies with our existing operations without
      substantial costs, delays or other adverse operational or financial
      consequences. Integrating our acquired companies involves a number of risks
      that
      could materially and adversely affect our business, including:




·
            failure
                of the acquired companies to achieve the results we
                expect;




·
            inability
                to retain key personnel of the acquired
                companies;




·
            dilution
                of existing stockholders;




·
            potential
                disruption of our ongoing business activities and distraction of
                our
                management;




·
            difficulties
                in retaining business relationships with suppliers and customers
                of the
                acquired companies;




·
            difficulties
                in coordinating and integrating overall business strategies, sales
                and
                marketing, and research and development efforts;
                and




·
            the
                difficulty of establishing and maintaining uniform standards, controls,
                procedures and policies, including accounting controls and
                procedures.




If
      any of
      our acquired companies suffers customer dissatisfaction or performance problems,
      the same could adversely affect the reputation of our group of companies and
      could materially and adversely affect our business, financial condition, future
      results and cash flow.





Moreover,
      any significant acquisition could require substantial use of our capital and
      may
      require significant debt or equity financing. We cannot provide any assurance
      as
      to the availability or terms of any such financing or its effect on our
      liquidity and capital resources.




*We
      incur substantial costs as a result of being a public company.*




As
      a
      public company, we incur significant legal, accounting, and other expenses
      in
      connection with our reporting requirements. Both the Sarbanes-Oxley Act of
      2002
      and the rules subsequently implemented by the Securities and Exchange Commission
      and NASDAQ, have required changes in corporate governance practices of public
      companies. These new rules and regulations have already increased our legal
      and
      financial compliance costs and the amount of time and effort we devote to
      compliance activities. We expect these rules and regulations to further increase
      our legal and financial compliance costs and to make compliance and other
      activities more time-consuming and costly. Further, due to increased
      regulations, it may be more difficult for us to attract and retain qualified
      persons to serve on our board of directors or as executive officers. We have
      attempted to address some of these attraction and retention issues by offering
      contractual indemnification agreements to our directors and executive officers,
      but this may not be sufficient. We continue to regularly monitor and evaluate
      developments with respect to these new rules with our legal counsel, but we
      cannot predict or estimate the amount of additional costs we may incur or the
      timing of such costs.




17




**RISKS
      RELATED TO SCR-TECH**




*SCR-Tech
      has incurred significant net losses since inception and may never achieve
      sustained profitability.*




SCR-Tech
      has incurred net losses of $2.6 million, $2.5 million and $0.1 million for
      the
      years ended December 31, 2007, 2006 and 2005, respectively. As of
      December 31, 2007, it had an accumulated deficit of approximately $9.7
      million. We believe that SCR-Tech will be profitable in 2008; however, we can
      provide no assurance that SCR-Tech will generate sufficient revenues to allow
      it
      to become profitable or to sustain profitability.




*SCR-Tech
      has a limited operating history*




SCR-Tech
      has completed only a limited number of SCR cleaning and regeneration projects
      since it commenced commercial operations in March 2003. Thus SCR-Tech does
      not
      have a long-term operational history sufficient to allow us to determine whether
      it can successfully operate its business under differing environments and
      conditions or at any level of sustained profitability.




*The
      size of the market for SCR-Tech’s business is uncertain.*




SCR-Tech
      offers SCR catalyst cleaning, rejuvenation and regeneration, as well as SCR
      system management and consulting services. The size and growth rate for this
      market will ultimately be determined by a number of factors, including
      environmental regulations and their enforcement, the growth in the use of SCR
      systems to reduce NOx and other pollutants, the length of operation of SCR
      systems without the need for cleaning, the differences, if any, in the
      accounting and rate-base effect of using regenerated SCR catalyst as compared
      to
      new SCR catalyst as adopted or approved by applicable federal and state
      regulatory authorities, rejuvenation or regeneration, the expansion of warranty
      coverage from SCR catalyst OEMs, the cost of new SCR catalyst, and other
      factors, most of which are beyond the control of SCR-Tech. There is limited
      historical evidence in the United States as to the cycle of replacement,
      cleaning and regeneration of SCR catalyst so as to accurately estimate the
      potential growth of the business. In addition, the number of times a catalyst
      can be regenerated is unknown, which also may affect the demand for regeneration
      in lieu of purchasing new catalyst. Any delay in the development of the market
      could significantly and adversely affect the value of SCR-Tech.




*SCR-Tech
      will be subject to vigorous competition with very large competitors that have
      substantially greater resources and operating histories.*




We
      are
      aware of one company, STEAG LLC (“Steag”), which is entering the U.S. catalyst
      regeneration market and we expect it to offer regeneration services in 2008.
      Steag is currently building a regeneration facility in North Carolina. Steag,
      based in Charlotte, North Carolina, is a subsidiary of a German power producer,
      STEAG GmbH (“Steag GmbH”). Steag GmbH is very large and has substantially
      greater resources than SCR-Tech or us. Competition from Steag may have a
      material adverse effect on our operations, including a potential reduction
      in
      operating margins and a loss of potential business.




We
      are
      also aware of at least one other company, Enerfab, Inc. that provides SCR
      catalyst management, rejuvenation and cleaning services. We are aware of certain
      companies, including Cormetech and Hitachi, who have indicated an interest
      in
      offering catalyst cleaning and regeneration. There also are a number of SCR
      catalyst manufacturers with substantial parent companies that may seek to
      maintain market share by significantly reducing prices which will put pressure
      on our operating margins. These companies include Cormetech Inc. (owned by
      Mitsubishi Heavy Industries and Corning, Inc.), Argillon GmbH (formerly
      Siemens), BASF/ CERAM, Haldor-Topsoe, Inc. and Hitachi America. Further, if
      the
      SCR catalyst regeneration market expands as we expect, additional competitors
      could emerge. In addition, if our intellectual property protection is weakened,
      competition could more easily develop.




18




*If
      we
      are unable to protect our intellectual property, or our intellectual property
      protection efforts are unsuccessful, others may duplicate our
      technology.*




We
      rely
      on a combination of patents, trademarks, copyrights, trade secret laws and
      restrictions on disclosure to protect our intellectual property rights. Our
      ability to compete effectively will depend, in part, on our ability to protect
      our proprietary technology, systems designs and manufacturing processes. The
      ability of others to use our intellectual property could allow them to duplicate
      the benefits of our products and reduce our competitive advantage. We do not
      know whether any of our pending patent applications will issue or, in the case
      of patents issued, that the claims allowed are or will be sufficiently broad
      to
      protect our technology or processes. Further, a patent issued covering one
      use
      of our technology may not be broad enough to cover uses of that technology
      in
      other business areas. In this regard, a significant portion of the patents
      relied upon by SCR-Tech were acquired from third parties. Even if all our patent
      applications are issued and are sufficiently broad, they may be challenged
      or
      invalidated. We could incur substantial costs in prosecuting patent and other
      intellectual property infringement suits and defending the validity of our
      patents and other intellectual property. While we have attempted to safeguard
      and maintain our property rights, we do not know whether we have been or will
      be
      completely successful in doing so. These actions could place our patents,
      trademarks and other intellectual property rights at risk and could result
      in
      the loss of patent, trademark or other intellectual property rights protection
      for the products, systems and services on which our business strategy partly
      depends.




We
      rely,
      to a significant degree, on contractual provisions to protect our trade secrets
      and proprietary knowledge. These trade secrets cannot be protected by patent
      protection. These agreements may be breached, and we may not have adequate
      remedies for any breach. Our trade secrets may also be known without breach
      of
      such agreements or may be independently developed by competitors.




*Third
      parties may claim that we are infringing their intellectual property, and we
      could suffer significant litigation or licensing expenses or be prevented from
      selling products and services if these claims are successful. We also may incur
      significant expenses in affirmatively protecting our intellectual property
      rights.*




Our
      competitors may independently develop or patent technologies or processes that
      are equivalent or superior to ours. In recent years, there has been significant
      litigation involving patents and other intellectual property rights in many
      technology-related industries and we believe our industry has a significant
      amount of patent activity. Third parties may claim that the technology or
      intellectual property that we incorporate into or use to develop, manufacture
      or
      provide our current and future products, systems or services infringe, induce
      or
      contribute to the infringement of their intellectual property rights, and we
      may
      be found to infringe, induce or contribute to the infringement of those
      intellectual property rights and may be required to obtain a license to use
      those rights. We may also be required to engage in costly efforts to design
      our
      products, systems and services around the intellectual property rights of
      others. The intellectual property rights of others may cover some of our
      technology, products, systems and services. In addition, the scope and validity
      of any particular third party patent may be subject to significant
      uncertainty.




Litigation
      regarding patents or other intellectual property rights is costly and time
      consuming, and could divert the attention of our management and key personnel
      from our business operations. The complexity of the technology involved and
      the
      uncertainty of intellectual property litigation increase these risks. Claims
      of
      intellectual property infringement might also require us to enter into costly
      royalty or license agreements or to indemnify our customers. However, we may
      not
      be able to obtain royalty or license agreements on terms acceptable to us or
      at
      all. Any inability on our part to obtain needed licenses could delay or prevent
      the development, manufacture and sale of our products, systems or services.
      We
      may also be subject to significant damages or injunctions against development,
      manufacture and sale of our products, systems or services.




19




We
      also
      may be required to incur significant time and expense in pursuing claims against
      companies we believe are infringing our intellectual property rights. The
      complexity of our technology and the nature of intellectual property litigation
      would make it expensive and potentially difficult to prove that a competitor
      is
      in fact infringing on our intellectual property rights, but we may nonetheless
      find it necessary to commence such litigation to protect our rights and future
      business opportunities. We can offer no assurance as to the outcome of any
      such
      litigation if it were to occur.




*SCR-Tech’s
      business is subject to customer concentration.*




SCR-Tech
      offers SCR catalyst cleaning, rejuvenation and regeneration, as well as SCR
      system management and consulting services to coal-fired power plants. Some
      of
      the utilities operating these plants are exceptionally large and operate a
      number of such power plants. Thus, one or more large utilities could provide
      a
      very large order or orders to SCR-Tech which likely would result in one or
      more
      such utilities providing most of the orders and revenues for SCR-Tech for a
      particular quarterly or annual period. During fiscal 2007, four customers
      represented more than 90% of our revenue. During fiscal 2006, one customer
      represented approximately 34% of our revenue and five customers represented
      approximately 92% of our revenue for such period. Although such large orders
      could prove extremely beneficial to SCR-Tech by providing a large and consistent
      source of orders and revenues without the expense of marketing to a number
      of
      smaller customers, SCR-Tech could become highly dependent on a small number
      of
      large utilities for its business. In such event, the loss of a particular
      customer would have a much greater adverse effect on SCR-Tech than the loss
      of a
      smaller customer. This also may result in significant swings in orders and
      revenues on a quarterly basis. SCR-Tech cannot at this time determine the
      likelihood or extent of such future customer concentration.




*Risk
      of changes in government regulation.*




Our
      business is significantly dependent on the nature and level of government
      regulation of emissions. Without government regulation of coal-fired power
      generation, SCR catalyst would not be used by utilities, there would be no
      need
      for utilities to acquire, clean or regenerate SCR catalyst, and SCR-Tech would
      have no business purpose. Further, changes in or adverse interpretations of
      governmental accounting or rate-based emissions regulations also could have
      a
      material adverse effect on our business. Although government regulation of
      emissions has become increasingly stringent in recent years, the growing costs
      associated with such regulations may limit the level of increase and scope
      of
      emissions requirements, which could limit the potential growth of our target
      markets. Any easing of governmental emissions requirements or the growth rate
      of
      such requirements could have a material adverse effect on our
      business.




*SCR-Tech’s
      business is subject to potential seasonality.*




Because
      some utilities and IPPs currently operate their SCR units only during the “ozone
      season” (May 1 — September 30), SCR-Tech’s business may be more
      limited than if SCR units were required to operate on a continual basis. The
      NOx
      SIP Call was configured to impose a summer ozone season NOx limitation in more
      than 19 states and the District of Columbia. During this period, utilities
      and IPPs seek to operate their SCR catalyst at maximum capacity so as to reduce
      NOx emissions. During non-ozone season periods, most operators currently have
      limited (if any) requirements to run their SCR systems. Unless and until such
      regulations are tightened, much of SCR-Tech’s business may be concentrated
      during the ozone season each year. This will likely result in less business
      than
      if SCR units were required to be operated throughout the year and may also
      result in quarters of relatively higher cash flow and earnings and quarters
      where cash flow and earnings may be minimal. These potential fluctuations in
      revenues and cash flow during a year may be significant and could materially
      impact our quarterly earnings and cash flow. This may have a material adverse
      effect on the perception of our business and the market price for our common
      stock.





20




*SCR-Tech
      does not own its regeneration facilities and it is subject to risks inherent
      in
      leasing the site of its operations.*




SCR-Tech
      does not own its regeneration site; instead it leases it from Clariant
      Corporation. Although we believe the lease terms are favorable, the dependence
      on Clariant and the site could subject SCR-Tech to increased risk in the event
      Clariant experiences financial setbacks or loses its right to operate the site.
      This risk is heightened because the site is a Federal Superfund site (under
      the
      Comprehensive Environmental Response, Compensation and Liability Act of 1980
      (“CERCLA”), which increases the risks that the site ultimately could be shut
      down or that Clariant will be financially unable to continue its ownership
      of
      the site. It may be difficult to relocate to another site on a timely or
      cost-effective basis, and SCR-Tech’s business could be negatively impacted by
      any problems with continuing to conduct its operations at its current
      site.




*SCR-Tech
      could be subject to environmental risks as a result of the operation of its
      business and the location of its facilities.*




The
      operation of SCR-Tech’s business and the nature of its assets create various
      environmental risks. SCR-Tech leases its site for operations at a property
      listed on the National Priority List as a Federal Superfund site. Five CERCLA
      Areas (those areas of concern identified under the CERCLA program) are
      identified on the property, and while SCR-Tech does not lease any property
      identified as a CERCLA Area, one such CERCLA Area has resulted in contamination
      of groundwater flowing underneath one of the buildings leased by SCR-Tech.
      Although SCR-Tech has indemnification from Clariant Corporation for any
      environmental liability arising prior to the operation of SCR-Tech’s business at
      the site, we can provide no assurance that such indemnification will be
      sufficient or that SCR-Tech would be protected from an environmental claim
      from
      the nature of the site. In addition, the operation of SCR-Tech’s business
      involves removal of hazardous wastes from catalyst and the use of significant
      chemical materials. As a result, SCR-Tech could be subject to potential
      liability resulting from such operations. To date, neither Acorn nor SCR-Tech
      has been identified as a potential responsible party to such environmental
      risks, nor have any amounts been recorded to accrue for these potential
      exposures.




*We
      likely will be required to make significant capital expenditures to expand
      SCR-Tech’s production facilities or for other purposes; we may require
      additional capital for such purposes.*




SCR-Tech
      does not own its regeneration site; instead it leases it from Clariant
      Corporation, the U.S. subsidiary of a Switzerland-based public company. We
      believe this site is sufficient to meet SCR-Tech’s anticipated production
      requirements through mid 2008. However, in order to meet anticipated demand
      for
      increased orders for SCR regeneration services in 2008, we expect to incur
      capital expenditure costs of $1.0 million to $1.5 million in 2008. In
      addition, we believe we will need to incur approximately $5.0 million of
      additional capital expenditures commencing in 2008 to construct a second
      regeneration plant to meet anticipated demand for regeneration services in
      2009.
      Although we believe SCR-Tech’s present site allows for building additional
      regeneration facilities, including a doubling of capacity in the current
      facility, such construction could require significantly more capital
      expenditures than anticipated. Moreover, because of necessary permitting and
      time for construction, we can provide no assurance that SCR-Tech could meet
      the
      demands from an unanticipated rapid increase in orders in a timely manner.
      Any
      failure to timely fulfill such orders could have an adverse impact on SCR-Tech’s
      business.




Although
      we believe our available non-restricted cash of approximately $19.6 at
      December 31, 2007 is sufficient to fund any currently anticipated capital
      requirements for SCR-Tech and to otherwise fund our current operations through
      2008, we can provide no assurance that we will not require additional capital.
      Moreover, if we incur the expected capital expenditures to expand the capacity
      of SCR-Tech, but the market does not develop as we expect or increased
      competition results in loss of significant business, we may not generate
      additional revenue from such expenses. This could adversely impact our financial
      position. Moreover, other unanticipated expenses for SCR-Tech, such as
      litigation or other costs for protecting intellectual property rights or as
      a
      result of a significant corporate transaction could result in the need for
      additional capital. These additional funding requirements may be significant,
      and funds may not be available when required or may be available only on terms
      unsatisfactory to us.




21




Beyond
      December 31, 2008, our cash requirements will depend on many factors,
      including but not limited to the market acceptance of our product and service
      offerings, the ability of SCR-Tech to generate significant cash flow, the rate
      of expansion of our sales and marketing activities, the rate of expansion of
      our
      production capacity, our ability to manage selling, general and administrative
      expenditures and the timing and extent of SCR-Tech related research and
      development projects.




In
      addition, we continue to actively pursue business opportunities, including
      but
      not limited to, mergers, acquisitions or other strategic arrangements. Such
      strategic opportunities could require the use of additional cash, reducing
      our
      available capital prior to December 31, 2008, or could require additional
      equity or debt financing. The nature and amount of any such financing or the
      use
      of any capital in any such transaction cannot be predicted and will depend
      on
      the terms and conditions of the particular transaction.




*Certain
      of SCR-Tech’s capital equipment is unique to our business and would be difficult
      and expensive to repair or replace.*




Certain
      of the capital equipment used in the services performed by SCR-Tech has been
      developed and made specifically for us and would be difficult to repair or
      replace if it were to become damaged or stop working. In addition, certain
      of
      our equipment is not readily available from multiple vendors. Consequently,
      any
      damage to or breakdown of our equipment at a time when we are regenerating
      large
      amounts of SCR catalyst at SCR-Tech may have a material adverse impact on our
      business.




*SCR-Tech
      may be subject to warranty claims from its customers.*




SCR-Tech
      typically provides limited warranties to its customers relating to the level
      of
      success of its catalyst cleaning and regeneration services. In the event
      SCR-Tech is unable to perform a complete regeneration of an SCR catalyst,
      SCR-Tech may be required to re-perform a regeneration or repay a portion of
      the
      fees earned for the regeneration efforts. SCR-Tech also may be required to
      provide warranties with respect to its other SCR catalyst services provided
      to
      its customers. Since SCR-Tech has only a limited operating history in North
      America, it is not possible to determine the amount or extent of any potential
      warranty claims that SCR-Tech may incur. There is a risk that any such claims
      could be substantial and could affect the profitability of SCR-Tech and the
      financial condition of the Company. The Company does maintain a limited warranty
      claim liability; however, should the amount of any potential warranty claims
      be
      incurred at levels higher than the warranty liability, the profitability and
      financial condition of the Company could be impacted.




*SCR-Tech
      is dependent on third parties to perform certain testing required to confirm
      the
      success of its regeneration.*




In
      connection with the regeneration of SCR catalyst, SCR-Tech generally must have
      an independent company provide testing services to determine the level of
      success of regeneration. Currently there are a limited number of companies
      providing this service. If SCR-Tech is unable to obtain this service on a
      cost-effective basis, SCR-Tech may not be able to perform its regeneration
      services.




*Significant
      price increases in key materials may reduce SCR-Tech’s gross margins and
      profitability of SCR-Tech’s regeneration of SCR Catalyst.*




The
      prices of various chemicals used to regenerate SCR Catalyst can be volatile.
      If
      the long-term costs of these materials were to increase significantly, we would
      attempt to reduce material usage or find substitute materials. If these efforts
      were not successful or if these cost increases could not be reflected in our
      price to customers, then our gross margins and profitability of regenerating
      SCR
      Catalyst would be reduced and our ability to operate SCR-Tech profitably could
      be compromised.




22




*Risks
      of purchasing used SCR catalyst.*




SCR-Tech’s
      primary business involves the cleaning and regenerating of customer-owned SCR
      catalyst. In certain instances, however, SCR-Tech may purchase used or “spent”
catalyst from utilities for regeneration, as when, for example, a utility wishes
      to avoid the costs and potential hazardous waste issues associated with the
      disposal of used or “spent” catalyst. SCR-Tech may purchase SCR catalyst for a
      nominal sum and then regenerate such catalyst for immediate sale, or may
      purchase spent SCR catalyst on an opportunistic basis for future regeneration
      and sale. The purchase of spent SCR catalyst involves potential risks to
      SCR-Tech. For example, spent SCR catalyst includes significant hazardous waste,
      and unlike the regeneration of customer-owned SCR catalyst, the purchase of
      spent SCR catalyst requires SCR-Tech to take ownership or “title” to the SCR
      catalyst, which may potentially increase SCR-Tech’s environmental risk exposure.
      Furthermore, if SCR-Tech cannot find a customer to purchase the regenerated
      catalyst, then SCR-Tech must either store the spent catalyst, subject to the
      inherent risk of holding catalyst which has not been regenerated and contains
      hazardous waste, or incur significant costs to dispose of the spent catalyst
      in
      a manner which complies with the strict requirements of applicable environmental
      laws. In addition, the sale of SCR catalyst may expose SCR-Tech to risks not
      inherent in the cleaning and regeneration of SCR catalyst, including product
      liability claims. It is unclear as to the amount of SCR catalyst which SCR-Tech
      may purchase, but it is possible such purchases ultimately may be substantial,
      and may significantly increase the risk profile of SCR-Tech’s
      business.




*Many
      of the risks of our business have only limited insurance coverage and many
      of
      our business risks are uninsurable.*




Our
      business operations are subject to potential environmental, product liability,
      employee and other risks. Although we have insurance to cover some of these
      risks, the amount of this insurance is limited and includes numerous exceptions
      and limitations to coverage. Further, no insurance is available to cover certain
      types of risks, such as acts of God, war, terrorism, major economic and business
      disruptions and similar events. In the event we were to suffer a significant
      environmental, product liability, employee or other claim in excess of our
      insurance or a loss or damages relating to an uninsurable risk, our financial
      condition could be negatively impacted. In addition, the cost of our insurance
      has increased substantially in recent years and may prove to be prohibitively
      expensive, thus making it impractical to obtain insurance. This may result
      in
      the need to abandon certain business activities or subject ourselves to the
      risks of uninsured operations.




**RISKS
      RELATED TO DSIT SOLUTIONS**




*Failure
      to accurately forecast costs of fixed-priced contracts could reduce our
      margins.*




When
      working on a fixed-price basis, we undertake to deliver software or integrated
      hardware/software solutions to a customer’s specifications or requirements for a
      particular project. The profits from these projects are primarily determined
      by
      our success in correctly estimating and thereafter controlling project costs.
      Costs may in fact vary substantially as a result of various factors, including
      underestimating costs, difficulties with new technologies and economic and
      other
      changes that may occur during the term of the contract. If, for any reason,
      our
      costs are substantially higher than expected, we may incur losses on fixed-price
      contracts.




*Hostilities
      in the Middle East region may slow down the Israeli hi-tech market and may
      harm
      our Israeli operations; our Israeli operations may be negatively affected by
      the
      obligations of our personnel to perform military service.*




Our
      software consulting and development services segment is currently conducted
      in
      Israel. Accordingly, political, economic and military conditions in Israel
      may
      directly affect DSIT. Any increase in hostilities in the Middle East involving
      Israel could weaken the Israeli hi-tech market, which may result in a
      significant deterioration of the results of our Israeli operations. In addition,
      an increase in hostilities in Israel could cause serious disruption to our
      Israeli operations if acts associated with such hostilities result in any
      serious damage to our offices or those of our customers or harm to our
      personnel.




23




Many
      of
      our employees in Israel are obligated to perform military reserve duty. In
      the
      event of severe unrest or other conflict, one or more of our key employees
      could
      be required to serve in the military for extended periods of time. In the past,
      there have been numerous call-ups of military reservists to active duty, and
      it
      is possible that there will be additional call-ups in the future. Our Israeli
      operations could be disrupted as a result of such call-ups for military
      service.




*Exchange
      rate fluctuations could increase the cost of our Israeli
      operations* .




A
      majority of DSIT’s sales are based on contracts or orders which are in U.S
      dollars or Euros or are in New Israeli Shekels (“NIS”) linked to the U.S.
      dollar. At the same time, most of DSIT’s expenses are denominated in NIS
      (primarily labor costs) and are not linked to any foreign currency. While the
      dollar value of the revenues of our operations in Israel will increase if the
      dollar is devalued in relation to the NIS, the net effect of such devaluation
      is
      that DSIT’s costs in dollar terms increase more than our revenues. The weakening
      of the dollar relative to the NIS has a net negative impact on DSIT’s
      operations. During the period from January 1, 2008 to March 20, 2008, the dollar
      lost 11.6% of its value relative to the NIS. DSIT is currently considering
      ways
      to control is exposures to exchange rate fluctuations, however, we can provide
      no assurance that such controls will be implemented successfully.




*One
      of our major customers has a history of operating deficits and may implement
      cost-cutting measures that may have a material adverse effect on
      us.*




In
      2007,
      19% of DSIT’s sales (17% in both 2006 and 2005, respectively) were related to
      the Clalit Health Fund (“Clalit”). Clalit is Israel’s largest HMO organization
      and has a history of running at a deficit, which in the past has required
      numerous cost cutting plans and periodic assistance from the Israeli government.
      Should Clalit have to institute additional cost cutting measures in the future,
      which may include restructuring of its terms of payment, this could have a
      material adverse effect on the performance of DSIT.




*We
      are substantially dependent on a small number of customers and the loss of
      one
      or more of these customers may cause revenues and cash flow to
      decline*




In
      2007,
      65% of DSIT’s sales (63% and 53% in 2006 and 2005, respectively) were
      concentrated in four customers (Israel Defense Ministry, Applied Materials
      Israel Ltd., RAFAEL Armament Development Authority Ltd. and Clalit). A
      significant reduction of orders from any of these customers could have a
      material adverse effect on the performance of DSIT.




*We
      are dependent on meeting milestones to provide cash flow for
      operations.*




In
      August
      2005, we sold our outsourcing business, which in the past provided our Israeli
      operations with a steady cash flow stream, and, in conjunction with bank lines
      of credit, helped to finance our Israeli operations. Our present operations,
      as
      we are currently structured, place a greater reliance on our meeting project
      milestones in order to generate cash flow to finance our operations. Should
      we
      encounter difficulties in meeting significant project milestones, resulting
      cash
      flow difficulties could have a material adverse effect on our
      operations.




*If
      we
      are unable to keep pace with rapid technological change, our results of
      operations, financial condition and cash flows may suffer.*




Some
      of
      our solutions are characterized by rapidly changing technologies and industry
      standards and technological obsolescence. Our competitiveness and future success
      depends on our ability to keep pace with changing technologies and industry
      standards on a timely and cost-effective basis. A fundamental shift in
      technologies could have a material adverse effect on our competitive position.
      Our failure to react to changes in existing technologies could materially delay
      our development of new products, which could result in technological
      obsolescence, decreased revenues, and/or a loss of market share to competitors.
      To the extent that we fail to keep pace with technological change, our revenues
      and financial condition could be materially adversely affected.




24




*We
      must at times provide significant guarantees in order to secure
      projects.*




Some
      of
      the projects we perform require significant performance and/or bank guarantees.
      In DSIT’s current state, it may not always be able to supply such guarantees
      without financial assistance from Acorn. If Acorn needs to provide financial
      guarantees for DSIT , Acorn
      may
      not have sufficient funds available to it invest in other emerging ventures
      or
      take advantage of opportunities available to us in a timely manner.




**RISKS
      RELATED TO OUR PAKETERIA INVESTMENT**





*Paketeria’s
      business plan is predicated on projected rapid growth in its network of
      franchised stores. If Paketeria fails to effectively manage this growth, its
      business and operating results could be harmed. Additionally they could be
      forced to incur significant expenditures to address the additional operational
      and control requirements of this growth* **.**





Paketeria’s
      business plan is predicated on projected rapid growth in its operations, which
      will place significant demands on its management, operational and financial
      infrastructure. If Paketeria does not effectively manage this growth, the
      quality of its services could suffer, which could negatively affect its
      operating results. To effectively manage this growth, Paketeria will need to
      continue to improve its operational, financial, and management controls and
      its
      reporting systems and procedures. These system enhancements and improvements
      could require Paketeria to make significant capital expenditures and an
      allocation of valuable management resources. If the improvements are not
      implemented successfully, Paketeria’s ability to manage growth may be impaired
      and could force it to make significant additional expenditures to address these
      issues, expenditures that could harm its financial position.




*Paketeria
      needs to raise funds to finance its planned activities.* **




Though
      Paketeria has successfully raised approximately $2.5 million in a private
      placement in 2007 and has recently registered on the Frankfurt Stock Exchange,
      Paketeria does not currently have enough cash to finance its planned activities
      in 2008 as it is continuing to raise funds from its offering on the Frankfurt
      Stock Exchange. We have agreed to lend Paketeria up to €1 million to bridge its
      finances during the period of its selling shares on the Frankfurt Exchange
      (Up
      through March 20, 2008, we have loaned approximately $750,000 to Paketeria).
      In
      the event that Paketeria is unable to sell shares on the Frankfurt exchange
      and
      raise funds from new investors, our investment and loans may be at risk (See
      “Recent Developments”). In the event that Paketeria is unable to obtain
      additional financing for its operations, we may be required to advance
      additional funds to Paketeria to maintain its viability and to protect our
      investment.




**RISKS
      RELATED TO OUR SECURITIES**





*Our
      share price may decline due to the large number of shares of our Common Stock
      eligible for future sale in the public market including the shares of the
      selling security holders.*





A
      substantial number of shares of our Common Stock are, or could upon exercise
      of
      options or warrants, become eligible for sale in the public market as described
      below. Sales of a substantial number of shares of ourCommon Stock in the public
      market, or the possibility of these sales, may adversely affect our stock
      price.





As
      of
      December 31, 2007, 11,134,795 shares of our Common Stock were issued and
      outstanding. As of December 31, 2007 we had 986,506 warrants outstanding and
      exercisable with a weighted average exercise price of $3.89 and 1,396,998
      options outstanding and exercisable with a weighted average exercise price
      of
      $2.96 per share, which if exercised for cash would result in the issuance of
      an
      additional 2,383,504 shares of Common Stock. Of the options and warrants noted
      above, there were 1,246,998 options and 986,506 warrants which are in-the-money
      at December 31, 2007.




25





*The
      market price of our Common Stock will likely be affected by fluctuations in
      the
      market price of the common stock of Comverge* .





A
      significant portion of the assets set forth on our balance sheet is comprised
      of
      the fair market value of our investment in Comverge shares. As described below
      under “Recent Developments,” the share price of Comverge’s common stock has
      fallen significantly since December 31, 2007. Due to the substantial position
      we
      hold in Comverge, the market price of our Common Stock is likely to be affected
      by fluctuations in the market price of the common stock of
      Comverge.





*We
      may be deemed to be an investment company under the Investment Company Act
      of
      1940; if we were deemed to be an investment company we could be forced to sell
      our shares in Comverge at prices lower than we might otherwise
      obtain.*





Under
      the
      Investment Company Act of 1940, as amended, and the rules thereunder we would
      be
      deemed to be an investment company if it is determined that the value of
      investment securities we own account for more than 45% of the total value of
      our
      assets. The Investment Company Act and the rules thereunder exclude from the
      definition of investment securities shares in companies which are majority-owned
      or “controlled primarily” by the issuer.





We
      believe that until the Comverge initial public offering in April 2007, we had
      primary control over Comverge for purposes of application of the Investment
      Company Act and our Comverge holdings were therefore excluded from the
      definition of investment securities. However, as a result of the offering,
      our
      voting agreement with the other major Comverge shareholders was terminated.
      It
      is therefore likely that as of the closing of the initial public offering,
      Comverge was no longer controlled primarily by us for Investment Company Act
      purposes. If that were the case, then as of June 30, 2007, we would no longer
      be
      excluded from the definition of an Investment Company since the value of our
      investment securities would be in excess of 45% of our assets.





Were
      we
      to have been deemed an investment company as a result of the Comverge IPO,
      we
      believe that we would be eligible for relief from the application of the
      Investment Company Act as a transient investment company under Rule 3a-2. Under
      Rule 3a-2, we would not be subject to the Investment Company Act provided that
      we have a bona fide intent to be engaged primarily, as soon as is reasonably
      possible (in any event within a one year period), in a business other than
      that
      of investing, reinvesting, owning, holding or trading in securities.





Our
      management and Board of Directors has formulated its plans for compliance with
      Rule 3a-2. These 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 all or a portion of our Comverge shares, and/or a merger or
      other acquisition transaction. Our acquisition of SCR-Tech and our sale of
      1,022,356 of our Comverge shares are significant steps in successfully
      implementing our plan.





To
      the
      extent that effectuating our plan to remain exempt from the Investment Company
      Act requires us to sell significant additional number of Comverge shares, we
      may
      be forced to sell a significant portion of our Comverge shares during a
      relatively short time period could result in our selling Comverge shares sooner
      than we otherwise would have, at prices lower than we might otherwise have
      obtained. While we could request an order from the SEC to give us additional
      time beyond the 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 Act, there is no assurance that such an order would be granted.




26





If
      we are
      unable to come into compliance with the Investment Company Act during the one
      year period (or any extension thereof granted to us by the SEC), we would be
      in
      violation of the Investment Company Act. Companies which fall under the Act
      are
      subject to substantial regulation concerning management, operations,
      transactions with affiliated persons, portfolio composition, including
      restrictions with respect to diversification and industry concentration, and
      other matters. We would be required to file reports with the SEC regarding
      various aspects of our business. The cost of such compliance would result in
      the
      Company incurring additional annual expenses. In addition, compliance with
      the
      Investment Company Act may not be consistent with the Company’s current strategy
      of holding primarily controlling interest in companies in which it holds
      interests.





**ITEM
              1B.**
            **UNRESOLVED
                STAFF COMMENTS**




**None.**




**ITEM
              2.**
            **PROPERTIES**




Our
      corporate activities are conducted in office space in Wilmington, Delaware.
      The
      annual rent is approximately $18,000 under a lease that expires in June
      2010.




SCR-Tech
      leases approximately 98,000 square feet of office, production, laboratory
      and warehouse space in Charlotte, North Carolina. The annual rent is
      approximately $273,000. This lease expires on December 31, 2012, with two
      options to renew for five years each.




Our
      RT
      Solutions activities are conducted in approximately 18,000 square feet of office
      space in the Tel Aviv, Israel metropolitan area under a lease that expires
      in
      August 2009. The annual rent is approximately $280,000.




As
      part
      of the 2006 sale of our Databit computer hardware subsidiary, we assigned all
      of
      the US leases to Databit and no longer have rental expense for facilities in
      New
      Jersey. The landlords of the properties have not yet consented to the
      assignments and we therefore continue to be contingently liable on these leases.
      Databit has agreed to indemnify us for any liability in connection with these
      leases.




**ITEM
              3.**
            **LEGAL
                PROCEEDINGS**




None.




**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**




At
      our
      Annual Meeting of Stockholders on December 5, 2007, John A. Moore, George
      Morgenstern, Richard J. Giacco, Joseph Musanti, Richard S. Rimer, Scott B.
      Ungerer and Samuel M. Zentman were elected as directors, each for a term of
      one
      year to serve until the next annual meeting of stockholders and until their
      successors have been elected and qualified. The results of the voting were
      as
      follows:


NOMINEE
              
              FOR
              
              WITHHELDJohn
                  A. Moore
              
              
              7,270,944
              
              
              387,787George
                  Morgenstern
              
              
              6,528,032
              
              
              1,130,699Richard
                  J. Giacco
              
              
              7,651,644
              
              
              7,087Joseph
                  Musanti
              
              
              7,651,644
              
              
              7,087Richard
                  S. Rimer
              
              
              7,609,344
              
              
              49,387Scott
                  B. Ungerer
              
              
              7,651,644
              
              
              7,087Samuel
                  M. Zentman
              
              
              7,608,344
              
              
              49,387




27




**PART
      II**




**ITEM
              5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**




Our
      Common Stock is currently traded on the NASDAQ Global Market under the symbol
      “ACFN”. Prior to December 17 ,
      2007, our
      Common Stock traded on OTC Bulletin
      Board (“OTCBB”) .
      The
      following table sets forth, for the periods indicated, the high and low reported
      sales prices per share of our Common Stock on NASDAQ and the OTCBB (as
      applicable).




High
            
            Low2006:First
                Quarter
            
            $
            2.80
            
            $
            1.43Second
                Quarter
            
            
            3.20
            
            
            2.50Third
                Quarter
            
            
            3.39
            
            
            2.85Fourth
                Quarter
            
            $
            3.47
            
            $
            3.142007:First
                Quarter
            
            $
            4.97
            
            $
            3.40Second
                Quarter
            
            
            5.28
            
            
            3.65Third
                Quarter
            
            
            5.59
            
            
            3.80Fourth
                Quarter
            
            $
            5.99
            
            $
            4.10




As
      of
      April 11, 2008, the last reported sales price of our Common Stock on the Nasdaq Global
      Market was
      $4.43, there were 83 record holders of our Common Stock and we estimate
      that there were approximately 1,100 beneficial owners of our Common
      Stock.




We
      paid
      no dividends in 2006 or 2007 and do not intend to pay
      any dividends in 2008.




**ITEM
              6.**
            **SELECTED
                FINANCIAL DATA**




The
      selected consolidated statement of operations data for the years ended December
      31, 2005, 2006 and 2007 and consolidated balance sheet data as of December
      31,
      2006 and 2007 has been derived from our audited Consolidated Financial
      Statements included in this Annual Report. The selected consolidated statement
      of operations data for the years ended December 31, 2003 and 2004 and the
      selected consolidated balance sheet data as of December 31, 2003, 2004 and
      2005
      has been derived from our unaudited consolidated financial statements not
      included herein.




28




This
      data
      should be read in conjunction with our Consolidated Financial Statements and
      related notes included herein and “Item 7. Management’s Discussion and Analysis
      of Financial Condition and Results of Operations.”




*Selected
      Consolidated Statement of Operations Data:*




For
                the Years Ended December 31,2003*
            
            2004
            
            2005
            
            2006
            
            2007(unaudited)(in
                thousands, except per share data)Sales
            
            $
            8,874
            
            $
            3,364
            
            $
            4,187
            
            $
            4,117
            
            $
            5,660Cost
                of sales
            
            
            6,833
            
            
            2,491
            
            
            2,945
            
            
            2,763
            
            
            4,248Gross
                profit
            
            
            2,041
            
            
            873
            
            
            1,242
            
            
            1,354
            
            
            1,412Research
                and development expenses
            
            
            153
            
            
            30
            
            
            53
            
            
            324
            
            
            415Selling,
                marketing, general and administrative expenses
            
            
            7,422
            
            
            3,374
            
            
            3,464
            
            
            4,658
            
            
            5,390Operating
                loss
            
            
            (5,534
            )
            
            (2,531
            )
            
            (2,275
            )
            
            (3,628
            )
            
            (4,393
            )Finance
                expense, net
            
            
            (534
            )
            
            (33
            )
            
            (12
            )
            
            (30
            )
            
            (1,585
            )Gain
                on Comverge IPO
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            16,169Gain
                on sale of shares in Comverge
            
            
            —
            
            
            705
            
            
            —
            
            
            —
            
            
            23,124Loss
                on Paketeria private placement
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (37
            )Other
                income, net
            
            
            —
            
            
            148
            
            
            —
            
            
            330
            
            
            —Income
                (loss) from operations before taxes on income
            
            
            (6,068
            )
            
            (1,711
            )
            
            (2,287
            )
            
            (3,328
            )
            
            33,278Income
                tax benefit (expense)
            
            
            48
            
            
            (27
            )
            
            37
            
            
            (183
            )
            
            445Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (6,020
            )
            
            (1,738
            )
            
            (2,250
            )
            
            (3,511
            )
            
            33,723Share
                of losses in Comverge
            
            
            (1,752
            )
            
            (1,242
            )
            
            (380
            )
            
            (210
            )
            
            —Share
                of losses in Paketeria
            
            
            —
            
            
            —
            
            
            —
            
            
            (424
            )
            
            (1,206
            )Minority
                interests, net of tax
            
            
            264
            
            
            (90
            )
            
            (73
            )
            
            —
            
            
            —Income
                (loss) from continuing operations
            
            
            (7,508
            )
            
            (3,070
            )
            
            (2,703
            )
            
            (4,145
            )
            
            32,517Gain
                (loss) on sale of discontinued operations and contract settlement
                (in
                2006), net of income taxes
            
            
            —
            
            
            —
            
            
            541
            
            
            (2,069
            )
            
            —Income
                (loss) from discontinued operations, net of income taxes
            
            
            1,226
            
            
            1,898
            
            
            844
            
            
            78
            
            
            —Net
                income (loss)
            
            $
            (6,282
            )
            $
            (1,172
            )
            $
            (1,318
            )
            $
            (6,136
            )
            $
            32,517Basic
                net income (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.97
            )
            $
            (0.39
            )
            $
            (0.26
            )
            $
            (0.48
            )
            $
            3.30Discontinued
                operations
            
            
            0.16
            
            
            0.24
            
            
            0.10
            
            
            (0.23
            )
            
            —Net
                income (loss) per share
            
            $
            (0.81
            )
            $
            (0.15
            )
            $
            (0.16
            )
            $
            (0.71
            )
            $
            3.30Weighted
                average number of shares outstanding
            
            
            7,738
            
            
            7,976
            
            
            8,117
            
            
            8,689
            
            
            9,848Diluted
                net income (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.97
            )
            $
            (0.39
            )
            $
            (0.26
            )
            $
            (0.48
            )
            $
            2.80Discontinued
                operations
            
            
            0.16
            
            
            0.24
            
            
            0.10
            
            
            (0.23
            )
            
            —Net
                income (loss) per share
            
            $
            (0.81
            )
            $
            (0.15
            )
            $
            (0.16
            )
            $
            (0.71
            )
            $
            2.80Weighted
                average number of shares outstanding
            
            
            7,738
            
            
            7,976
            
            
            8,117
            
            
            8,689
            
            
            12,177







*
      The
      selected consolidated statements of operations data for the year ended December
      31, 2003 have been restated for the discontinued operations of our US-based
      computer VAR business and our Israel and US-based consulting businesses and
      are
      unaudited.




29





*Selected
      Consolidated Balance Sheet Data:*




As
                of December 31,2003
            
            2004
            
            2005
            
            2006
            
            2007(in
                thousands)Working
                capital
            
            $
            729
            
            $
            874
            
            $
            1,458
            
            $
            259
            
            $
            13,843Total
                assets
            
            
            17,784
            
            
            17,025
            
            
            10,173
            
            
            7,258
            
            
            96,967Short-term
                and long-term debt
            
            
            2,259
            
            
            1,396
            
            
            365
            
            
            788
            
            
            4,998Minority
                interests
            
            
            1,367
            
            
            1,471
            
            
            —
            
            
            —
            
            
            —Total
                shareholders’ equity (deficit)
            
            
            3,200
            
            
            2,125
            
            
            820
            
            
            (461
            )
            
            67,325




**ITEM
                7.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




**RECENT
      DEVELOPMENTS**




***Redemption
      of Convertible Debentures***




In
      January 2008, we completed our previously announced redemption of our
      outstanding 10% Convertible Redeemable Subordinated Debentures due March 2011.
      Prior to the redemption, the debenture holders converted the $3.44 million
      convertible portion of the debentures into approximately 900,000 shares of
      our
      common stock and the remaining $3.44 million of debentures were redeemed in
      accordance with the notice of redemption.




***Sale
      of 15% of CoaLogix to EnerTech***




On
      February 29, 2008, we entered into a Common Stock Purchase Agreement (the
“Agreement”) with CoaLogix and EnerTech Capital Partners III L.P. (“EnerTech”)
      pursuant to which EnerTech purchased from CoaLogix a 15% interest in CoaLogix
      for $1.95 million. Following the transaction, we own 85% of CoaLogix.




In
      connection with the transaction under the Agreement, the Company, CoaLogix,
      EnerTech and the senior management of CoaLogix entered into a Stockholders’
Agreement dated as of February 29, 2008 (the “Stockholders’ Agreement”). Under
      the Stockholders’ Agreement, EnerTech is entitled to designate a member of the
      Board of Directors of CoaLogix. In addition, the Stockholders’ Agreement
      provides the Company and EnerTech with reciprocal rights of first refusal and
      co-sale in connection with proposed transfers of their CoaLogix stock.




Pursuant
      to the Stockholders’ Agreement, EnerTech also has a right to purchase additional
      stock to maintain its percentage interest in CoaLogix in the event of dilutive
      transactions. The right may be exercised until such time as the Company’s
      ownership in CoaLogix is reduced to 75% or CoaLogix completes an initial public
      offering.




30




***Comverge***




The
      market value of our 1,763,665 common shares of Comverge on December 31, 2007
      was
      approximately $55.5 million based on a market share price of $31.49 on that
      date. Since December 31, 2007, the share price of Comverge’s shares have fallen
      significantly and currently (as of April 9, 2008) our shares in Comverge have
      a
      value of $19.7 million based on a market share price of $11.17.




***Paketeria***




Thus
      far
      in 2008, we have provided Paketeria with approximately $750,000 of loans in
      order to provide it with additional temporary financing to help it support
      its
      operations until it is able to raise funds through the sale by existing
      shareholders of shares through the escrow arrangement described above or from
      other sources.




***GridSense***




On
      January 2, 2008, we closed on a transaction where we were the lead investor
      in
      GridSense Systems Inc. (“GridSense”) placement, acquiring 15,714,285 shares and
      15,714,285 warrants for C$1.1 million (approximately $1.1 million). The
      15,714,285 shares acquired by us in the placement represent 24.52% of
      GridSense's issued and outstanding shares. If we exercise all of the 15,714,285
      warrants acquired in the placement, we will own 31,428,570 GridSense common
      shares, representing 39.37% of GridSense's issued and outstanding shares.




***Restricted
      Cash***




In
      January 2008, we transferred $1 million (in addition to the $1.5 million
      transferred in 2007) to a bank in Israel as security for a guarantee the bank
      has provided to the Israel Ministry of Defense in connection with a $7.5 million
      naval project being performed by our DSIT subsidiary. The cash is restricted
      and
      is expected to be unavailable to us until early 2009.




**OVERVIEW
      AND TREND INFORMATION**




The
      following discussion includes statements that are forward-looking in nature.
      Whether such statements ultimately prove to be accurate depends upon a variety
      of factors that may affect our business and operations. Certain of these factors
      are discussed in “Item 1. Business-Risk Factors Which May Affect Future
      Results.”




We
      operate in two reportable segments: SCR and RT Solutions. As we acquired our
      interest in SCR-Tech on November, 7, 2007, our results for 2007 include
      SCR-Tech’s results only for the period from November 7, 2007 to December 31,
      2007.




The
      following analysis should be read together with the segment information provided
      in Note 20 to our Consolidated Financial Statements included in this
      report.




*CoaLogix/SCR*




CoaLogix
      is focused on providing cutting edge services to coal-fired generating
      facilities to reduce their environmental footprint through technology,
      optimization and efficiency improvements. CoaLogix currently owns SCR-Tech
      which
      provides SCR (selective catalyst reduction) services to power plants, including
      a proprietary technology to regenerate catalyst. We acquired SCR-Tech and began
      consolidating its results in November 2007. As such, we have not presented
      comparative data for SCR-Tech’s results. In the first two months of 2008
      SCR-Tech secured eight new contracts from major U.S. companies representing
      over
      two times its entire 2007 sales. Included in these contracts are a three year
      and a five year contract bundling selective catalytic reduction (SCR) management
      services and time sensitive regeneration during planned outages. The contracts
      represent three new and five repeat customers. Total revenues for SCR-Tech
      in
      2007 were approximately $4.5 million (including revenues for the period prior
      to
      our acquisition). We anticipate a significant increase in revenues in 2008
      from
      SCR-Tech.




31




In
      March
      2008, CoaLogix announced its CoalVision 360o strategy and the addition of a
      strategic partner, EnerTech Capital III, which acquired a 15% interest in
      CoaLogix. We currently own 85% of CoaLogix following EnerTech’s investment.
      CoalVision 360o is CoaLogix’s strategy for creating value for its customers and
      shareholders while fulfilling our industry’s obligations to our ever tightening
      clean air laws.





During
      2008, we expect CoaLogix to significantly improve on its 2007 results based
      upon the anticipated significant increase in revenues from new orders
      received in late 2007 and early 2008. We expect that CoaLogix will need to
      expand its current facilities in 2008 in order to accommodate its anticipated
      growth.




*RT
      Solutions*




During
      2005, 2006 and 2007, sales from our RT solutions activities were $2.9 million,
      $2.8 million and $3.5 million, respectively, accounting for approximately 69%,
      68% and 61% of Company sales for 2005, 2006 and 2007, respectively.




We
      generally provide our RT solutions on a fixed-price basis. When working on
      a
      fixed-price basis, we undertake to deliver software or hardware/software
      solutions to a customer’s specifications or requirements for a particular
      project, accounting for these services on the percentage-of-completion method.
      Since the profit margins on these projects are primarily determined by our
      success in controlling project costs, the margins on these projects may vary
      as
      a result of various factors, including underestimating costs, difficulties
      associated with implementing new technologies and economic and other changes
      that may occur during the term of the contract.




Segment
      revenues increased by $0.7 million or 24% in 2007 as compared to 2006. The
      increase in sales was the result of the acquisition of two significant projects
      in 2007.




·
            A
                NIS 30 million (approximately $7.7 million at December 31, 2007)
                order for
                a sonar and underwater acoustic system for the Israeli Ministry of
                Defense, and




·
            An
                order to supply what we believe to be the world’s first underwater
                surveillance system to protect a strategic coastal energy installation.




Both
      of
      these projects began in mid-2007 and our increased sales are a direct result
      of
      our progress in those projects. The revenues we recorded from those projects
      were partially offset by reduced revenues in our other embedded hardware and
      software development projects. Our gross profits also increased (from $1.0
      million in 2006 to $1.1 million in 2007) as a result of the increased sales
      from
      our two significant projects, however, our gross profit margins decreased from
      2006 to 2007 from 36% to 33% due to the completion in 2006 of a number of
      relatively high margin embedded hardware and software development projects
      during that year.




Our
      projected growth in sales in 2008 is expected to come primarily from our Naval
      solutions projects with our embedded hardware and software development projects
      expected to remain relatively stable. We anticipate our 2008 sales to increase
      based on our abovementioned contract with the Israeli MOD for which we have
      a
      backlog of approximately $6.8 million. In addition, we anticipate receiving
      in
      the second half of 2008 a number of significant Naval solutions contracts for
      additional underwater surveillance systems to protect strategic coastal energy
      installations. We believe that with these increased sales, this segment will
      reach profitability towards the end of the year.




*Paketeria*




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 2008, Paketeria is planning to continue its
      expansion of stores. Paketeria continues to seek additional capital investment
      to help fund its activities and expansion.




32





In
      September 2007, Paketeria raised approximately €1.7 million ($2.5 million at the
      then exchange rate) in a private placement by way of a share issuance. The
      shares were issued by Paketeria on the basis of a valuation representing a
      pre-money valuation of Paketeria of €8 million ($11.3 million at the then
      exchange rate). In addition, concurrent with the private placement, we converted
      shareholder loans in the aggregate principal amount of €750,000 ($1.1 million at
      the then exchange rate) plus accrued interest, into shares of Paketeria on
      the
      same basis as the private placement.





After
      the
      private placement and related transactions described above, we owned
      approximately 31% of Paketeria.




In
      2008
      to date, we loaned Paketeria approximately $750,000 to help it finance its
      ongoing activities until it acquires additional capital investment or cash
      from
      the sale of Paketeria shares from its listing on the Frankfurt Stock Exchange
      are released.




*Corporate*




In
      January 2008, following our December sale of 1,022,356 shares of our investment
      in Comverge from which we received approximately $28.4 million of proceeds,
      we
      completed the redemption of our outstanding 10% Convertible Redeemable
      Subordinated Debentures due March 2011. Prior to the redemption, the debenture
      holders converted the entire $3.44 million convertible portion of the debentures
      into approximately 900,000 shares of Acorn common stock and the remaining $3.44
      million of debentures were redeemed in accordance with the notice of redemption.
      Following the debenture redemption and our repayment in November 2007 of the
      $14
      million debt related to our recent purchase of SCR-Tech, we have no corporate
      debt and approximately $9.3 million in unrestricted cash (at the end of March
      2008). We continue to have significant corporate cash expenses and will continue
      to expend in the future, significant amounts of funds on professional fees
      and
      other costs in connection with our strategy to seek out and invest in companies
      that fit our target business model.




**CRITICAL
      ACCOUNTING POLICIES**




The
      Securities and Exchange Commission (“SEC”) defines “critical accounting
      policies” as those that require application of management's most difficult,
      subjective or complex judgments, often as a result of the need to make estimates
      about the effect of matters that are inherently uncertain and may change in
      subsequent periods.




The
      following discussion of critical accounting policies represents our attempt
      to
      report on those accounting policies, which we believe are critical to our
      consolidated financial statements and other financial disclosure. It is not
      intended to be a comprehensive list of all of our significant accounting
      policies, which are more fully described in Note 2 of the Notes to the
      Consolidated Financial Statements included in this Annual Report. In many cases,
      the accounting treatment of a particular transaction is specifically dictated
      by
      generally accepted accounting principles, with no need for management's judgment
      in their application. There are also areas in which the selection of an
      available alternative policy would not produce a materially different
      result.




We
      have
      identified the following as critical accounting policies affecting our company:
      principles of consolidation and investments in associated companies; sale of
      stock by a subsidiary, investments in marketable securities, revenue
      recognition, foreign currency transactions and stock-based
      compensation.




*Principles
      of Consolidation and Investments in Associated Companies*




Our
      consolidated financial statements include the accounts of all majority-owned
      subsidiaries. All intercompany balances and transactions have been eliminated.
      Minority interests in net losses are limited to the extent of their equity
      capital. Losses in excess of minority interest equity capital are charged
      against us in our consolidated statements of operations.




33




Investments
      in other entities are accounted for using the equity method or cost basis
      depending upon the level of ownership and/or our ability to exercise significant
      influence over the operating and financial policies of the investee. Investments
      of this nature are recorded at original cost and adjusted periodically to
      recognize our proportionate share of the investee’s net income or losses after
      the date of investment. When net losses from an investment accounted for under
      the equity method exceed its carrying amount, the investment balance is reduced
      to zero and additional losses are not provided for. We resume accounting for
      the
      investment under the equity method
      when the entity subsequently reports net income and our share of that net income
      exceeds the share of net losses not recognized during the period the equity method
      was suspended. Investments are written down only when there is clear evidence
      that a decline in value that is other than temporary has
      occurred.




The
      Company’s investment in Paketeria is accounted for by the equity method. The
      Company’s investments in both LPI and EnerTech is accounted for by the cost
      method.




Our
      Paketeria investment is comprised of an initial investment of $877,000
      (including transaction costs) for approximately 23% of Paketeria and a
      subsequent investment of approximately $461,000 (including transaction costs),
      which increased our holdings in Paketeria to approximately 33%. Our investment
      in Paketeria was allocated as follows:




·
            $68,000
                to the net value of various options in the initial
                investment;




·
            281,000
                to the value of the non-compete agreement given to Paketeria’s founder and
                managing director;




·
            $185,000
                to the value of the franchise agreements acquired at the date of
                our
                investment;




·
            $446,000
                to the value of the Paketeria brand name;
                and




·
            $356,000
                to goodwill.




On
      September 20, 2007, Paketeria raised approximately €1.7 million ($2.5 million at
      the then exchange rate) through a private placement of its shares.




In
      addition, concurrent with the private placement, we converted loans in the
      aggregate principal amount of €750,000 (approximately $1.1 million at the then
      exchange rate) plus accrued interest, into shares of Paketeria on the same
      basis
      as the private placement. Additionally, we exercised an option under the August
      2006 investment agreement to acquire a convertible promissory note in the amount
      of €70,000 (approximately $98,000 at the then exchange rate) plus accrued
      interest. The increase in our investment in Paketeria from our additional
      investment is attributed to an increase in the goodwill among the components
      of
      our investment in Paketeria.




After
      the
      private placement and related transactions described above, we owned
      approximately 31% of Paketeria.




Since
      we
      account for our investment in Paketeria under the equity method, we have, in
      2007, reduced our investment in Paketeria by $971,000, which represents our
      share of Paketeria’s losses during the year ended December 31, 2007. In
      addition, we have included in our equity loss the amortization of the value
      of
      the acquired non-compete agreement and the franchise agreements and change
      in
      value of options, which in 2007 totaled $186,000.




The
      options that we have in Paketeria allow us to increase our holdings in Paketeria
      from our current 31% to 36%.




*Sale
      of Stock by a Subsidiary*




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. Comverge’s shares are listed on the
      Nasdaq Global Market under the symbol "COMV". 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 owned 2,786,021
      shares of Comverge common stock.




34




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. Comverge’s shares are listed on the
      Nasdaq Global Market under the symbol "COMV". 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 owned 2,786,021
      shares of Comverge common stock.




We
      account for the sale of stock by a subsidiary in accordance with the Securities
      and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 51,
“Accounting for Sales of Stock by a Subsidiary” (“ SAB 51”),
      which requires that the difference between the carrying amount of the parent’s
      investment in a subsidiary and the underlying net book value of the subsidiary
      after the issuance of stock by the subsidiary be reflected as either a gain
      or
      loss in the statement of operations or reflected as an equity transaction.
      In
      the past, we elected to record gains or losses resulting from the sale of a
      subsidiary’s stock in our statement of operations.




As
      a
      result of the Comverge offering, we recorded an increase in our 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
      accounted for its investment in Comverge under the equity method.




In
      September 2007, Paketeria also completed a private placement. As a result of
      the
      Paketeria private placement, we recorded a non-cash loss of $37,000 in “Loss on
      Private Placement in Paketeria”.




*Investments
      in Marketable Securities*




We
      account for our investments in equity securities under Financial Accounting
      Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
      No. 115, Accounting for Certain Investments in Debt and Equity Securities,
      (FAS 115). Marketable securities are classified as available-for-sale securities
      and are accounted for at their fair value. Unrealized gains and losses on these
      securities are reported as other comprehensive income (loss), respectively.
      Under FAS 115,
      unrealized holding gains and losses are excluded from earnings and reported
      net
      of the related tax effect in other comprehensive income as a separate component
      of shareholders’ equity.




As
      of
      December 31, 2007, the 1,763,665 Comverge shares we held following our December
      sale of Comverge shares can be considered “available-for-sale” under SFAS 115.
      Accordingly, we recorded our investment in Comverge based on Comverge’s share
      price of $31.49 at December 31, 2007 and recorded an increase of $46,457,000
      to
      our investment balance by recording those shares at fair market value and
      recorded a deferred tax liability of $16,902,000 to Accumulated Other
      Comprehensive Income with respect to the recording those shares at fair market
      value.




*Revenue
      Recognition*




Revenue
      from time-and-materials service contracts, maintenance agreements and other
      services is recognized as services are provided.




In
      2007,
      we derived $2.5 million of revenues from fixed-price type contracts in DSIT
      representing approximately 45% of consolidated sales in 2007 ($1.8 million
      and
      43%, and $1.9 million and 46%, in 2006 and 2005, respectively), which require
      the accurate estimation of the cost, scope and duration of each engagement.
      Revenue and the related costs for these projects are recognized for a particular
      period, using the percentage-of-completion method as costs (primarily direct
      labor) are incurred, with revisions to estimates reflected in the period in
      which changes become known. If we do not accurately estimate the resources
      required or the scope of work to be performed, or do not manage our projects
      properly within the planned periods of time or satisfy our obligations under
      the
      contracts, then future revenue and consulting margins may be significantly
      and
      negatively affected and losses on existing contracts may need to be recognized.
      Any such resulting changes in revenues and reductions in margins or contract
      losses could be material to our results of operations.




*Foreign
      Currency Transactions*




The
      currency of the primary economic environment in which our corporate headquarters
      and our U.S. subsidiaries operate is the United States dollar (“dollar”).
      Accordingly, the Company and all of its U.S. subsidiaries use the dollar as
      their functional currency.




35




As
      we
      acquired SCR-Tech on November, 7 2007 and have consolidated its results into
      ours from that date, most (86%) of our revenues in the year ended December
      31,
      2007 and all of our revenues in the years ended December 31, 2005 and 2006
      came
      from our DSIT Israeli subsidiary. DSIT’s functional currency is the New Israeli
      Shekel (“NIS”) and its financial statements have been translated using the
      exchange rates in effect at the balance sheet date. Statements of operations
      amounts have been translated using the exchange rate at date of transaction.
      All
      exchange gains and losses denominated in non-functional currencies are reflected
      in finance expense, net in the consolidated statement of operations when they
      arise.




*Stock-based
      Compensation*




Effective
      January 1, 2006, we have accounted for share-based compensation pursuant to
      SFAS No. 123R, Share-Based Payment (SFAS 123R). SFAS No. 123R
      requires a public entity to measure the cost of employee services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award and to recognize that cost over the period during which an employee
      is required to provide service in exchange for the award. As a result of our
      adoption of SFAS No. 123R, during the years ended December 31, 2007
      and 2006, we recognized expense related to share options issued prior to but
      unvested as of January 1, 2006 as well as expense related to share options
      issued subsequent to January 1, 2006.




The
      fair values of all stock options granted were estimated using the Black-Scholes
      option-pricing model. The Black-Scholes model requires the input of highly
      subjective assumptions such as risk-free interest rates, volatility factor
      of
      the expected market price of our Common Stock and the weighted-average expected
      option life. The expected volatility factor used to value stock options in
      2007
      was based on the historical volatility of the market price of the Company’s
      Common Stock over a period equal to the estimated weighted average life of
      the
      options. In December 2007, the SEC issued Staff Accounting Bulletin 110
      (SAB 110) to amend the SEC's views discussed in Staff Accounting
      Bulletin 107 (SAB 107) regarding the use of the simplified method in
      developing an estimate of expected life of share options in accordance with
      SFAS
      No. 123(R). We will continue to use the simplified method until we have the
      historical data necessary to provide a reasonable estimate of expected life
      in
      accordance with SAB 107, as amended by SAB 110. For expected option
      life, we have what SAB 107 defines as "plain-vanilla" stock options, and
      therefore used a simple average of the vesting period and the contractual term
      for options as permitted by SAB 107. The risk-free interest rate used is
      based upon U.S. Treasury yields for a period consistent with the expected term
      of the options. Historically, we have not paid dividends and we do not
      anticipate paying dividends in the foreseeable future; accordingly, our expected
      dividend rate is zero. We recognize this expense on a straight-line basis over
      the requisite service period. Due to the numerous assumptions involved in
      calculating share-based compensation expense, the expense
      recognized in our consolidated financial statements may differ significantly
      from the value realized by employees on exercise of the share-based instruments.
      In accordance with the methodology prescribed by SFAS 123R, we do not
      adjust our recognized compensation expense to reflect these differences.
      Recognition of share-based compensation expense had, and will likely continue
      to
      have, a material affect on our general and administrative line items within
      our
      consolidated statements of operations and also may have a material affect on
      our
      deferred income taxes and additional paid-in capital line items within our
      consolidated balance sheets. Under SFAS No. 123R, we are required to
      use judgment in estimating the amount of stock-based awards that are expected
      to
      be forfeited. If actual forfeitures differ significantly from the original
      estimate, stock-based compensation expense and our results of operations could
      be materially impacted.




For
      the
      years ended December 31, 2007 and December 31, 2006, we incurred stock
      compensation expense of approximately $0.9 million and $1.8 million,
      respectively.




36




See
      Note
      16 to the consolidated financial statements for information on the impact of
      our
      adoption of SFAS 123R and the assumptions used to calculate the fair value
      of
      share-based employee compensation.




We
      account for stock-based compensation issued to non-employees on a fair value
      basis in accordance with SFAS No. 123 and EITF Issue No. 96-18, “Accounting for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
      in
      conjunction with Selling, Goods or Services” and related interpretations.




*Business
      combination accounting*




We
      have
      acquired a number of businesses during the last several years, and we may
      acquire additional businesses in the future. Business combination accounting,
      often referred to as purchase accounting, requires us to determine the fair
      value of all assets acquired, including identifiable intangible assets, and
      liabilities assumed. The cost of the acquisition is allocated to the assets
      acquired and liabilities assumed in amounts equal to the estimated fair value
      of
      each asset and liability, and any remaining acquisition cost is classified
      as
      goodwill. This allocation process requires extensive use of estimates and
      assumptions, including estimates of future cash flows to be generated by the
      acquired assets. Certain identifiable intangible assets, such as customer lists
      and covenants not to compete, are amortized based on the pattern in which the
      economic benefits of the intangible assets are consumed over the intangible
      asset's estimated useful life. The estimated useful life of amortizable
      identifiable intangible assets ranges from two to fourteen years. Goodwill
      is
      not amortized. Accordingly, the acquisition cost allocation has had, and will
      continue to have, a significant impact on our current operating results.




**RESULTS
      OF OPERATIONS**




The
      following table sets forth selected consolidated statement of operations data
      as
      a percentage of our total sales:




Year
                Ended December 31,2003
            
            2004
            
            2005
            
            2006
            
            2007(unaudited)Sales
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            77
            
            
            74
            
            
            70
            
            
            67
            
            
            75Gross
                profit
            
            
            23
            
            
            26
            
            
            30
            
            
            33
            
            
            25Research
                and development expenses
            
            
            2
            
            
            1
            
            
            1
            
            
            8
            
            
            7Selling,
                marketing, general and administrative expenses
            
            
            84
            
            
            100
            
            
            83
            
            
            113
            
            
            95Operating
                loss
            
            
            (62
            )
            
            (75
            )
            
            (54
            )
            
            (88
            )
            
            (78
            )Finance
                expense, net
            
            
            (6
            )
            
            (1
            )
            
            0
            
            
            (1
            )
            
            (28
            )Gain
                on sale of shares in Comverge
            
            
            —
            
            
            21
            
            
            —
            
            
            —
            
            
            409Gain
                on IPO of Comverge
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            286Loss
                on private placement of Paketeria
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1
            )Other
                income, net
            
            
            —
            
            
            4
            
            
            —
            
            
            8
            
            
            —Income
                (loss) from operations before taxes on income
            
            
            (68
            )
            
            (51
            )
            
            (55
            )
            
            (81
            )
            
            588Income
                tax benefit (expense)
            
            
            (1
            )
            
            (1
            )
            
            1
            
            
            (4
            )
            
            8Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (68
            )
            
            (51
            )
            
            (54
            )
            
            (85
            )
            
            596Share
                of losses in Paketeria
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )
            
            (21
            )Share
                of losses in Comverge
            
            
            (20
            )
            
            (37
            )
            
            (9
            )
            
            (5
            )
            
            —Minority
                interests, net of tax
            
            
            3
            
            
            (3
            )
            
            (2
            )
            
            —
            
            
            —Income
                (loss) from continuing operations
            
            
            (85
            )
            
            (91
            )
            
            (65
            )
            
            (101
            )
            
            575Gain
                (loss) on sale of discontinued operations and contract settlement
                (in
                2006), net of income taxes
            
            
            —
            
            
            —
            
            
            13
            
            
            (50
            )
            
            —Income
                from discontinued operations, net of income taxes
            
            
            14
            
            
            56
            
            
            20
            
            
            2
            
            
            —Net
                income (loss)
            
            
            (71
            )%
            
            (35
            )%
            
            (31
            )%
            
            (149
            )%
            
            575
            %




37




The
      following table sets forth certain information with respect to revenues and
      profits of our reportable business segments for the years ended December 31,
      2005, 2006 and 2007, including the percentages of revenues attributable to
      such
      segments. (See Note 20 to our consolidated financial statements for the
      definitions of our reporting segments.). The column marked “Other” aggregates
      information relating to miscellaneous operating segments, which may be combined
      for reporting under applicable accounting principles.




RT
                Solutions
            
            SCR
            
            Other
            
            Total(in
                thousands)Year
                ended December 31, 2007:Revenues
                from external customers
            
            $
            3,472
            
            $
            797
            
            $
            1,391
            
            $
            5,660Percentage
                of total revenues from external customers
            
            
            61
            %
            
            14
            %
            
            25
            %
            
            100
            %Gross
                profit
            
            
            1,139
            
            
            116
            
            
            157
            
            
            1,412Segment
                loss before income taxes
            
            
            (309
            )
            
            (140
            )
            
            (799
            )
            
            (1,248
            )Year
                ended December 31, 2006:Revenues
                from external customers
            
            $
            2,797
            
            $
            —
            
            $
            1,320
            
            $
            4,117Percentage
                of total revenues from external customers
            
            
            68
            %
            
            —
            
            
            32
            %
            
            100
            %Gross
                profit
            
            
            1,004
            
            
            —
            
            
            350
            
            
            1,354Segment
                loss before income taxes
            
            
            (155
            )
            
            —
            
            
            (296
            )
            
            (451
            )Year
                ended December 31, 2005:Revenues
                from external customers
            
            $
            2,873
            
            
            —
            
            $
            1,314
            
            $
            4,187Percentage
                of total revenues from external customers
            
            
            69
            %
            
            —
            
            
            31
            %
            
            100
            %Gross
                profit
            
            
            834
            
            
            —
            
            
            408
            
            
            1,242Segment
                income before income taxes
            
            
            54
            
            
            —
            
            
            47
            
            
            101




**2007
      COMPARED TO 2006**




*Sales.* Sales
      increased by $1.54 million or 37% to $5.66 million in 2007 as compared to sales
      of $4.12 million in 2006. Of the increase in sales, $0.8 million was
      attributable to sales from our newly acquired SCR-Tech subsidiary whose sales
      were included in our consolidated sales during the period from November 7,
      2007
      to year end. Without SCR-Tech’s sales, our sales increased by $0.7 million or
      18%. The increase in sales is attributable to certain new projects (primarily
      a
      new Naval solutions project) in our RT Solutions segment.




*Gross
      profit.* Gross
      profit increased marginally by $58,000 or 4% to $1.41 million in 2007 as
      compared to gross profit of $1.35 million in 2006. If the gross profit from
      our
      newly acquired SCR-Tech subsidiary were excluded, our gross profit would have
      decreased by $58,000 or 4% in 2007 as compared to 2006. Gross profit margins
      also decreased from 33% in 2006 to 25% in 2007, including SCR-Tech’s results,
      and 27% excluding SCR-Tech’s 2007 results. Gross profit in our RT Solutions
      segment increased as a result of increased sales. This increase was offset
      in
      part by a moderate decrease in gross margin for the segment (from 36% in 2006
      to
      33% in 2007) due to the completion in 2006 of a number of relatively high margin
      projects in the segment. The large decrease in gross margin (from 27% in 2006
      to
      11% in 2007) in our Other segment was due to a significant decrease in the
      number of billable hours in our DSIT subsidiary’s non-RT Solution activities
      without a commensurate decrease in labor costs.




*Research
      and development expenses (“R&D”).* R&D
      expenses increased in 2007 by $91,000 or 28% as compared to 2006. In the first
      half of 2007, our DSIT subsidiary invested approximately $175,000 in developing
      costs for its OncoPro software. Such development efforts ceased in the second
      half of 2007 when DSIT decided to concentrate its development efforts in its
      AquaShield TM Diver
      Detection Sonar.




38




*Selling,
      marketing, general and administrative expenses (“SMG&A”).* Our
      SMG&A costs increased by $0.7 million or 16% to $5.4 million in 2007 as
      compared to $4.7 million in 2006. A portion of the increase (approximately
      $250,000) was attributable to SMG&A costs from SCR-Tech for the period since
      our acquisition. We also had significantly increased professional fees due
      to
      our increase in corporate activity and Sarbanes-Oxley compliance as well as
      increased administrative salary costs. These increased costs offset the decrease
      of $0.8 million in non-cash stock compensation expense in 2007 as compared
      to
      2006.




*Finance
      expense, net* .
      Finance
      expense, net, increased in 2007 as compared to 2006 from $30,000 to $1.6
      million. The increase is entirely attributable to the finance costs associated
      with our private placement of convertible debt in the first and second quarters
      of 2007. Of the $1.6 million of interest expense recorded in 2007, $1.3 million
      was non-cash interest expense related to the amortization of beneficial
      conversion features, debt origination costs and the value of warrants issued
      in
      connection with our 2007 private placement of convertible debt.




*Income
      tax benefit, net* .
      We had
      an income tax benefit of $445,000 in 2007 due to the recording of deferred
      tax
      assets of $0.9 million as well as a reduction of a $0.7 million tax provision
      recorded in a previous year with respect to one of our foreign subsidiaries.
      Such tax benefits were partially offset by a $1.1 million current tax provision
      recorded as a result of our current year’s net income.




*Gain
      on Comverge IPO* .
      In
      April 2007, Comverge completed its initial public offering. As a result of
      the
      Comverge offering, the Company recorded an increase in its investment in
      Comverge and recorded a non-cash gain of $16.2 million in “Gain on public
      offering of Comverge”.




*Gain
      on sale of shares in Comverge* .
      In
      December 2007, as part of Comverge’s follow-on offering, we sold 1,022,356 of
      its Comverge shares for approximately $28.4 million, net of transaction costs
      and recorded a pre-tax gain of approximately $23.1 million.




*Loss
      on private placement of Paketeria* .
      In
      September 2007, Paketeria completed a private placement of shares. As part
      of
      the transaction, the Company converted approximately $1.2 million of debt to
      equity in Paketeria. As a result of the Paketeria private placement, the Company
      recorded a decrease in its investment in Paketeria and recorded a non-cash
      gain
      of $37,000 in “Loss on private placement of Paketeria”.




*Share
      of losses in Paketeria* .
      In
      2007, we recognized losses of $1.2 million representing our approximate 31%
      share of Paketeria’s losses for the year and amortization expense associated
      with acquired non-compete and franchise agreements and the change in value
      of
      options.




*Net
      income* .
      We had
      net income of $32.5 million in 2007 compared with a net loss of $6.1 million
      in
      2006, due to a non-cash gain on the Comverge IPO of $16.2 million plus the
      gain
      recognized on our sale of Comverge shares of $23.1 million. Those gains were
      partially offset by our corporate expenses of approximately $3.1 million, net
      finance expenses of approximately $1.6 million, DSIT losses of $1.2 million
      and
      our share of losses in Paketeria of $1.2 million.




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      December 31, 2007, we had working capital of $13.8 million, including $19.6
      million in unrestricted cash and cash equivalents. Net cash of $18.1 million
      was
      provided during 2007. Net cash of $2.6 million was used in operating activities
      during 2007 .
      Th e
      net
      income for the year ended December 31, 2007 of $32.5 million was due primarily
      to the non-cash gain recorded on the IPO of Comverge of $16.2 million coupled
      with our subsequent gain on the sale of Comverge shares of $23.1 million. These
      income items were partially offset by approximately $1.8 million of interest
      expense (of which approximately $1.3 million was non-cash), $1.2 million of
      losses associated with DSIT, $1.2 million of losses associated with our
      investment in Paketeria and corporate expenses of $3.1 million of which $0.8
      million was related to stock option compensation.




39




We
      used
      net cash of $2.6 million in operating activities in 2007. The primary use of
      cash in operating activities during 2007 was corporate general and
      administrative expenditures of approximately $1.8 million and DSIT’s use of cash
      in operating activities of approximately $1.0 million. Net cash of $13.9 million
      provided from investing activities was primarily the result of the $28.4 million
      of proceeds from the sale of our Comverge stock, offset by cash used for
      investments in SCR-Tech ($10.1 million) and other investments ($2.6 million)
      and
      $1.5 million of restricted cash deposited in an Israeli bank as security for
      guarantees provided to DSIT. We expect the restricted cash to be released in
      early 2009. Additional cash of $6.8 million was provided by financing
      activities, primarily from the proceeds of our private placement of debenture
      and warrants, net of related discounts ($5.8 million, net) and the proceeds
      from
      option and warrant exercises ($1.2 million) offset by debt repayments ($0.4
      million).




In
      December 2007, we decided to redeem all of our outstanding 10% Convertible
      Redeemable Subordinated Debentures due March 2011. On January 29, 2008 we
      completed the
      redemption of all of our outstanding Debentures. Subsequent to the Company’s
      announcement of redemption, the holders of the debentures elected to convert
      approximately $3.0 million into approximately 780,000 shares of our common
      stock, at a conversion price of $3.80 per share. We redeemed the remaining
      $3.4
      million principal amount of debentures in accordance with the notice of
      redemption.




During
      the first three months of 2008, we also made our $1.1 million investment in
      GridSense, transferred an additional $1 million to an Israeli bank for
      additional security for guarantees for DSIT’s Naval solutions project for the
      Israeli MOD and paid $2.5 million for accrued expenses related to payables
      in
      connection with our acquisition of SCR-Tech, tax payments and other accrued
      expenses.




Acorn’s cash
      balance at the end of March 2008 was approximately $9.3 million not including
      the $2.5 million of restricted cash. 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.




At
      December 31, 2007, DSIT had approximately $244,000 in Israeli credit lines
      available to DSIT by an Israeli bank, all of which was then being used. In
      addition, the bank has allowed DSIT to utilize an additional $346,000 of credit
      which is secured by deposits made by the Acorn. DSIT’s credit lines are
      denominated in NIS and bear interest at a weighted average rate of the Israeli
      prime rate per annum
      plus 1.5% (at December 31, 2006, plus 2.2%). The Israeli prime rate fluctuates
      and as of December 31, 2007 was 5.5% (December 31, 2006, 6.0%). The Company
      has
      a floating lien and provided guarantees with respect to DSIT’s outstanding lines
      of credit. At December 31, 2007, DSIT was in technical violation of covenants
      under its line of credit with its 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. In addition, Acorn has agreed
      to be supportive of DSIT’s liquidity requirements over the next 12
      months.




At
      the
      end of March 2008, DSIT was using its entire lines-of-credit (approximately
      $265,000 at current exchange rates) plus an additional $475,000 that the bank
      is
      allowing DSIT to use with our support. With our
      temporary support, we believe that dsIT will have sufficient liquidity to
      finance its activities from cash flow from its own operations over the next
      12
      months. This is based on continued utilization of its lines of credit and
      expected improved operating results stemming from anticipated growth in sales.
      However, we can provides no assurance that these measures will be successful
      and
      we may need to provide supplementary financing, or sell all or part of that
      business.




SCR-Tech
      does not have bank financing and currently finances its operations from its
      activities. From time to time, we may provide SCR-Tech with temporary financial
      support as the need arises until it arranges for outside financing. In the
      first
      quarter of 2008, we l oaned SCR-Tech
      $350,000. Such funds have been returned to us.




40




*Contractual
      Obligations and Commitments*




The
      table
      below provides information concerning obligations under certain categories
      of
      our contractual obligations as of December 31, 2007.




Ending
                December 31,(in
                thousands)Cash
                Payments due to Contractual Obligations
            
            Total
            
            2008
            
            2009-2010
            
            2011-2012
            
            2013
                and thereafterLong-term
                debt
            
            $
            167
            
            $
            167
            
            $
            —
            
            $
            —
            
            $
            —Convertible
                debentures (1)
            
            
            6,406
            
            
            6,406
            
            
            —
            
            
            —
            
            
            —Enertech
                (2)
            
            
            4,600
            
            
            4,600
            
            
            —
            
            
            —
            
            
            —Operating
                leases
            
            
            2,485
            
            
            774
            
            
            1,088
            
            
            623
            
            
            —Potential
                severance obligations to Israeli employees (3)
            
            
            2,397
            
            
            —
            
            
            —
            
            
            —
            
            
            2,397Total
                contractual cash obligations
            
            $
            16,055
            
            $
            11,947
            
            $
            1,088
            
            $
            623
            
            $
            2,397




We
      expect
      to finance these contractual commitments in 2008 from cash currently on hand
      and
      cash generated from operations.




(1)
      In January
      2008, we completed the redemption of all of our outstanding 10% Convertible
      Redeemable Subordinated Debentures due March 2011. Of the $6.4 million of
      Debentures outstanding at December 31, 2007, holders of the debentures elected
      to convert approximately $3.0 million into approximately 780,000 shares of
      our
      common stock, at a conversion price of $3.80 per share. We
      redeemed t he
      remaining $3.4 million principal amount of debentures in accordance with the
      notice of redemption.




(2)
      In
      August 2007, we committed to invest up to $5 million over a ten-year period
      in
      EnerTech Capital Partners III L.P. (“EnerTech III”), a proposed $250 million
      venture capital fund targeting early and expansion stage energy and clean energy
      technology companies that can enhance the profits of the producers and consumers
      of energy.




The
      primary objective of EnerTech III is to provide superior venture returns. In
      so
      doing, EnerTech III may also provide investors with venture portfolio
      diversification, a hedge against rising commodity fuel prices and access to
      emerging companies that reduce the global dependence on
      hydrocarbons.




Our
      obligation under this commitment is presented as a current liability, though
      it
      is uncertain as to when actual payments may be made. To date, we have received
      and funded a capital call of $400,000 to EnerTech III.




(3)
      Under
      Israeli law and labor agreements, DSIT is required to make severance payments
      to
      dismissed employees and to employees leaving employment under certain other
      circumstances. The obligation for severance pay benefits, as determined by
      the
      Israeli Severance Pay Law, is based upon length of service and last salary.
      These obligations are substantially covered by regular deposits with recognized
      severance pay and pension funds and by the purchase of insurance policies.
      As of
      December 31, 2007, we accrued a total of $2.4 million for potential severance
      obligations of which approximately $1.6 million was funded with cash to
      insurance companies.




*Certain
      Information Concerning Off-Balance Sheet Arrangements.*




Our
      DSIT
      subsidiary has provided various performance, advance and tender guarantees
      as
      required in the normal course of its operations. As at December 31, 2007, such
      guarantees totaled approximately $1.6 million and were due to expire through
      2010. As security for a portion of these guarantees, Acorn has deposited with
      an
      Israeli bank approximately $1.5 million which is shown as restricted cash on
      our
      Consolidated Balance Sheets. The Company expects the restricted cash to be
      released in early 2009.




41




*Impact
      of Inflation and Currency Fluctuations*




A
      majority of DSIT’s sales are denominated in dollars or are denominated in NIS
      linked to the dollar. Such sales transactions are negotiated in dollars;
      however, for the convenience of the customer they are settled in NIS. These
      transaction amounts are linked to the dollar between the date the transactions
      are entered into until the date they are effected and billed. From the time
      these transactions are effected and billed through the date of settlement,
      amounts are primarily unlinked. The majority of our expenses in Israel are
      in
      NIS, while a portion is in dollars or dollar-linked NIS.




The
      dollar cost of our operations in Israel may be adversely affected in the future
      by a revaluation of the NIS in relation to the dollar. In 2007 the appreciation
      of the NIS against the dollar was 9.0% and in 2006 the appreciation of the
      NIS
      against the dollar was 8.2%. Inflation in Israel was 3.9% in 2007 and -(0.1)%
      during 2006. During the first two months of 2008, the NIS appreciated an
      additional 5.5% against the dollar and inflation during this period was -0.2%.





As
      of
      December 31, 2007, virtually all of DSIT’s monetary assets and liabilities that
      were not denominated in dollars or dollar-linked NIS were denominated in NIS.
      In
      the event that in the future we have material net monetary assets or liabilities
      that are not denominated in dollar-linked NIS, such net assets or liabilities
      would be subject to the risk of currency fluctuations.




42


**SUMMARY
      QUARTERLY FINANCIAL DATA (Unaudited)**




The
      following table sets forth certain of our unaudited quarterly consolidated
      financial information for the years ended December 31, 2006 and 2007. This
      information should be read in conjunction with our Consolidated Financial
      Statements and the notes thereto.





2006
            
            2007First
            
            Second
            
            Third
            
            Fourth
            
            First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarterrestated
            
            restated
            
            restated(in
                thousands, except per share amounts)Sales
            
            $
            973
            
            $
            990
            
            $
            923
            
            $
            1,231
            
            $
            1,039
            
            $
            681
            
            $
            1,595
            
            $
            2,345Cost
                of sales
            
            
            745
            
            
            645
            
            
            597
            
            
            776
            
            
            754
            
            
            625
            
            
            1,122
            
            
            1,747Gross
                profit
            
            
            228
            
            
            345
            
            
            326
            
            
            455
            
            
            285
            
            
            56
            
            
            473
            
            
            598Research
                and development expenses
            
            
            26
            
            
            71
            
            
            137
            
            
            90
            
            
            130
            
            
            103
            
            
            77
            
            
            105Selling,
                marketing, general and administrative expenses
            
            
            922
            
            
            1,044
            
            
            1,570
            
            
            1,122
            
            
            810
            
            
            1,049
            
            
            1,153
            
            
            2,378Operating
                loss
            
            
            (720
            )
            
            (770
            )
            
            (1,381
            )
            
            (757
            )
            
            (655
            )
            
            (1,096
            )
            
            (757
            )
            
            (1,885
            )Finance
                income (expense), net
            
            
            14
            
            
            (20
            )
            
            (17
            )
            
            (7
            )
            
            (26
            )
            
            (345
            )
            
            (358
            )
            
            (856
            )Gain
                on public offering of Comverge
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            16,169
            
            
            —
            
            
            —Gain
                on sale of Comverge shares
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            23,124Loss
                on Paketeria private placement
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (37
            )
            
            —Other
                income, net
            
            
            330
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                (loss) before taxes on income
            
            
            (376
            )
            
            (790
            )
            
            (1,398
            )
            
            (764
            )
            
            (681
            )
            
            14,728
            
            
            (1,152
            )
            
            20,383Income
                tax benefit (expense)
            
            
            (2
            )
            
            (4
            )
            
            (2
            )
            
            (175
            )
            
            (2
            )
            
            (3
            )
            
            (4
            )
            
            454Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (378
            )
            
            (794
            )
            
            (1,400
            )
            
            (939
            )
            
            (683
            )
            
            14,725
            
            
            (1,156
            )
            
            20,837Share
                of loss in Paketeria
            
            
            —
            
            
            —
            
            
            (251
            )
            
            (173
            )
            
            (187
            )
            
            (201
            )
            
            (440
            )
            
            (378
            )Share
                of loss in Comverge
            
            
            (210
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss) from continuing operations
            
            
            (588
            )
            
            (794
            )
            
            (1,651
            )
            
            (1,112
            )
            
            (870
            )
            
            14,524
            
            
            (1,596
            )
            
            20,459Gain
                (loss) on sale of discontinued operations, net of tax
            
            
            (2,298
            )
            
            —
            
            
            —
            
            
            229
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income from discontinued operations, net of tax
            
            
            78
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            (2,808
            )
            $
            (794
            )
            $
            (1,651
            )
            $
            (883
            )
            $
            (870
            )
            $
            14,524
            
            $
            (1,596
            )
            $
            20,459Basic
                net income (loss) per share:Net
                income (loss) per share from continuing operations
            
            $
            (0.07
            )
            $
            (0.10
            )
            $
            (0.18
            )
            $
            (0.11
            )
            $
            (0.09
            )
            $
            1.52
            
            $
            (0.16
            )
            $
            2.00Discontinued
                operations
            
            
            (0.27
            )
            
            —
            
            
            —
            
            
            0.02
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss) per share
            
            $
            (0.34
            )
            $
            (0.10
            )
            $
            (0.18
            )
            $
            (0.09
            )
            $
            (0.09
            )
            $
            1.52
            
            $
            (0.16
            )
            $
            2.00Diluted
                net income (loss) per share:Net
                income (loss) per share from continuing operations
            
            $
            (0.07
            )
            $
            (0.10
            )
            $
            (0.18
            )
            $
            (0.11
            )
            $
            (0.09
            )
            $
            1.21
            
            $
            (0.16
            )
            $
            1.68Discontinued
                operations
            
            
            (0.27
            )
            
            —
            
            
            —
            
            
            0.02
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss) per share
            
            $
            (0.34
            )
            $
            (0.10
            )
            $
            (0.18
            )
            $
            (0.09
            )
            $
            (0.09
            )
            $
            1.21
            
            $
            (0.16
            )
            $
            1.68Weighted
                average number of shares outstanding - basic
            
            
            8,160
            
            
            8,161
            
            
            8,993
            
            
            9,444
            
            
            9,507
            
            
            9,583
            
            
            10,063
            
            
            10,217Weighted
                average number of shares outstanding - diluted
            
            
            8,160
            
            
            8,161
            
            
            8,993
            
            
            9,444
            
            
            9,507
            
            
            12,290
            
            
            10,063
            
            
            12,789




43




Results
      have been restated for those previously reported for the first, second and
      third
      quarters of 2007 following:




1)
            the
                determination that our conversion of debt into equity following the
                third
                quarter private placement of Paketeria was effectively one single
                connected transaction and not separate transactions; and




2)
            the
                determination that the Beneficial Conversion Feature (“BCF”) in our
                Convertible Debenture which had initially been one-half expensed
                at each
                of the closings in March and April of 2007 should have been expensed
                over
                the four-year life of the Debenture along with the remaining balance
                of
                the BCF which had initially been expensed over a one-year
                period.




The
      effect of the restatement on the our net loss and basic and diluted loss per
      share for the three, six and nine month periods ended March 31, June 30 and
      September 30, 2007, are shown below:





Three
                months ended
            
            Six
                months
              ended
            
            Three
                months ended
            
            Nine
                months ended
            
            Three
                months endedMarch
                31, 2007
            
            June
                30, 2007
            
            September
                30, 2007Net
                income (loss) as reported
            
            $
            (1,697
            )
            $
            11,914
            
            $
            13,611
            
            $
            10,530
            
            $
            (1,384
            )Effect
                of Paketeria restatement
            
            
            —
            
            
            —
            
            
            —
            
            
            (570
            )
            
            (570
            )Effect
                of BCF restatement
            
            
            827
            
            
            1,740
            
            
            913
            
            
            2,098
            
            
            358Net
                income (loss) - as restated
            
            $
            (870
            )
            $
            13,654
            
            $
            14,524
            
            $
            12,058
            
            $
            (1,596
            )Basic
                net income (loss) per share - as reported
            
            $
            (0.18
            )
            $
            1.25
            
            $
            1.42
            
            $
            1.08
            
            $
            (0.14
            )Effect
                of restatements
            
            
            0.09
            
            
            0.18
            
            
            0.10
            
            
            0.16
            
            
            (0.02
            )Basic
                net income (loss) per share - as restated
            
            $
            (0.09
            )
            $
            1.43
            
            $
            1.52
            
            $
            1.24
            
            $
            (0.16
            )Diluted
                net income (loss) per share - as reported
            
            $
            (0.18
            )
            $
            1.05
            
            $
            1.11
            
            $
            1.01
            
            $
            (0.14
            )Effect
                of restatements
            
            
            0.09
            
            
            0.14
            
            
            0.07
            
            
            0.14
            
            
            (0.02
            )Diluted
                net income (loss) per share - as restated
            
            $
            (0.09
            )
            $
            1.19
            
            $
            1.18
            
            $
            1.15
            
            $
            (0.16
            )




44




**ITEM
              7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




*General*




We
      are
      required to make certain disclosures regarding our financial instruments,
      including derivatives, if any.




A
      financial instrument is defined as cash, evidence of an ownership interest
      in an
      entity, or a contract that imposes on one entity a contractual obligation either
      to deliver or receive cash or another financial instrument to or from a second
      entity. Examples of financial instruments include cash and cash equivalents,
      trade accounts receivable, loans, investments, trade accounts payable, accrued
      expenses, options and forward contracts. The disclosures below include, among
      other matters, the nature and terms of derivative transactions, information
      about significant concentrations of credit risk, and the fair value of financial
      assets and liabilities.




*Foreign
      Currency Risk*




The
      translation of the balance sheets of our Israeli operations from NIS into U.S.
      dollars is sensitive to changes in foreign currency exchange rates. These
      translation gains or losses are recorded either as cumulative translation
      adjustments (“CTA) within stockholders’ equity, or foreign exchange gains
      or
      losses in the statement of operations. In 2007 the NIS strengthened in relation
      to the U.S. dollar by 9.0%. To test the
      sensitivity of these operations to fluctuations in the exchange rate, the
      hypothetical change in CTA and foreign exchange gains and losses is calculated
      by multiplying the net assets of these non-U.S. operations by a 10% change
      in
      the currency exchange rates.




As
      of
      December 31, 2007, a 10% weakening of the U.S. dollar against the NIS would
      have
      decreased stockholders’ equity by approximately $55,000 (arising from a negative
      CTA adjustment of approximately $51,000 and net exchange losses of approximately
      $4,000). These hypothetical changes are based on increasing the December 31,
      2007 exchange rates by 10%.





In
      addition, $3.7 million, $0.2 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 foreign currency exchange rate exposures although we
      are
      currently examining ways of limiting our foreign currency
      exposures.




*Fair
      Value of Financial Instruments*




Fair
      values of financial instruments included in current assets and current
      liabilities are estimated to approximate their book values due to the short
      maturity of such investments. Fair value for long-term debt and long-term
      deposits are estimated based on the current rates offered to us for debt and
      deposits with similar terms and remaining maturities. The fair value of our
      long-term debt and long-term deposits are not materially different from their
      carrying amounts.




*Concentrations
      of Credit Ri* sk




Financial
      instruments, which potentially subject us to concentrations of credit risk,
      consist principally of cash and cash equivalents, short and long-term bank
      deposits, and trade receivables. The counterparty to a majority of our cash
      equivalent deposits is a major financial institution of high credit standing.
      We
      do not believe there is significant risk of non-performance by this
      counterparty. Approximately 54% of the trade accounts receivable at December
      31,
      2007 was due from a customer that pays its trade receivables over usual credit
      periods. Credit risk with respect to the balance of trade receivables is
      generally diversified due to the number of entities comprising our customer
      base.




45




**ITEM
              8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA**




Furnished
      at the end of this report commencing on page F-1.




**ITEM
              9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**




None.




**ITEM
              9A.**
            **CONTROLS
                AND PROCEDURES**




***Evaluation
      of Disclosure Controls and Procedures***





Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, has evaluated the effectiveness of the design and operation
      of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
      the Securities Exchange Act of 1934, as amended (the “Act”) as of the end of the
      period covered by this annual report on Form 10-K. Based on this evaluation,
      our
      Chief Executive Officer and Chief Financial Officer concluded that these
      disclosure controls and procedures were effective as of such date, at a
      reasonable level of assurance, in ensuring that the information required to
      be
      disclosed by our company in the reports we file or submit under the Act is
      (i)
      accumulated and communicated to our management (including the 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.





***Internal
      Control Over Financial Reporting***




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).
      Under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer, we conducted an
      evaluation of the effectiveness of our internal control over financial reporting
      based on the criteria in Internal Control - Integrated Framework issued by
      the
      Committee of Sponsoring Organizations of the Treadway Commission. Based on
      our
      evaluation, management has concluded that our internal control over financial
      reporting was effective as of December 31, 2007. Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risks that controls may
      become inadequate because of changes in conditions, or that the degree of
      compliance with the policies or procedures may deteriorate. This annual
      report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting pursuant
      to
      temporary rules of the Securities and Exchange Commission.





***Changes
      in Internal Control Over Financial Reporting***





There
      was
      no change in our internal control over financial reporting (as defined in Rule
      13a-15(f) under the Securities Exchange Act of 1934, as amended) during our
      last
      fiscal quarter that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.




**ITEM
              9B.**
            **OTHER
                INFORMATION**




None.




46


**PART
      III**




**ITEM
              10.**
            **DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE
                GOVERNANCE**




**Directors
      and Executive Officers**




Set
      forth
      below is certain information concerning the directors and certain officers
      of
      the Company:




Name
            
            Age
            
            PositionGeorge
                Morgenstern
            
            74
            
            Founder,
                Chairman of the Board; Chairman of the Board of our DSIT Solutions
                Ltd.
                subsidiary (“DSIT”)John
                A. Moore
            
            42
            
            Director,
                President and Chief Executive Officer; and director of our Paketeria
                AG
                equity affiliate (“Paketeria”)Samuel
                M. Zentman
            
            61
            
            Director
                and member of our Audit CommitteeRichard
                J. Giacco
            
            55
            
            Director
                and member of our Audit CommitteeRichard
                Rimer
            
            42
            
            DirectorScott
                Ungerer
            
            49
            
            DirectorJoe
                Musanti
            
            50
            
            Director
                and Chairman of our Audit CommitteeWilliam
                J. McMahon
            
            52
            
            Chief
                Executive Officer and President of CoaLogixBenny
                Sela
            
            60
            
            Chief
                Executive Officer and President of DSITMichael
                Barth
            
            47
            
            Chief
                Financial Officer of the Company and
                DSIT.





**George
      Morgenstern** ,
      founder
      of the Company, and one of our directors since 1986, has been Chairman of the
      Board since June 1993. Mr. Morgenstern served as our President and Chief
      Executive Officer from our incorporation in 1986 until March 2006.
      Mr. Morgenstern also serves as Chairman of the Board of DSIT.
      Mr. Morgenstern served as a member of the Board of Directors of Comverge
      from October 1997 to March 2006 and as Chairman until April 2003.




**John
      A. Moore** has
      been
      a director and President and Chief Executive Officer of our Company since March
      2006. Mr. Moore also served as a director of Comverge from March 2006 through
      January 2008. Mr. Moore is the President and founder of Edson Moore Healthcare
      Ventures, which he founded to acquire $150 million of drug delivery assets
      from
      Elan Pharmaceuticals in 2002. Mr. Moore was Chairman and EVP of ImaRx
      Therapeutics, a drug and medical therapy development company, from February
      2004
      to February 2006 and Chairman of Elite Pharmaceuticals from February 2003 to
      October 2004. He is currently a member of the Board of Directors of Voltaix,
      Inc., a leading provider of specialty gases to the solar and semiconductor
      industries. He was CEO of Optimer, Inc. (a research based polymer development
      company) from inception in 1994 until 2002 and Chairman from inception until
      its
      sale in February 2008 to Sterling Capital.




**Samuel
      M. Zentman** has been
      one of our directors since November 2004. Since 1980 Dr. Zentman has been
      the president and chief executive officer of a privately-held textile firm,
      where he also served as vice president of finance and administration from 1978
      to 1980. From 1973 to 1978, Dr. Zentman served in various capacities at
      American Motors Corporation.




**Richard
      J. Giacco** was
      elected to the Board in September 2006. Mr. Giacco has been President of Empower
      Materials, Inc., a manufacturer of carbon dioxide based thermoplastics, since
      January 1999. Mr. Giacco is also a Managing Member of Ajedium Film Group,
      LLC, a manufacturer of thermoplastic films. Mr. Giacco served as Associate
      General Counsel of Safeguard Scientifics, Inc. from 1984 to 1990.
      Mr. Giacco presently serves as the Chair of the Audit Committee of the
      Board of Directors of Ministry of Caring, Inc., and the Chair of the Finance
      Committee of the Board of Directors of Sacred Heart Village, Inc.




47




**Richard
      Rimer** was
      elected to the Board in September 2006. From 2001 to 2006, Mr. Rimer was
      a
      Partner at Index Ventures, a private investment company. He formerly served
      on
      the boards of Direct Medica, a provider of marketing services to pharmaceutical
      companies, and Addex Pharmaceuticals, a pharmaceutical research and development
      company. Prior to joining Index Ventures, Mr. Rimer was the co-founder of
      MediService, the leading direct service pharmacy in Switzerland and had served
      as a consultant with McKinsey & Co.




**Scott
      Ungerer** was
      elected to the Board in September 2007. Mr. Ungerer has been a power and energy
      sector investor for over 13 years and is the Managing Member of EnerTech
      Capital, a pioneer in energy technology venture investing which he founded
      in
      1996. Mr. Ungerer's primary investing activities focus on opportunities in
      software, advanced materials, and engineered solutions. Specific areas of
      interest include opportunities in electric power generation, transmission and
      distribution, power line carrier, natural gas distribution and advanced engine
      technologies. He currently serves as a director of CURRENT Group, Intellon,
      and
      The NanoSteel Company.




**Joe
      Musanti** was
      elected to the Board in September 2007. Mr. Musanti  is
      President of Main Tape Inc., a leading manufacturer of surface protection film
      and paper products, based in Cranberry, New Jersey. Prior to becoming President,
      Mr. Musanti served as Vice President Finance of Main Tape. Before that, Mr.
      Musanti was Vice President Finance of Rheometric Scientific, Inc., a
      manufacturer of thermal analytical instrumentation products where he held
      significant domestic and foreign, operational, managerial, financial and
      accounting positions.




**William
      J. McMahon** serves
      as Chief Executive Officer and President of CoaLogix since its creation in
      November 2007. Mr. McMahon also serves as president of SCR-Tech, LLC, a position
      he has held since March 2005. Prior to that, Mr. McMahon served as Group
      Vice President of the Ultrapure Water division of Ionics, Inc. from 2000 to
      2004. From 1997 to 2000, he held several executive level positions including
      Chairman, President and Chief Executive Officer of Pantellos; President and
      Chief Executive Officer of Stone & Webster Sonat Energy Resources; and
      President of Stone & Webster Energy Services Inc. From 1978 to 1997,
      Mr. McMahon held positions at DB Riley, Inc. and at The Babcock &
Wilcox Company. Mr. McMahon earned a B.S. degree in Nuclear Engineering
      from Georgia Institute of Technology and an MBA from Xavier University.




**Benny
      Sela** serves
      as the CEO of DSIT. Previously, he held the position of Executive Vice President
      and Head of the company's Real Time Division. Prior to this, Mr. Sela was
      the General Manager of DSI Technologies. Mr. Sela served in the Israeli Air
      Force reaching the position of Lt. Colonel (Ret.). During his service in the
      Israeli Air Force, Mr. Sela was head of the Electronic Warfare branch, working
      on both the F-16 and Lavi projects. He holds a B.Sc. in Electrical Engineering,
      a Masters Degree in Operations Research from Stanford University, and an
      MBA.




**Michael
      Barth** has been
      our Chief Financial Officer and the Chief Financial Officer of DSIT since
      December 2005. For the six years prior, he served as Deputy Chief Financial
      Officer and Controller of DSIT. Mr. Barth is a Certified Public Accountant
      in both the U.S. and Israel and has over 20 years of experience in public and
      private accounting.




**Audit
      Committee; Audit Committee Financial Expert**




The
      three
      members of the Audit Committee of our Board of Directors (the “Audit Committee”)
      are Joe Musanti, Richard J. Giacco and Samuel M. Zentman. The Board of Directors
      has determined that each member of the Audit Committee meets the independence
      criteria prescribed by applicable law and the rules of the SEC for audit
      committee membership and meets the criteria for audit committee membership
      required by NASDAQ. Further, each Audit Committee member meets NASDAQ’s
      financial knowledge requirements. Also, our Board has determined that Joe
      Musanti qualifies as an “audit committee financial expert,” as defined in the
      rules and regulations of the SEC.




48




**Compliance
      with Section 16(a) of the Securities Exchange Act of 1934**




Section
      16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our
      executive officers and directors, and persons who own more than 10% of a
      registered class of our equity securities to file reports of ownership and
      changes in ownership with the SEC. These persons are also required by SEC
      regulation to furnish us with copies of all Section 16(a) forms they file.
      Based
      solely on our review of such forms or written representations from certain
      reporting persons, we believe that during 2007 our executive officers and
      directors complied with the filing requirements of Section 16(a),  with
      the
      exception of the late filing of the following reports: Richard J. Giacco filed
      a
      late Form 4 reporting the grant of 10,000 stock options on December 5, 2007
      (Form 4 filed April 11, 2008); George Morgenstern filed a late Form 4 reporting
      the grant of 10,000 stock options on December 5, 2007 (Form 4 filed December
      19,
      2007); Richard S. Rimer filed a late Form 4 reporting the vesting of 25,000
      performance based stock options on September 20, 2007 (Form 4 filed November
      13,
      2007) and a late Form 4 reporting the grant of 10,000 stock options on December
      5, 2007 (Form 4 filed December 19, 2007); and Samuel M. Zentman filed a late
      Form 4 reporting the grant of 10,000 stock options on December 5, 2007 (Form
      4
      filed December 19, 2007).




We
      have
      implemented measures to assure timely filing of Section 16(a) reports by our
      executive officers and directors in the future.




**Code
      of Ethics**




We
      have
      adopted a code of ethics that applies to our principal executive officer,
      principal financial officer, and principal accounting officer or controller,
      and/or persons performing similar functions. Our code of ethics may be accessed
      on the Internet at http://www.acornfactor.com/pdfs/code.pdf.




**ITEM
              11.**
            **EXECUTIVE
                COMPENSATION**




**Summary
      Compensation Table**





**Name
                and Principal Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Option
                Awards ($)**
            
            **All
                Other**
              **Compensation
                ($)**
            
            **Total
                ($)**John
                A. Moore
              President
                and Chief Executive Officer
            
            
            2007
            
            
            275,000
            
            
            200,000
            
            
            177,545
            (1)
            
            8,898
            (2)
            
            661,4432006
            
            
            131,750
            
            
            —
            
            
            675,744
            (3)
            
            11,669
            (4)
            
            819,163William
                J. McMahon
              Chief
                Executive Officer of CoaLogix and SCR-Tech and President of CoaLogix
                and
                SCR-Tech (5)
            
            
            2007
            
            
            215,000
            
            
            129,500
                (6
            )
            
            —
            
            
            23,263
            (7)
            
            367,763Benny
                Sela
              Chief
                Executive Officer of DSIT and President of DSIT (8)
            
            
            2007
            
            
            137,287
            
            
            3,800
                (9
            )
            
            30,458
            (10)
            
            39,331
            (11)
            
            210,876Jacob
                Neuwirth
              Former
                Chief Executive Officer of DSIT and President of DSIT (12)
            
            
            2007
            
            
            127,553
            
            
            —
            
            
            —
            
            
            29,545
            (11)
            
            157,0982006
            
            
            201,038
            
            
            10,733
                (13
            )
            
            —
            
            
            55,972
            (11)
            
            267,743Michael
                Barth
              Chief
                Financial Officer and Chief Financial Officer of DSIT
            
            
            2007
            
            
            99,996
            
            
            20,000
            
            
            62,473
            (14)
            
            21,581
            (11)
            
            204,0502006
            
            
            95,250
            
            
            —
            
            
            57,912
            (15)
            
            18,463
            (11)
            
            171,625





(1)
      Represents FAS 123R expense with respect to 400,000 stock options granted as
      of
      March 27, 2006 with an exercise price of $2.60 per share and 60,000 options
      granted as of February 27, 2007 with an exercise price of $4.53 per
      share.




49




(2)
      Consists of health insurance premiums.




(3)
      Represents FAS 123R expense with respect to 400,000 stock options granted as
      of
      March 27, 2006 with an exercise price of $2.60 per share.




(4)
      Consists of (i) $4,669 in health insurance premiums and (ii) $7,000 in
      director’s fees.




(5)
      Appointed Chief Executive Officer and President of CoaLogix as of November
      7,
      2007 upon the acquisition of SCR-Tech by Acorn Energy. The compensation amounts
      shown in the table are for the full year. The portions of such compensation
      amounts that were earned subsequent to the acquisition of SCR-Tech by Acorn
      on
      November 7, 2007 were: FAS 123R expense with respect to 400,000 stock options
      granted as of March 27, 2006 with an exercise price of $2.60 per
      share.




(6)
      Bonus
      paid in 2007 for performance in 2006.




(7)
      Consists of (i) $15,163 in health insurance premiums and (ii) $8,100 in 401k
      contributions.




(8)
      Appointed Chief Executive Officer of DSIT and President of DSIT effective July
      1, 2007.




(9)
      Bonus
      paid in 2007 for performance in 2006 prior to his appointment as CEO and
      President of DSIT.




(10)
      Represents FAS 123R expense with respect to 25,000 stock options granted as
      of
      February 27, 2007 with an exercise price of $3.50 per share and 20,000 options
      granted as of December 31, 2004 with an exercise price of $0.91 per
      share.




(11)
      Consists of contributions to severance and pension funds and automobile fringe
      benefits. Contributions to severance and pension funds are made on substantially
      the same basis as those made on behalf of other Israeli executives.




(12)
      Resigned as Chief Executive Officer of DSIT and President of DSIT effective
      June
      30, 2007.




(13)
      Bonus paid in 2006 for performance in 2005.




(14)
      Represents FAS 123R expense with respect to 50,000 stock options granted as
      of
      July 21, 2006 with an exercise price of $3.00, 6,000 stock options granted
      as of
      February 27, 2007 with an exercise price of $4.53 per share, 30,000 stock
      options granted as of September 20, 2007 with an exercise price of $3.90 per
      share and 5,000 options granted as of December 31, 2004 with an exercise price
      of $0.91 per share.




(15)
      Represents FAS 123R expense with respect to 50,000 stock options granted as
      of
      July 21, 2006 with an exercise price of $3.00 per share and 5,000 options
      granted as of December 31, 2004 with an exercise price of $0.91 per
      share




**Employment
      Arrangements**




***John
      A. Moore*** became
      our President and Chief Executive Officer in March 2006. Effective October
      2006,
      the Board approved annual compensation for Mr. Moore of $275,000 with standard
      benefits. The Board also approved in principle to provide Mr. Moore with a
      year-end performance bonus to commence in 2007 with performance targets to
      be
      established by the Board. To date, no performance targets have been set by
      the
      Board. In December 2007, the Board awarded a $200,000 bonus to Mr. Moore with
      respect to 2007.




In
      February 2007, the Board approved a grant to Mr. Moore of an option to purchase
      60,000 shares of our Common Stock at an exercise price of $4.53 per share,
      of
      which 49,000 vested immediately and 11,000 to vest on March 30, 2009 subject
      to
      certain accelerated vesting provisions. In 2007, the accelerated vesting
      provisions were met and all options granted in 2007 were vested by December
      31,
      2007.




50




***William
      J. McMahon*** has
      served as Chief Executive Officer and President of CoaLogix since
      the Company’s acquisition of SCR-Tech and its related companies on November 7,
      2007. Mr. McMahon employment terms are based on employment agreement signed
      effective January 1, 2007 between Mr. McMahon and SCR-Tech’s former parent
      company. The employment agreement was subsequently assumed and modified on
      November 7, 2007 in conjunction with the Company’s acquisition of SCR-Tech. Mr.
      McMahon’s employment agreement calls for base salary of $215,000 per year. Mr.
      McMahon is eligible to receive an annual bonus with a target payment equal
      to
      50% of his base salary based upon criteria developed by the Board of Directors.
      To date, no performance targets have been set by the Board. Based on previously
      established bonus targets for 2007, Mr. McMahon earned a bonus of $96,750 which
      is to be paid in 2008.




***Benny
      Sela*** has
      served as President and Chief Executive Officer of DSIT beginning July 1, 2007.
      In December 2007, the Board of DSIT approved new employment terms for Mr. Sela
      retroactive to July 1, 2007. Mr. Sela’s current employment agreement provides
      for a base salary which is denominated in Israeli Consumer Price Index linked
      NIS, currently equivalent to approximately $156,000 per annum. In addition
      to
      his base salary, Mr. Sela is also entitled to receive a bonus payment equal
      to
      5% of DSIT’s net profit before tax. Mr. Sela received a bonus in 2007 of $3,800
      related to his 2006 performance prior to his appointment as President and Chief
      Executive Officer of DSIT.




***Jacob
      Neuwirth*** served
      as President and Chief Executive Officer of DSIT until his resignation effective
      June 30, 2007 pursuant to an employment agreement dated as of December 16,
      2001.
      Mr. Neuwirth’s employment agreement provided for a base salary which was
      denominated in Israeli Consumer Price Index linked NIS, equivalent to
      approximately $184,000 per annum. Under his employment agreement, Mr. Neuwirth
      was entitled to a loan of up to $100,000 from DSIT. Such loan principal
      ($99,000) and all accrued interest were repaid in November 2007 as part of
      a
      Share Purchase Agreement whereby Acorn acquired Mr. Neuwirth’s shares in
      DSIT.




***Michael
      Barth*** has
      served as Chief Financial Officer of the Company and Chief Financial Officer
      of
      DSIT beginning December 1, 2005. In July 2006, the Board approved an annual
      salary of $100,000 for Mr. Barth. In 2007, the Board also approved the payment
      of a bonus of $20,000 to Mr. Barth.




In
      February 2007, the Board approved a grant to Mr. Barth of an option to purchase
      6,000 shares of our Common Stock at an exercise price of $4.53 per share,
      vesting one-third immediately and one-third on each of December 31, 2007 and
      2008, and expiring on July 31, 2011. Subsequently, in September 2007, the Board
      also approved a grant to Mr. Barth of an option to purchase 30,000 shares of
      our
      Common Stock at an exercise price of $3.90 per share, vesting one-third on
      each
      of September 19, 2007, 2008 and 2009, and expiring on September 19,
      2014.




**Outstanding
      Equity Awards At 2007 Fiscal Year End**




**Name**
            
            **Number
                of Securities Underlying Unexercised**
              **Options
                (#)**
              **Exercisable**
            
            **Number
                of Securities Underlying Unexercised**
              **Options
                (#)**
              **Unexercisable**
            
            **Option
                Exercise Price ($)**
            
            **Option
                Expiration Date**John
                A. Moore
            
            
            400,000
            
            
            —
            
            
            2.60
            
            
            March
                31, 201160,000
            
            
            —
            
            
            4.53
            
            
            March
                31, 2011Benny
                Sela
            
            
            20,000
            
            
            —
            
            
            1.80
            
            
            March
                31, 200920,000
            
            
            —
            
            
            0.91
            
            
            December
                31, 2009Michael
                Barth
            
            
            5,000
            
            
            —
            
            
            0.91
            
            
            December
                31, 200933,333
            
            
            16,667
            (1)
            
            3.00
            
            
            July
                31, 20114,000
            
            
            2,000
            (1)
            
            4.53
            
            
            July
                31, 2009—
            
            
            30,000
            (2)
            
            3.90
            
            
            September
                19, 2014




(1)
            These
                options vest on December 31, 2008.




51




(2)
            One-third
                of these options vest on each of September 19, 2008, 2009 and 2010.




**Estimated
      Payments and Benefits Upon Termination or Change in Control**




The
      amount of compensation and benefits payable to each named executive officer
      in
      various termination situations has been estimated in the tables below.




*William
      J. McMahon*




Under
      the
      terms of the employment agreement with Mr. McMahon, we are obligated to make
      certain severance payments to him in the event of termination or termination
      in
      connection with a change of control (as defined). The Modification Agreement
      signed with Mr. McMahon upon acquisition of SCR-Tech by the Company provides
      for
      the following benefits in the event he is involuntarily terminated, other than
      for cause, at any time prior to an announcement of a change of control or on
      or
      after the date that is 24 months following a change of control or the
      announcement of a change of control, whichever comes later, then,
      Mr. McMahon will be entitled to receive a cash payment equal to 200% of his
      then base salary, subsidized COBRA premiums for himself and his eligible
      dependents for up to a maximum of 12 months, in the case of termination not
      in connection with a change in control, and 100% company-paid health,
      dental and life insurance coverage at the same level of coverage as was provided
      to him and his dependents immediately prior to the termination for up to a
      maximum of two years from the date of his termination, in the case of
      termination in connection with change in control.




The
      following table describes the potential payments and benefits upon termination
      of employment for Mr. McMahon, the President and Chief Executive Officer of
      our
      CoaLogix subsidiary, as if his employment terminated as of December 31,
      2007, the last day of our last fiscal year.




Circumstances
                of TerminationPayments
                and benefits
            
            Voluntary
              resignation
            
            Termination
                not for cause
            
            Change
                of
              control
            
            Death
                or
              disabilityCompensation:Base
                salary
            
            
            —
            (1)
            $
            430,000
            (2)
            $
            430,000
            (4)
            
            —Benefits
                and perquisites:Perquisites
                and other personal benefits
            
            
            —
            
            
            15,163
            (3)
            
            294,151
            (5)
            
            —Total
            
            $
            —
            
            $
            445,163
            
            $
            724,151
            
            
            —




(1)
            Assumes
                that there is no earned but unpaid base salary at the time of termination.




52




(2)
            The
                $430,000 represents 200% of Mr. McMahon’s base
                salary




(3)
            The
                $15,163 represents 12 months of subsidized health insurance payments




(4)
            The
                $430,000 represents 200% of Mr. McMahon’s base salary assuming the
                consideration for change of control to the Company or its stockholders
                is
                more than $10 million.




(5)
            The
                $294,151 represents (i) $35,151 of 24 months of subsidized health
                insurance payments and (ii) $259,000 which is in respect of 200%
                of Mr.
                McMahon’s target bonus, both assuming the consideration for change of
                control to the Company or its stockholders is more than
                $10 million.




*Benny
      Sela*




Under
      the
      terms of the employment agreement with Mr. Sela, we are obligated to make
      certain payments to fund in part our severance obligations to him. We are
      required to pay Mr. Sela an amount equal to his last month’s salary multiplied
      by the number of years (including partial years) that Mr. Sela has worked for
      us. This severance obligation, which is customary for executives of Israeli
      companies, will be reduced by the amount contributed by us to certain Israeli
      pension and severance funds pursuant to Mr. Sela’s employment agreement. In
      addition, the agreement with Mr. Sela provided for an additional payment equal
      to 1.5 times his last month’s total compensation, payable at the end of his
      employment with us. As of December 31, 2007, the unfunded portion of these
      payments was $115,435. During 2007, in order to provide additional support
      to
      DSIT, improve its financial results and help solidify its banking relationships,
      Mr. Sela waived $78,000 of amount due to him under his employment agreement.




The
      following table describes the potential payments and benefits upon termination
      of employment for Mr. Sela, the President and Chief Executive Officer of
      our DSIT subsidiary, as if his employment terminated as of December 31,
      2007, the last day of our last fiscal year.




Circumstances
                  of TerminationPayments
                  and benefits
              
              Voluntary
                resignation
              
              Termination
                  not
                for
                  cause
              
              Change
                  of
                control
              
              Death
                  or
                disabilityCompensation:Base
                  salary
              
              $
              78,000
              (1)
              $
              117,000
              (2)
              
              —
              
              $
              117,000
              (2)Benefits
                  and perquisites:Perquisites
                  and other personal benefits
              
              $
              348,755
              (3)
              $
              357,140
              (4)
              
              —
              
              $
              357,140
              (4)Total
              
              $
              426,755
              
              $
              474,140
              
              
              —
              
              $
              474,140




(1)
            Assumes
                that there is no earned but unpaid base salary at the time of termination.
                The $78,000 represents a parachute payment of six months salary due
                to Mr.
                Sela.




(2)
            Assumes
                that there is no earned but unpaid base salary at the time of termination.
                The $117,000 represents a parachute payment of nine months salary
                due to
                Mr. Sela.




(3)
            Includes
                $369,072 of severance pay based in accordance with Israeli labor
                law
                calculated based on his last month’s salary multiplied by the number of
                years (including partial years) that Mr. Sela worked for us multiplied
                by
                150% in accordance with his contract. Of the $369,072 due Mr. Sela,
                we
                have funded $253,637 in an insurance fund. Also includes accumulated,
                but
                unpaid vacation days ($35,663), car benefits ($5,250) and payments
                for
                pension and education funds ($16,770) less $78,000 of benefits waived
                in
                support of DSIT’s operations.




(4)
            Includes
                $369,072 of severance pay based in accordance with Israeli labor
                law
                calculated based on his last month’s salary multiplied by the number of
                years (including partial years) that Mr. Sela worked for us multiplied
                by
                150% in accordance with his contract. Of the $369,072 due Mr. Sela,
                we
                have funded $253,637 in an insurance fund. Also includes accumulated,
                but
                unpaid vacation days ($35,663), car benefits ($5,250) and payments
                for
                pension and education funds ($25,155) less $78,000 of benefits waived
                in
                support of DSIT’s operations.




53




*Michael
      Barth*




Under
      the
      terms of the employment agreement with Mr. Barth, we are obligated to make
      certain payments to fund in part our severance obligations to him. We were
      required to pay Mr. Barth an amount equal to 120% of his last month’s salary
      multiplied by the number of years (including partial years) that Mr. Barth
      worked for us. This severance obligation, which is customary for executives
      of
      Israeli companies, was to be reduced by the amount contributed by us to certain
      Israeli pension and severance funds pursuant to Mr. Barth’s employment
      agreement. In addition, the agreement with Mr. Barth provided for an additional
      payment equal to six times his last month’s total compensation, payable at the
      end of his employment with us. As of December 31, 2007, the unfunded portion
      of
      these payments was $40,020. During 2007, in order to provide additional support
      to DSIT, improve its financial results and help solidify its banking
      relationships, Mr. Barth waived $48,000 of amount due to him under his
      employment agreement.




The
      following table describes the potential payments and benefits upon termination
      of employment for Mr. Barth, our Chief Financial Officer, as if his
      employment terminated as of December 31, 2007, the last day of our last
      fiscal year.




Circumstances
                  of TerminationPayments
                  and benefits
              
              Voluntary
                  resignation
              
              Termination
                  not for cause
              
              Change
                  of control
              
              Death
                  or disabilityCompensation:Base
                  salary
              
              $
              16,667
              (1)
              $
              50,000
              (2)
              
              —
              
              $
              50,000
              (2)Benefits
                  and perquisites:Perquisites
                  and other personal benefits
              
              $
              16,002
              (3)
              $
              66,689
              (4)
              
              —
              
              $
              66,689
              (4)Total
              
              $
              32,669
              
              $
              116,689
              
              $
              —
              
              $
              116,689




(1)
            Assumes
                that there is no earned but unpaid base salary at the time of termination.
                The $16,667 represents a parachute payment of two months salary due
                to Mr.
                Barth.




(2)
            Assumes
                that there is no earned but unpaid base salary at the time of termination.
                The $50,000 represents a parachute payment of 6 months salary due
                to Mr.
                Barth upon termination without cause or by death or
                disability.




(3)
            Includes
                $41,155 of severance pay based on the amounts funded in for Mr. Barth’s
                severance in accordance with Israeli labor law. Also includes accumulated,
                but unpaid vacation days ($17,514), car benefits ($1,750) and payments
                for
                pension and education funds ($3,583) less $48,000 of benefits waived
                in
                support of DSIT’s operations..




(4)
            Includes
                $81,175 of severance pay based in accordance with Israeli labor law
                calculated based on his last month’s salary multiplied by the number of
                years (including partial years) that Mr.. Barth worked for us multiplied
                by 120% in accordance with his contract. Of the $81,175 due Mr. .Barth,
                we
                have funded $41,155 in an insurance fund. Also includes accumulated,
                but
                unpaid vacation days ($17,514), car benefits ($5,250) and payments
                for
                pension and education funds ($10,750) less $48,000 of benefits waived
                in
                support of DSIT’s operations.




**Director
      Compensation in 2007**




**Name**
            
            **Fees
                Earned or Paid in Cash ($)**
            
            **Option
                Awards ($) (1)**
            
            **All
                Other Compensation ($)**
            
            **Total
                ($)**Scott
                Ungerer (2)
            
            
            12,000
            
            
            9,075
            
            
            —
            
            
            21,075Joe
                Musanti (3)
            
            
            12,000
            
            
            9,464
            
            
            —
            
            
            21,464George
                Morgenstern
            
            
            30,000
            
            
            13,757
            
            
            65,000
            (4)
            
            108,757Samuel
                M. Zentman
            
            
            30,000
            
            
            47,313
            
            
            —
            
            
            77,313Richard
                J. Giacco
            
            
            30,000
            
            
            29,729
            
            
            —
            
            
            59,729Richard
                Rimer
            
            
            29,500
            
            
            88,916
            
            
            —
            
            
            118,416Kevin
                Wren (5)
            
            
            17,500
            
            
            29,729
            
            
            —
            
            
            47,229




(1)
            Reflects
                the dollar amount recognized for financial statement reporting purposes
                for the fiscal year ended December 31, 2007 in accordance with FAS
                123(R),
                and thus includes amounts from awards granted in and prior to 2007.
                All
                options awarded to directors in 2007 remained outstanding at fiscal
                year-end.




54




(2)
            Was
                appointed as a director on October 10,
                2007.




(3)
            Was
                appointed as a director on October 4,
                2007.




(4)
            Mr.
                Morgenstern received a non-accountable expense allowance of $65,000
                to
                cover travel and other expenses pursuant to a consulting
                agreement.




(5)
            Resigned
                as a director on October 1, 2007.




**Compensation
      of Directors**




Through
      the end of September 2007, each of our directors was paid an annual cash
      retainer of $20,000 payable quarterly in advance, as well as meeting fees for
      Board and Committee meetings of $500 per meeting.




Beginning
      in October 2007, we agreed that each of our non-employee directors would be
      paid
      an annual cash retainer of $40,000 payable quarterly in advance, as well as
      meeting fees for Board and Committee meetings of $1,000 per
      meeting.




Our
      2006
      Stock Option Plan for Non-Employee Directors, which was adopted in February
      2007, provides for formula grants to non-employee directors equal to an option
      to purchase (i) 25,000 shares of our Common Stock upon a member’s first
      appointment or election to the Board of Directors and (ii) 10,000 shares of
      our
      Common Stock to each director, other than newly appointed or elected directors,
      immediately following each annual meeting of stockholders. The option to
      purchase 25,000 shares of our Common Stock shall vest one-third per year for
      each of the three years following such date of appointment or election and
      the
      option for the purchase of 10,000 shares of the Company’s Common Stock shall
      fully vest one year from the date of grant. Both options shall be granted at
      an
      exercise price equal to the closing price on NASDAQ on the day preceding the
      date of grant and shall be exercisable until the earlier of (a) seven years
      from
      the date of grant or (b) 18 months from the date that the director ceases to
      be
      a director, officer, employee, or consultant. The plan also provides for
      non-formal grants at our discretion. The maximum number of shares of our Common
      Stock to be issued under the plan is 200,000. Our Board of Directors is to
      administer the plan.




*Consulting
      Agreement with Mr. Morgenstern*




Mr.
      Morgenstern, the Chairman of our Board, has been retained as a consultant by
      our
      Company since March 2006 primarily to provide oversight of our Israeli
      activities. Mr. Morgenstern’s consulting agreement provides for the payment of
      an annual consulting fee of $1.00 and a non-accountable expense allowance,
      which
      had been $65,000 per year beginning in March 2006. The agreement was amended
      in
      March 2008 to (i) extend its term through March 2009, (ii) raise the annual
      non-accountable expense allowance to $75,000 and (iii) provide for an additional
      consulting fee of $25,000 if certain performance-based criteria are achieved
      in
      our Israeli activities.




55





**ITEM
              12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT**




The
      following table and the notes thereto set forth information, as of April 14,
      2008 (except as otherwise set forth herein), concerning beneficial ownership
      (as
      defined in Rule 13d-3 under the Securities Exchange Act of 1934) of Common
      Stock
      by (i) each director of the Company, (ii) certain current or former executive
      officers (iii) all executive officers and directors as a group, and (iv) each
      holder of 5% or more of the Company’s outstanding shares of Common Stock.




**Name
                and Address of Beneficial Owner (1) (2)**
            
            **Number
                    of Shares of**
                  **Common
                    Stock**
                  **Beneficially
                    Owned (2)**
            
            **Percentage
                    of**
                  **Common
                    Stock**
                  **Outstanding
                    (2)**George
                Morgenstern
            
            
            482,054
            (3)
            
            4.2
            %John
                A. Moore
            
            
            850,877
            (4)
            
            7.3
            %Richard
                J. Giacco
            
            
            11,333
            (5)
            
            *Joseph
                Musanti
            
            
            0
            
            
            —Richard
                Rimer
            
            
            93,333
            (6)
            
            *Scott
                B. Ungerer
            
            
            0
            
            
            —Samuel
                M. Zentman
            
            
            54,954
            (7)
            
            *Michael
                Barth
            
            
            47,267
            (8)
            
            *William
                J. McMahon
            
            
            6,500
            (9)
            
            *Benny
                Sela
            
            
            40,000
            (10)
            
            *All
                executive officers and directors of theCompany
                as a group (10 people)
            
            
            1,586,318
            
            
            13.0
            %Jacob
                Neuwirth (11)
            
            
            0
            (12)
            
            —Austin
                W. Marxe and David M. Greenhouse
            
            
            871,885
            (13)
            
            7.8
            %







*
                Less than 1%





(1)
            Unless
                otherwise indicated, the address for each of the beneficial owners
                listed
                in the table is in care of the Company, 4 West Rockland Road, Montchanin,
                Delaware 19710.




(2)
            Unless
                otherwise indicated, each person has sole investment and voting power
                with
                respect to the shares indicated. For purposes of this table, a person
                or
                group of persons is deemed to have “beneficial ownership” of any shares as
                of a given date which such person has the right to acquire within
                60 days
                after such date. Percentage information is based on the 11,189,391
                shares
                outstanding as of April 14, 2008.(3)
            Consists
                of 45,115 shares, 387,500 shares underlying currently exercisable
                options,
                and 49,439 shares owned by Mr. Morgenstern’s wife.(4)
            Consists
                of 390,877 shares and 460,000 shares underlying currently exercisable
                options.(5)
            Consists
                of 3,000 shares and 8,333 shares underlying currently exercisable
                options.(6)
            Consists
                of 35,000 shares and 58,333 shares underlying currently exercisable
                options.(7)
            Consists
                of 5,297 shares, 48,333 shares underlying currently exercisable options
                and 1,324 shares underlying currently exercisable warrants.(8)
            Consists
                of 3,289 shares, 42,333 shares underlying currently exercisable options,
                and 1,645 shares underlying currently exercisable warrants.(9)
            Consists
                of 6,500 shares.




56




(10)
            Consists
                of 40,000 shares underlying currently exercisable
                options.(11)
            Resigned
                as Chief Executive Officer of the Company’s subsidiary dsIT Solutions Ltd.
                effective June 30, 2007.(12)
            Based
                on information available to the Company as of July 26, 2007.(13)
            The
                information presented with respect to these beneficial owners is
                based on
                a Schedule 13G filed with the SEC on February 13, 2008.Austin
                W. Marxe and David M. Greenhouse share sole voting and investment
                power
                over 168,043 shares of Common Stock owned by Special Situations Cayman
                Fund, L.P., 58,633 shares of Common Stock owned by Special Situations
                Fund
                III, L.P. and 645,209 shares of Common Stock owned by Special Situations
                Fund III QP, L.P. The business address for Austin W. Marxe and David
                M.
                Greenhouse is 527 Madison Avenue, Suite 2600, New York, NY
                10022.




57




**EQUITY
      COMPENSATION PLAN INFORMATION**




The
      table
      below provides certain information concerning our equity compensation plans
      as
      of December 31, 2007.




Plan
                Category
            
            Number of Securities to
              be
                Issued Upon
              Exercise
                of
              Outstanding
                Options,
              Warrants
                and Rights
              (a)
            
            Weighted-average
              Exercise
                Price of
              Outstanding
              Options, Warrants
              and
                Rights
              (b)
            
            Number of Securities
              Remaining Available for
              Future
                Issuance Under
              Equity
                Compensation
              Plans
                (Excluding
              Securities
                Reflected in
              Column
                (a) (c)Equity
                Compensation Plans Approved by Security Holders
            
            
            424,500
            
            $
            3.17
            
            
            0Equity
                Compensation Plans Not Approved by Security
                Holders(1)
            
            
            295,000
            
            $
            3.47
            
            
            415,000Total
            
            
            719,500
            
            $
            3.29
            
            
            415,000







(1)All
      grants were made under our 2006 Stock Incentive Plan (the “Incentive Plan”) and
      our 2006 Stock Option Plan for Non-Employee Directors (the “Outside Director
      Plan”).The
      Incentive Plan allows for grants and awards from time to time to employees,
      officers, directors, and third party service providers, of cash and stock-based
      awards, including, stock options, restricted stock, and stock appreciation
      rights. A total of 400,000 shares of our Common Stock, are available for grant
      or award under the Incentive Plan. The Incentive Plan is to be administered
      by
      either the full Board or an option committee appointed by the Board. Any grants
      or awards under the Incentive Plan must be made at fair market value and are
      intended to comply with Section 409A of the Internal Revenue Code of 1986,
      as
      amended. The Outside Director Plan provides for formula grants to non-employee
      directors as follows: a grant of 25,000 shares of Common Stock upon first
      election or appointment to the Board, with vesting as to the purchase of
      one-third of the shares on each of the three anniversaries following the date
      of
      election or appointment; and a grant of 7,500 shares of Common Stock to each
      non-employee director immediately following each Annual Meeting of Stockholders,
      other than to any non-employee director first elected to the Board within the
      four months immediately preceding and including such meeting, with vesting
      on
      the date that is one year from the date of the meeting. In addition to the
      above
      formula grants, the non-employee directors are eligible for grants at the
      discretion of the Board. The terms of any discretionary grants are to be set
      by
      the Board. A total of 200,000 shares are available for use in the Outside
      Director Plan. All grants shall be made at the fair market value of the shares
      of Common Stock on the date immediately preceding the date of grant. Both the
      Incentive Plan and the Outside Director Plan shall terminate on February 8,
      2017.




**ITEM
              13.**
            **CERTAIN
                RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
                INDEPENDENCE**




**Transactions
      With Related Persons**




During
      2007, we paid approximately $654,000 for legal services rendered and
      reimbursement of out-of-pocket expenses to Eilenberg Krause & Paul LLP, a
      law firm in which Sheldon Krause, a former director and our Secretary and
      General Counsel, is a member. Such fees related to services rendered by Mr.
      Krause and other members and employees of his firm, as well as certain special
      and local counsel retained and supervised by his firm who performed services
      on
      our behalf. Mr. Krause is the son-in-law of George Morgenstern, our Chairman
      of
      the Board, who up until March 2006, also served as our President and Chief
      Executive Officer.




In
      December 2006, John Moore, our CEO loaned us $300,000 on a note payable for
      a
      period of six months. The note provided for interest at the rate of 9.5% during
      the time it was outstanding. Under the note, we had the right to repay the
      note
      at any time prior to maturity and the note would have become immediately due
      and
      payable to the extent we raise proceeds through any equity or debt financing
      transaction or from the sale of shares of Comverge Inc. The note was repaid
      in
      full on April 3, 2007 together with $7,000 of interest.




In
      August
      2006, as part of our initial investment in Paketeria, we also entered into
      a
      Stock Purchase Agreement with two shareholders of Paketeria—one of whom is our
      President and Chief Executive Officer and the other is one of our directors.
      Pursuant to that agreement, we were entitled through August 2007 to purchase
      the
      shares of Paketeria equally held by the two Paketeria shareholders for an
      aggregate purchase price of the US dollar equivalent on the date of purchase
      of
€598,000 (approximately $776,000 at the then exchange rate), payable in our
      Common Stock and warrants on the same terms as our July 2006 private placement.
      The option was initially extended by both shareholders to November 5, 2007
      and
      again by our President and Chief Executive Officer for his share (€299,000 or
      approximately $440,000 at December 31, 2007 exchange rates) to March 31, 2008.
      At the December 31, 2007 exchange rate, the exercise of the option would result
      in the issuance of approximately 166,000 shares of our Common Stock and warrants
      exercisable for approximately 41,500 shares of Common Stock. The warrants would
      have an exercise price of $2.78 per share and be exercisable for five years
      from
      their grant date.




58




For
      additional information regarding our transactions with Paketeria, see the
      discussions under the captions “Recent Developments”, Overview and Trend
      Information” and “Critical Accounting Policies” in “Item 7 Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”




For
      additional information regarding our Stockholders’ Agreement with CoaLogix and
      EnerTech, see the discussion under the caption “Recent Developments” in “Item 7
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.” Scott Ungerer, one of our directors, is a principal of
      EnerTech.







It
      is the
      policy of the Company that before a transaction with a related party will be
      entered into, it must receive the approval of a majority of the disinterested
      members of the Board of Directors. In determining whether or not a transaction
      involves a related party we apply the definition provided under Item 404 of
      Regulation S-K.





All
      of
      the above transactions received the unanimous approval of the disinterested
      members of our Board of Directors.




59


**Director
      Independence**





Applying
      the definition of independence provided under the Nasdaq Marketplace Rules,
      with
      the exception of Mr. Moore and Mr. Morgenstern, all of the members of the Board
      of Directors are independent. Applying Marketplace Rules, Mr. Moore would not
      be
      deemed independent because he is an employee of the Company and Mr. Morgenstern
      would not be deemed independent because of his prior service as Chief Executive
      Officer of the Company.





**ITEM
              14.**
            **PRINCIPAL
                ACCOUNTING FEES AND
                SERVICES**




**Accounting
      Fees**




Aggregate
      fees billed by our principal accountant during the last two fiscal years are
      as
      follows:




2006
            
            2007Audit
                Fees
            
            $
            94,000
            
            $
            147,000Audit-
                Related Fees
            
            
            29,000
            
            
            —Tax
                Fees
            
            
            —
            
            
            —Other
                Fees
            
            
            36,000
            
            
            57,000Total
            
            $
            159,000
            
            $
            204,000




*Audit
      Fees* were for
      professional services rendered for the audits of the consolidated financial
      statements of the Company, statutory and subsidiary audits, assistance with
      review of documents filed with the SEC, consents, and other assistance required
      to be performed by our independent accountants.




*Other
      Fees* were
      for
      services related to reviewing registration statements and due diligence
      procedures. Other fees in 2006 were for services related to a response letter
      to
      the SEC and for reviewing registration statements.




**Audit
      Committee Pre-Approval Policies and Procedures**




The
      Audit
      Committee’s current policy is to pre-approve all audit and non-audit services
      that are to be performed and fees to be charged by our independent auditor
      to
      assure that the provision of these services does not impair the independence
      of
      the auditor. The Audit Committee was in compliance with the requirements of
      the
      Sarbanes-Oxley Act of 2002 regarding the pre-approval of all audit and non-audit
      services and fees by the mandated effective date of May 6, 2003. The Audit
      Committee pre-approved all audit and non-audit services rendered by our
      principal accountant in 2007 and 2006.




60




**PART
      IV**




**ITEM
              15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**




**(a)(1)** **List of Financial Statements of the Registrant**




The
      consolidated financial statements of the Registrant and the report thereon
      of
      the Registrant’s Independent Registered Public Accounting Firm are included in
      this Annual Report beginning on page F-1.




Report
      of
      Kesselman & Kesselman




Consolidated
      Balance Sheets as of December 31, 2006 and 2007




Consolidated
      Statements of Operations for the years ended December 31, 2005, 2006 and
      2007




Consolidated
      Statements of Changes in Shareholders’ Equity (Capital Deficiency) for the years
      ended December 31, 2005, 2006 and 2007




Consolidated
      Statements of Cash Flows for the years ended December 31, 2005, 2006 and
      2007




Notes
      to
      Consolidated Financial Statements




**(a)(2)
      List of Financial Statement Schedules**




Financial
      Statement Schedules:




The
      financial statement schedule of the Registrant and the report thereon of the
      Registrant’s Independent Registered Public Accounting Firm are included in this
      Annual Report beginning on page F-1.




Schedule
      II - Valuation and Qualifying Accounts




(a)(3)
      List of Exhibits




No.3.1
            
            Certificate
                of Incorporation of the Registrant, with amendments thereto (incorporated
                herein by reference to Exhibit 3.1 to the Registrant’s Registration
                Statement on Form S-1 (File No. 33-70482) (the “1993 Registration
                Statement”)).3.2
            
            Certificate
                of Ownership and Merger dated September 15, 2006 effecting the name
                change
                to Acorn Factor, Inc.(incorporated
                herein by reference to Exhibit 3.1 to the Registrant’s Current Report on
                Form 8-K filed September 21, 2006).3.3
            
            Certificate
                of Ownership and Merger dated December 21, 2007 effecting the name
                change
                to Acorn Energy, Inc.(incorporated
                herein by reference to Exhibit 3.1 to the Registrant’s Current Report on
                Form 8-K filed January 3, 2008).3.4
            
            By-laws
                of the Registrant (incorporated herein by reference to Exhibit 3.2
                to the
                Registrant’s Registration Statement on Form S-1 (File No. 33-44027) (the
                “1992 Registration Statement”)).3.5
            
            Amendments
                to the By-laws of the Registrant adopted December 27, 1994 (incorporated
                herein by reference to Exhibit 3.3 of the Registrant’s Current Report on
                Form 8-K dated January 10, 1995).4.1
            
            Specimen
                certificate for the Common Stock (incorporated herein by reference
                to
                Exhibit 4.2 to the 1992 Registration Statement).4.2
            
            Warrant
                to Purchase Common Stock of the Registrant, dated October 12, 1999
                (incorporated herein by reference to Exhibit 4.4 to the Registrant’s
                Annual Report on Form 10-K for the year ended December 31, 2000 (the
“2000
                10-K”)).




61




4.3
            
            Securities
                Purchase Agreement, dated as of June 11, 2002, by and among the
                Registrant, Databit, Inc. and Laurus Master Fund, Ltd. (“Laurus”)
                (including the forms of convertible note and warrant) (incorporated
                herein
                by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
                8-K dated June 11, 2002).4.4
            
            Purchase
                and Security Agreement, dated as of December 4, 2002, made by and
                between
                Comverge (“Comverge”) and Laurus (incorporated herein by reference to
                Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December
                5, 2002 (the “December 2002 8-K”)).4.5
            
            Convertible
                Note, dated December 4, 2002, made by and among Comverge, Laurus
                and, as
                to Articles III and V only, the Registrant (incorporated herein by
                reference to Exhibit 10.2 to the December 2002 8-K).4.6
            
            Common
                Stock Purchase Warrant, dated December 5, 2002, issued by the Registrant
                to Laurus (incorporated herein by reference to Exhibit 10.3 to the
                December 2002 8-K).4.7
            
            Registration
                Rights Agreement, dated as of December 4, 2002, by and between the
                Registrant and Laurus (incorporated herein by reference to Exhibit
                10.4 to
                the December 2002 8-K).4.8
            
            Form
                of Warrant (incorporated herein by reference to Exhibit 4.1 to the
                Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                2006).4.9
            
            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).4.10
            
            Form
                of Warrant(incorporated
                herein by reference to Exhibit 4.10 to the Registrant’s Annual Report on
                Form 10-K for the fiscal year ended December 31, 2006).#4.11
            
            Promissory
                Note of Acorn Factor, Inc. in favor of John A. Moore, dated December
                31,
                2006.4.12
            
            Form
                of Agent Warrant(incorporated
                herein by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on
                Form 10-Q for the quarter ended March 31, 2007).10.1
            
            Employment
                Agreement between the Registrant and George Morgenstern, dated as
                of
                January 1, 1997 (incorporated herein by reference to Exhibit 10.1
                to the
                Registrant’s Annual Report on Form 10-K for the year ended December 31,
                1997 (the “1997 10-K”)).*10.2
            
            Employment
                Agreement between the Registrant and Yacov Kaufman, dated as of January
                1,
                1999 (incorporated herein by reference to Exhibit 10.22 of the Registrants
                Annual Report on Form 10-K for the year ended December 31, 1999 (the
“1999
                10-K”)).*10.3
            
            1991
                Stock Option Plan (incorporated herein by reference to Exhibit 10.4
                to the
                1992 Registration Statement).*10.4
            
            1994
                Stock Incentive Plan, as amended. (incorporated herein by reference
                to
                Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2004(the “2004 10-K”)).*10.5
            
            1994
                Stock Option Plan for Outside Directors, as amended (incorporated
                herein
                by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the year
                ended December 31, 1995 (the “1995
                10-K”)).*




62




10.6
            
            1995
                Stock Option Plan for Non-management Employees, as amended (incorporated
                herein by reference to Exhibit 10.6 to the 2004 10-K).*10.7
            
            Share
                Purchase Agreement, dated as of November 29, 2001, by and among the
                Registrant, Decision Systems Israel Ltd., Endan IT Solutions Ltd.,
                Kardan
                Communications Ltd., Neuwirth Investments Ltd., Jacob Neuwirth (Noy)
                and
                Adv. Yossi Avraham, as Trustee for Meir Givon (incorporated herein
                by
                reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
                dated December 13, 2001).10.8
            
            Registration
                Rights Agreement, dated as of December 13, 2002, by and among the
                Registrant, Kardan Communications Ltd. and Adv. Yossi Avraham, as
                Trustee
                for Meir Givon (incorporated herein by reference to Exhibit 10.2
                to the
                Registrant’s Current Report on Form 8-K dated December 13,
                2002).10.9
            
            First
                Amendment to Employment Agreement, dated as of May 17, 2002, by and
                between the Registrant and George Morgenstern (incorporated herein
                by
                reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K
                for the year ended December 31, 2001.*10.10
            
            Second
                Amendment to Employment Agreement, dated as of March 12, 2002, between
                the
                Registrant and George Morgenstern (incorporated herein by reference
                to
                Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended March 31, 2002).*10.11
            
            Amendment
                to Employment Agreement, dated as of June 1, 2002, between the Registrant
                and Yacov Kaufman (incorporated herein by reference to Exhibit 10.1
                to the
                Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
                30, 2002).*10.12
            
            Preferred
                Stock Purchase Agreement, dated as of April 7, 2003, by and among
                Comverge, the Registrant and the other investors named therein
                (incorporated herein by reference to Exhibit 10.29 to the 2002
                10-K).10.13
            
            Investors’
                Rights Agreement, dated as of April 7, 2003, by and among Comverge,
                the
                Registrant and the investors and Comverge management named therein
                (incorporated herein by reference to Exhibit 10.30 to the 2002
                10-K).10.14
            
            Co-Sale
                and First Refusal Agreement, dated as of April 7, 2003, by and among
                Comverge, the Registrant and the investors and stockholders named
                therein
                (incorporated herein by reference to Exhibit 10.31 to the 2002
                10-K).10.15
            
            Voting
                Agreement, dated as of April 7, 2003, by and among Comverge, the
                Registrant and the other investors named therein (incorporated herein
                by
                reference to Exhibit 10.32 to the 2002 10-K).10.16
            
            Letter
                Agreement, dated as of April 1, 2003, by and between the Registrant
                and
                Laurus (incorporated herein by reference to Exhibit 10.33 to the
                2002
                10-K).10.17
            
            Employment
                Agreement dated as of August 19, 2004 and effective as of January
                1, 2004
                by and between the Registrant and Shlomie Morgenstern (incorporated
                herein
                by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
                10-Q for the quarter ended September 30, 2004).*10.18
            
            Restricted
                Stock Award Agreement dated as of August 19, 2004, by and between
                the
                Registrant and Shlomie Morgenstern (incorporated herein by reference
                to
                Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended September 30, 2004).*




63




10.19
            
            Stock
                Option Agreement dated as of August 19, 2004, by and between Shlomie
                Morgenstern and the Registrant (incorporated herein by reference
                to
                Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended September 30, 2004).*10.20
            
            Second
                Amended and Restated Co-Sale And First Refusal Agreement dated as
                of
                October 26, 2004, by and among Comverge, Inc., the Registrant and
                other
                persons party thereto (incorporated herein by reference to Exhibit
                10.4 to
                the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2004).10.21
            
            Third
                Amendment to Employment Agreement, dated as of December 30, 2004,
                between
                the Registrant and George Morgenstern(incorporated herein by reference
                to
                Exhibit 10.34 of the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2004 (the “2004 10-K”).*10.22
            
            Form
                of Stock Option Agreement to employees under the 1994 Stock Incentive
                Plan
                (incorporated herein by reference to Exhibit 10.35 of the 2004
                10-K).10.23
            
            Form
                of Stock Option Agreement under the 1994 Stock Option Plan for Outside
                Directors (incorporated herein by reference to Exhibit 10.36 of the
                2004
                10-K).10.24
            
            Form
                of Stock Option Agreement under the 1995 Stock Option Plan for
                Nonmanagement Employees (incorporated herein by reference to Exhibit
                10.37
                of the 2004 10-K).10.25
            
            Stock
                Option Agreement dated as of December 30, 2004 by and between George
                Morgenstern and the Registrant (incorporated herein by reference
                to
                Exhibit 10.38 of the 2004 10-K).*10.26
            
            Stock
                Option Agreement dated as of December 30, 2004 by and between Yacov
                Kaufman and the Registrant (incorporated herein by reference to Exhibit
                10.39 of the 2004 10-K).*10.27
            
            Stock
                Option Agreement dated as of December 30, 2004 by and between Sheldon
                Krause and the Registrant (incorporated herein by reference to Exhibit
                10.35 of the 2004 10-K).*10.28
            
            Stock
                Purchase Agreement dated as of March 9, 2006 by and between Shlomie
                Morgenstern, Databit Inc., and the Registrant (incorporated herein
                by
                reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
                dated March 16, 2006 (the “2006 8-K”)).10.29
            
            Termination
                and Release Agreement dated as of March 9, 2006 by and between Shlomie
                Morgenstern and the Registrant (incorporated herein by reference
                to
                Exhibit A to Exhibit 10.1 to the 2006 8-K).*10.30
            
            Amendment
                Agreement to GM Employment Agreement dated as of March 9, 2006 by
                and
                between George Morgenstern and the Registrant (incorporated herein
                by
                reference to Exhibit B to Exhibit 10.1 to the 2006
                8-K).*10.31
            
            Amendment
                Agreement to Purchaser Option Agreements and Restricted Stock Award
                Agreement dated as of March 9, 2006 by and between Shlomie Morgenstern
                and
                Data System’s and Software Inc. (incorporated herein by reference to
                Exhibit C to Exhibit 10.1 to the 2006 8-K).*10.32
            
            Amendment
                Agreement to GM Option Agreements and Restricted Stock Agreement
                dated as
                of March 9, 2006 by and between George Morgenstern and Data System’s &
                Software Inc. (incorporated herein by reference to Exhibit D to Exhibit
                10.1 to the 2006 8-K).*




64




10.33
            
            Consulting
                Agreement dated as of March 9, 2006 by and between George Morgenstern
                and
                the Registrant (incorporated by reference to Exhibit E to Exhibit
                10.1 to
                the 2006 8-K).*10.34
            
            Form
                of Consent Agreement (incorporated herein by reference to Exhibit
                F to
                Exhibit 10.1 to the 2006 8-K.).10.35
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
                ended June 30, 2006).10.36
            
            Placement
                Agent Agreement between First Montauk Securities Corp. and the Registrant
                dated June 12, 2006 (incorporated herein by reference to Exhibit
                10.2 to
                the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2006).10.37
            
            Form
                of Common Stock Purchase Agreement (incorporated herein by reference
                to
                Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated August
                17, 2006 (the “August 2006 8-K“)).10.38
            
            Form
                of Note Purchase Agreement with Form of Convertible Promissory Note
                attached (incorporated herein by reference to Exhibit 10.2 to the
                August
                2006 8-K).10.39
            
            Form
                of Stock Purchase Agreement (incorporated herein by reference to
                Exhibit
                10.3 to the August 2006 8-K).10.40
            
            Form
                of Investors’ Rights Agreement (incorporated herein by reference to
                Exhibit 10.4 to the August 2006 8-K).10.41
            
            Form
                of Non-Plan Option Agreement (incorporated herein by reference to
                Exhibit
                10.5 to the August 2006 8-K).*10.42
            
            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 filed March 6, 2007).*10.43
            
            Acorn
                Factor, Inc. 2006 Stock Incentive Plan (incorporated herein by reference
                to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March
                6, 2007).*10.44
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                10.47 to the Registrant’s Annual Report on Form 10-K for the year ended
                December 31, 2006).10.45
            
            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 Registrant’s Annual Report on Form 10-K for the year ended December
                31, 2006).#10.46
            
            Amended
                and Restated Registration Rights Agreement between Acorn Factor,
                Inc. and
                Comverge, Inc., dated October 16, 2007.#10.47
            
            Form
                of Lock-Up Agreement with Comverge, Inc.10.48
            
            Loan
                Agreement by and between Acorn Factor, Inc. and Citigroup Global
                Markets,
                Inc., dated as of November 1, 2007(incorporated
                herein by reference to Exhibit 10.2 to the Registrant’s Current Report on
                Form 8-K filed November 14, 2007).




65




10.49
            
            Stock
                Purchase Agreement by and among Acorn Factor, Inc., CoaLogix Inc.,
                Catalytica Energy Systems, Inc., and with respect to Article 11 only,
                Renegy Holdings, Inc., dated as of November 7, 2007(incorporated
                herein by reference to Exhibit 10.1 to the Registrant’s Current Report on
                Form 8-K filed November 14, 2007).10.50
            
            Employment
                Agreement between and among William J. McMahon III, Catalytica Energy
                Systems, Inc., SCR-Tech LLC and CESI-SCR, Inc., effective as of January
                1,
                2007(incorporated
                herein by reference to Exhibit 10.1 to theCatalytica
                Energy Systems, Inc.Current Report on Form 8-K filed January 10, 2007).*#10.51
            
            Modification
                Agreement by and among William J. McMahon III, SCR-Tech, LLC, CESI-SCR,
                Inc., CoaLogix Inc. and Acorn Factor, Inc., dated as of November
                7,
                2007.*10.52
            
            Lease
                Agreement dated December 16, 2002 and First Amendment to Lease Agreement
                dated February 18, 2004 (incorporated herein by reference to Exhibit
                10.46
                to theCatalytica
                Energy Systems, Inc.Annual Report on Form 10-K for the year ended December 31,
                2003).10.53
            
            Second
                Amendment to Lease Agreement dated December 29, 2006 (incorporated
                herein
                by reference to Exhibit 10.74 to theCatalytica
                Energy Systems, Inc.Annual Report on Form 10-KSB for the year ended December 31,
                2006).14.1
            
            Code
                of Business Conduct and Ethics of the Registrant (incorporated herein
                by
                reference to Exhibit 14 to the Registrant’s Current Report on Form 8-K
                filed November 2, 2007).#21.1
            
            List
                of subsidiaries.#23.1
            
            Consent
                of Kesselman & Kesselman CPA.#31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.







*
            This
                exhibit includes a management contract, compensatory plan or arrangement
                in which one or more directors or executive officers of the Registrant
                participate.




#
            This
                exhibit is filed or furnished
                herewith.





66




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, in the Township  of
      Montchanin, State of Delaware, on April 15, 2008.




Acorn
                  Energy, IncBY:
            /s/ John
                A.
                MooreJohn
              A. MoorePresident
                and Chief Executive Officer




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




**Signature**
            
            **Title**
            
            **Date**/s/
                John A. MooreJohn
                A. Moore
            
            President;
                Chief Executive Officer;
              and
                Director
            
            April
                15, 2008/s/
                George MorgensternGeorge
                Morgenstern
            
            Chairman
                of the Board and Director
            
            April
                15, 2008/s/
                Michael BarthMichael
                Barth
            
            Chief
                Financial Officer (Principal Financial
              Officer
                and Principal Accounting Officer)
            
            April
                15, 2008/s/
                Samuel M. ZentmanSamuel
                M. Zentman
            
            Director
            
            April
                15, 2008/s/
                Richard J. GiaccoRichard
                J. Giacco
            
            Director
            
            April
                15, 2008/s/
                Richard RimerRichard
                Rimer
            
            Director
            
            April
                15, 2008/s/
                Joe MusantiJoe
                Musanti
            
            Director
            
            April
                15, 2008/s/
                Scott UngererScott
                Ungerer
            
            Director
            
            April
                15, 2008




67


**ACORN
      ENERGY, INC.**


(FORMERLY
      KNOWN AS ACORN FACTOR,
      INC.)


AND
      SUBSIDIARIES


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




CONSOLIDATED
      FINANCIAL STATEMENTS OF ACORN ENERGY, INC.:


Report
                  of Independent Registered Public Accounting Firm
              
              
              F-1Consolidated
                  Balance Sheets as of December 31, 2007 and December 31,
                  2006
              
              
              F-2Consolidated
                  Statements of Operations for the years ended December 31, 2007,
                  December
                  31, 2006 and December 31, 2005
              
              
              F-3Consolidated
                  Statements of Changes in Shareholders’ Equity (Capital Deficiency) for the
                  years ended December 31, 2007, December 31, 2006 and December 31,
                  2005
              
              
              F-4Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007,
                  December
                  31, 2006 and December 31, 2005
              
              
              F-5Notes
                  to Consolidated Financial Statements.
              
              
              F-7










**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and Shareholders of


Acorn
      Energy, Inc. (formerly known as Acorn Factor, Inc.)





We
      have
      audited the consolidated balance sheets of Acorn Energy, Inc. (formerly known as Acorn Factor, Inc.)


(the
      “Company”) and its subsidiaries as of December 31, 2007 and 2006, and the
      related consolidated statements of operations, changes in shareholders’ equity
      (capital deficiency) and cash flows for each of the three years in the period
      ended December 31, 2007. These financial statements are the responsibility
      of
      the Company’s Board of Directors and management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by the Company’s Board of Directors and management,
      as well as evaluating the overall financial statement presentation. We believe
      that our audits provide a reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of the Company and its
      subsidiaries as of December 31, 2007 and 2006 and the results of their
      operations and of their cash flows for each of the three years in the period
      ended December 31, 2007, in conformity with accounting principles generally
      accepted in the United States of America.




As
      discussed in Note 2 to the consolidated financial statements, the Company
      changed the manner in which it accounts for share based payments in 2006 and
      the
      manner in which it accounts for uncertain tax positions in 2007.





April
      15,
      2008





/s/
      Kesselman & Kesselman


Certified
      Public Accountants


A
      member
      of PricewaterhouseCoopers International Limited


Tel-Aviv,
      Israel




F-1


**ACORN
      ENERGY, INC.**


**(FORMERLY
      KNOWN AS ACORN FACTOR, INC.)**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(IN
      THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**




**As
                of December 31,****2006**
            
            **2007**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            1,521
            
            $
            19,644Accounts
                receivable, net
            
            
            1,373
            
            
            1,775Unbilled
                work-in-process
            
            
            393
            
            
            1,784Inventory
            
            
            —
            
            
            119Other
                current assets
            
            
            316
            
            
            1,391Total
                current assets
            
            
            3,603
            
            
            24,713Property
                and equipment, net
            
            
            445
            
            
            1,335Available
                for sale - Investment in Comverge
            
            
            —
            
            
            55,538Investment
                in Paketeria
            
            
            1,212
            
            
            1,439Other
                investments
            
            
            —
            
            
            668Funds
                in respect of employee termination benefits
            
            
            1,568
            
            
            1,607Restricted
                cash
            
            
            —
            
            
            1,517Other
                intangible assets, net
            
            
            48
            
            
            5,987Goodwill
            
            
            97
            
            
            3,945Other
                assets
            
            
            285
            
            
            218Total
                assets
            
            $
            7,258
            
            $
            96,967LIABILITIES
                AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)Current
                liabilities:Short-term
                bank credit
            
            $
            462
            
            $
            590Current
                maturities of long-term debt and Note payable - related
                party
            
            
            326
            
            
            171Convertible
                debt, net
            
            
            —
            
            
            4,237Accounts
                payable
            
            
            378
            
            
            910Accrued
                payroll, payroll taxes and social benefits
            
            
            478
            
            
            1,118Other
                current liabilities
            
            
            1,700
            
            
            3,844Total
                current liabilities
            
            
            3,344
            
            
            10,870Long-term
                liabilities:Investment
                in Comverge, net
            
            
            1,824
            
            
            —Liability
                for employee termination benefits
            
            
            2,545
            
            
            2,397Long-term
                debt
            
            
            —
            
            
            12Deferred
                income taxes
            
            
            —
            
            
            16,038Other
                liabilities
            
            
            6
            
            
            325Total
                long-term liabilities
            
            
            4,375
            
            
            18,772Commitments
                and contingencies (Note 15)Shareholders’
                equity (capital deficiency):Common
                stock - $0.01 par value per share:Authorized
                - 20,000,000 shares; Issued -10,276,030 and 11,134,795 shares at
                December
                31, 2006 and 2007
            
            
            102
            
            
            111Additional
                paid-in capital
            
            
            43,987
            
            
            49,306Warrants
            
            
            888
            
            
            1,330Accumulated
                deficit
            
            
            (41,904
            )
            
            (9,692
            )Treasury
                stock, at cost - 777,371 shares for December 31, 2006 and
                2007
            
            
            (3,592
            )
            
            (3,592
            )Accumulated
                other comprehensive income
            
            
            58
            
            
            29,862Total
                shareholders’ equity (capital deficiency)
            
            
            (461
            )
            
            67,325Total
                liabilities and shareholders’ equity (capital deficiency)
            
            $
            7,258
            
            $
            96,967




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


F-2


**ACORN
      ENERGY, INC.**


**(FORMERLY
      KNOWN AS ACORN FACTOR, INC.)**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(IN
      THOUSANDS, EXCEPT NET INCOME (LOSS) PER SHARE DATA)**




**Year
                Ended December 31,****2005**
            
            **2006**
            
            **2007**Sales:Projects
            
            $
            3,204
            
            $
            3,186
            
            $
            4,061Catalytic
                regeneration services
            
            
            —
            
            
            —
            
            
            797Services
            
            
            954
            
            
            863
            
            
            730Other
            
            
            29
            
            
            68
            
            
            72Total
                sales
            
            
            4,187
            
            
            4,117
            
            
            5,660Cost
                of sales:Projects
            
            
            2,117
            
            
            2,022
            
            
            2,891Catalytic
                regeneration services
            
            
            —
            
            
            —
            
            
            681Services
            
            
            828
            
            
            741
            
            
            676Other
            
            
            —
            
            
            —
            
            
            —


Total
                cost of sales
            
            
            2,945
            
            
            2,763
            
            
            4,248Gross
                profit
            
            
            1,242
            
            
            1,354
            
            
            1,412Operating
                expenses:Research
                and development expenses, net
            
            
            53
            
            
            324
            
            
            415Selling,
                marketing, general and administrative expenses
            
            
            3,464
            
            
            4,658
            
            
            5,390Total
                operating expenses
            
            
            3,517
            
            
            4,982
            
            
            5,805Operating
                loss
            
            
            (2,275
            )
            
            (3,628
            )
            
            (4,393
            )Finance
                expense, net
            
            
            (12
            )
            
            (30
            )
            
            (1,585
            )Gain
                on sale of shares in Comverge
            
            
            —
            
            
            —
            
            
            23,124Gain
                on Public offering of Comverge
            
            
            —
            
            
            —
            
            
            16,169Loss
                on private placement in Paketeria
            
            
            —
            
            
            —
            
            
            (37
            )Other
                income - settlement of a claim
            
            
            —
            
            
            330
            
            
            —Income
                (loss) before taxes on income
            
            
            (2,287
            )
            
            (3,328
            )
            
            33,278Income
                tax benefit (expense)
            
            
            37
            
            
            (183
            )
            
            445Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            (2,250
            )
            
            (3,511
            )
            
            33,723Share
                in losses of Paketeria
            
            
            —
            
            
            (424
            )
            
            (1,206
            )Share
                in losses of Comverge
            
            
            (380
            )
            
            (210
            )
            
            —Minority
                interests
            
            
            (73
            )
            
            —
            
            
            —Net
                income (loss) from continuing operations
            
            
            (2,703
            )
            
            (4,145
            )
            
            32,517Gain
                on sale of discontinued operations, net of tax
            
            
            541
            
            
            —
            
            
            —Loss
                on sale of discontinued operations and contract settlement, net of
                tax
            
            
            —
            
            
            (2,069
            )
            
            —Net
                income from discontinued operations, net of tax
            
            
            844
            
            
            78
            
            
            —Net
                income (loss)
            
            $
            (1,318
            )
            $
            (6,136
            )
            $
            32,517Basic
                net income (loss) per share:Income
                (loss) per share from continuing operations
            
            $
            (0.26
            )
            $
            (0.48
            )
            $
            3.30Discontinued
                operations
            
            
            0.10
            
            
            (0.23
            )
            
            —Net
                income (loss) per share
            
            $
            (0.16
            )
            $
            (0.71
            )
            $
            3.30Weighted
                average number of shares outstanding - basic
            
            
            8,117
            
            
            8,689
            
            
            9,848Diluted
                net income (loss) per share:Income
                (loss) per share from continuing operations
            
            $
            (0.26
            )
            $
            (0.48
            )
            $
            2.80Discontinued
                operations
            
            
            0.10
            
            
            (0.23
            )
            
            —Net
                income (loss) per share
            
            $
            (0.16
            )
            $
            (0.71
            )
            $
            2.80Weighted
                average number of shares outstanding -diluted
            
            
            8,117
            
            
            8,689
            
            
            12,177




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




F-3





**ACORN
      ENERGY, INC.**


**(FORMERLY
      KNOWN AS ACORN FACTOR, INC.)**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**


**(IN
      THOUSANDS)**




Number
                of Shares
            
            Common
                Stock
            
            Additional
              Paid-In
              Capital
            
            Warrants
            
            Accumulated
                Deficit
            
            Treasury
                Stock
            
            Accumulated
                Other Comprehensive Income (Loss)
            
            TotalBalances
                as of December 31, 2004
            
            
            8,937
            
            $
            88
            
            $
            39,674
            
            $
            461
            
            $
            (34,290
            )
            $
            (3,791
            )
            $
            (17
            )
            $
            2,125Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,318
            )
            
            —
            
            
            —
            
            
            (1,318
            )Differences
                from translation of subsidiaries’ financial statements associated with
                sale of dsIT Technologies
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            22
            
            
            22Differences
                from translation of subsidiaries’ financial statements
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (32
            )
            
            (32
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,328
            )Amortization
                of stock-based deferred compensation
            
            
            —
            
            
            —
            
            
            23
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            23Expiration
                of warrants
            
            
            —
            
            
            —
            
            
            278
            
            
            (278
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Balances
                as of December 31, 2005
            
            
            8,937
            
            
            88
            
            
            39,975
            
            
            183
            
            
            (35,608
            )
            
            (3,791
            )
            
            (27
            )
            
            820Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (6,136
            )
            
            —
            
            
            —
            
            
            (6,136
            )Differences
                from translation of subsidiaries’ financial statements and investment in
                Paketeria
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            85
            
            
            85Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,051
            )Private
                placements of common stock and warrants, net of issuance costs of
                $715
            
            
            1,216
            
            
            12
            
            
            1,810
            
            
            705
            
            
            —
            
            
            —
            
            
            —
            
            
            2,527Warrants
                issued with respect to financial advisory services
            
            
            —
            
            
            —
            
            
            —
            
            
            121
            
            
            —
            
            
            —
            
            
            —
            
            
            121Cancellation
                of warrants
            
            
            —
            
            
            —
            
            
            121
            
            
            (121
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Exercise
                of options
            
            
            123
            
            
            2
            
            
            244
            
            
            —
            
            
            (160
            )
            
            199
            
            
            —
            
            
            285Stock
                option and reclassification of stock-based deferred
                compensation
            
            
            —
            
            
            —
            
            
            1,837
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,837Balances
                as of December 31, 2006
            
            
            10,276
            
            
            102
            
            
            43,987
            
            
            888
            
            
            (41,904
            )
            
            (3,592
            )
            
            58
            
            
            (461
            )Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            32,517
            
            
            —
            
            
            —
            
            
            32,517Unrealized
                gain on investment in Comverge, net of deferred taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            29,555
            
            
            29,555Differences
                from translation of subsidiaries’ financial statements and investment in
                Paketeria
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            249
            
            
            249Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            62,321Adjustment,
                as of January 1, 2007, resulting from first-time adoption of FIN
                48
                adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (305
            )
            
            —
            
            
            —
            
            
            (305
            )Warrants
                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
            
            
            —
            
            
            —
            
            
            894
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            894Exercise
                of options and warrants
            
            
            733
            
            
            8
            
            
            1,445
            
            
            (302
            )
            
            —
            
            
            —
            
            
            —
            
            
            1,151Conversion
                of Debentures
            
            
            126
            
            
            1
            
            
            479
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            480Transaction
                costs of previous private placements
            
            
            —
            
            
            —
            
            
            (69
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (69
            )Balances
                as of December 31, 2007
            
            
            11,135
            
            $
            111
            
            $
            49,306
            
            $
            1,330
            
            $
            (9,692
            )
            $
            (3,592
            )
            $
            29,862
            
            $
            67,325




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




F-4


**ACORN
      ENERGY, INC.**


**(FORMERLY
      KNOWN AS ACORN FACTOR, INC.)**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**




**2005**
            
            **2006**
            
            **2007**Cash
                flows used in operating activities:Net
                income (loss)
            
            $
            (1,318
            )
            $
            (6,136
            )
            $
            32,517Adjustments
                to reconcile net loss to net cash used in operating activities (see
                Schedule A)
            
            
            (431
            )
            
            4,548
            
            
            (35,100
            )Net
                cash used in operating activities
            
            
            (1,749
            )
            
            (1,588
            )
            
            (2,583
            )Cash
                flows provided by (used in) investing activities:Maturity
                of short-term bank deposits
            
            
            72
            
            
            —
            
            
            —Acquisitions
                of property and equipment
            
            
            (240
            )
            
            (149
            )
            
            (228
            )Acquisitions
                of goodwill and intangibles
            
            
            (36
            )
            
            —
            
            
            —Purchase
                of additional share in DSIT
            
            
            —
            
            
            —
            
            
            (740
            )Proceeds
                from the sale of Comverge shares
            
            
            —
            
            
            —
            
            
            28,388Proceeds
                from the sale of property and equipment
            
            
            152
            
            
            —
            
            
            —Restricted
                cash (under agreement to a related party)
            
            
            (1,350
            )
            
            1,350
            
            
            —Restricted
                cash
            
            
            (3
            )
            
            247
            
            
            (1,517
            )Investment
                in Comverge
            
            
            —
            
            
            (210
            )
            
            —Investment
                in Paketeria
            
            
            —
            
            
            (1,338
            )
            
            —Loans
                to and costs of acquisition of note due from Paketeria
            
            
            —
            
            
            —
            
            
            (1,189
            )Investment
                in Local Power Inc.
            
            
            —
            
            
            —
            
            
            (268
            )Investment
                in Enertech
            
            
            —
            
            
            —
            
            
            (400
            )Amounts
                funded for employee termination benefits
            
            
            (558
            )
            
            (671
            )
            
            (343
            )Utilization
                of employee termination benefits
            
            
            687
            
            
            544
            
            
            304Sale
                of dsIT Technologies (see Schedule C)
            
            
            3,431
            
            
            —
            
            
            —Sale
                of Databit (see Schedule D)
            
            
            —
            
            
            (974
            )
            
            —Acquisition
                of SCR-Tech (see Schedule E)
            
            
            —
            
            
            —
            
            
            (10,112
            )Net
                cash provided by (used in) investing activities
            
            
            2,155
            
            
            (1,201
            )
            
            13,895Cash
                flows provided by (used in) financing activities:Proceeds
                from employee stock option and warrant exercises
            
            
            —
            
            
            285
            
            
            1,151Proceeds
                (expenses)from private placement of common stock and warrants, net
                of
                issuance costs
            
            
            —
            
            
            2,631
            
            
            (137
            )Proceeds
                from note payable to a related party
            
            
            425
            
            
            300
            
            
            —Repayment
                of note payable to a related party
            
            
            (425
            )
            
            —
            
            
            (300
            )Proceeds
                from loan for acquisition of SCR-Tech
            
            
            —
            
            
            —
            
            
            14,000Repayment
                of loan for acquisition of SCR-Tech
            
            
            —
            
            
            —
            
            
            (14,000
            )Short-term
                bank credit, net
            
            
            182
            
            
            332
            
            
            128Proceeds
                from borrowings of long-term debt
            
            
            90
            
            
            —
            
            
            276Proceeds
                from convertible debentures with warrants net of transaction costs
                of
                $1,046
            
            
            —
            
            
            —
            
            
            5,840Repayments
                of long-term debt
            
            
            (450
            )
            
            (151
            )
            
            (147
            )Net
                cash provided by (used in) financing activities
            
            
            (178
            )
            
            3,397
            
            
            6,811Net
                increase in cash and cash equivalents
            
            
            228
            
            
            608
            
            
            18,123Cash
                and cash equivalents at beginning of year
            
            
            685
            
            
            913
            
            
            1,521Cash
                and cash equivalents at end of year
            
            $
            913
            
            $
            1,521
            
            $
            19,644Supplemental
                cash flow information:Cash
                paid during the year for:Interest
            
            $
            144
            
            $
            25
            
            $
            547Income
                taxes
            
            $
            102
            
            $
            19
            
            $
            44




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




F-5


**ACORN
      ENERGY, INC.**


**(FORMERLY
      KNOWN AS ACORN FACTOR, INC.)**


**AND
      SUBSIDIARIES**


**SCHEDULES
      TO CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**





**2005**
            
            **2006**
            
            **2007**A.
                Adjustments to reconcile net loss to net cash provided by (used in)
                operating activities:Depreciation
                and amortization.
            
            $
            254
            
            $
            204
            
            $
            300Change
                inminority
                interests
            
            
            73
            
            
            —
            
            
            —Share
                in losses of Comverge
            
            
            380
            
            
            210
            
            
            —Share
                in losses of Paketeria
            
            
            —
            
            
            159
            
            
            1,157Change
                in deferred taxes
            
            
            (81
            )
            
            —
            
            
            (893
            )Impairment
                of goodwill and intangibles
            
            
            —
            
            
            40
            
            
            112Increase
                (decrease) in liability for employee termination benefits
            
            
            (277
            )
            
            281
            
            
            (148
            )Gain
                on sale of shares in Comverge
            
            
            —
            
            
            —
            
            
            (23,124
            )Gain
                on public offering of investment in Comverge
            
            
            —
            
            
            —
            
            
            (16,169
            )Loss
                on private placement of Paketeria
            
            
            —
            
            
            —
            
            
            37Gain
                on sale of dsIT Technologies Ltd.
            
            
            (541
            )
            
            —
            
            
            —Loss
                on sale of Databit and contract settlement.
            
            
            —
            
            
            2,298
            
            
            —Gain
                on sale of property and equipment, net
            
            
            (6
            )
            
            —
            
            
            —Stock
                and stock option compensation
            
            
            23
            
            
            1,522
            
            
            894Value
                of warrants issued for services provided
            
            
            —
            
            
            121
            
            
            —Amortization
                of beneficial conversion feature, debt origination costs and value
                of
                warrants in private placement of Debentures
            
            
            —
            
            
            —
            
            
            1,297Other
            
            
            (71
            )
            
            7
            
            
            (6
            )Changes
                in operating assets and liabilities:Decrease
                in accounts receivable, unbilled work-in- process, other current
                assets
                and other assets
            
            
            1,210
            
            
            350
            
            
            107Decrease
                (increase) in inventory
            
            
            36
            
            
            (18
            )
            
            20Increase
                (decrease) in accounts payable, other current liabilities and other
                liabilities
            
            
            (1,431
            )
            
            (626
            )
            
            1,316$
            (431
            )
            $
            4,548
            
            $
            (35,100
            )B.
                Non-cash investing and financing activities:Increase
                in goodwill from sale of dsIT Technologies
            
            $
            79Accrued
                expenses in respect of private placement of common stock
            
            
            
            
            $
            104Unrealized
                gain from Comverge shares, net of deferred taxes
            
            
            
            
            
            
            
            $
            29,555Conversion
                of loans and notes receivable and accrued interest due from Paketeria
                to
                investment in Paketeria
            
            
            
            
            
            
            
            $
            1,154Conversion
                of convertible debentures to common stock
            
            
            
            
            
            
            
            $
            479Adjustment
                of retained earnings and other current liabilities with respect to
                the
                adoption of FIN 48
            
            
            
            
            
            
            
            $
            305C.
                Assets/liabilities disposed of in the sale of dsIT
                Technologies:Current
                assets
            
            $
            1,152Non-current
                assets
            
            
            1,114Goodwill
                disposed
            
            
            4,358Differences
                from translation of dsIT Technologies financial statements
            
            
            22Goodwill
                acquired
            
            
            (79
            )Short-term
                debt
            
            
            (781
            )Current
                liabilities
            
            
            (256
            )Other
                liabilities
            
            
            (1,461
            )Minority
                interests
            
            
            (1,552
            )Gain
                on sale of dsIT Technologies Ltd
            
            
            541Deferred
                taxes on gain on sale of dsIT Technologies Ltd.
            
            
            373$
            3,431D.
                Assets/liabilities disposed of in the sale of Databit Inc. and contract
                settlement:Current
                assets
            
            
            
            
            $
            2,815Non-current
                assets
            
            
            
            
            
            40Debt
            
            
            
            
            
            (20
            )Current
                liabilities
            
            
            
            
            
            (1,816
            )Stock
                compensation costs
            
            
            
            
            
            315Other
            
            
            
            
            
            (10
            )Loss
                on the sale of Databit and contract settlement.
            
            
            
            
            
            (2,298
            )$
            (974
            )E.Assets/liabilities
                acquired in the acquisition of SCR-Tech:Current
                assets
            
            
            
            
            
            
            
            $
            (2,120
            )Non-current
                assets
            
            
            
            
            
            
            
            
            (845
            )Intangibles
            
            
            
            
            
            
            
            
            (5,511
            )Goodwill
            
            
            
            
            
            
            
            
            (3,714
            )Debt
            
            
            
            
            
            
            
            
            12Current
                liabilities
            
            
            
            
            
            
            
            
            1,110Deferred
                taxes
            
            
            
            
            
            
            
            
            29(11,039
            )Less
                unpaid transaction costs
            
            
            
            
            
            
            
            
            927(10,112
            )




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




F-6




**NOTE
      1—NATURE OF OPERATIONS**




(a)
      Description of Business




Acorn
      Energy, Inc. (“Acorn” or the “Company”) (formerly known as Acorn Factor, Inc.) a
      Delaware corporation is a holding company that specializes in acquiring and
      accelerating the growth of emerging ventures that promise improvement in the
      economic and environmental efficiency of the energy sector.




Through
      its majority-owned operating subsidiaries the Company provides the
      following:




·
            **RT
                Solutions**.
                Real time software consulting and development services, provided
                through
                the Company’s DSIT subsidiary, with a focus on port security for strategic
                energy installations.





·
            **SCR
                Catalyst and Management Services**for coal-fired power plants that use selective catalytic reduction
                (SCR)
                systems to reduce nitrogen oxide (NOx) emissions, provided through
                CoaLogix and its subsidiary SCR-Tech LLC. These services include
                SCR
                catalyst management, cleaning and regeneration as well as consulting
                services to help power plant operators to optimize efficiency and
                reduce
                overall NOx compliance costs.





The
      Company’s equity affiliates and other entities in which the Company owns
      significant equity interests are engaged in the following
      activities:





·
            **Comverge
                Inc.**Energy intelligence solutions for utilities and energy companies
                through
                demand response by Comverge, Inc.





·
            **Paketeria
                AG**.
                Owner and franchiser of a full- service franchise chain in Germany
                that
                combines eight services (post and parcels, electricity, eBay dropshop,
                mobile telephones, copies, printing, photo processing and printer
                cartridge refilling) in one store.





·
            **Local
                Power, Inc**.
                (LPI) Consultation services for Community Choice Aggregation, through
                Local Power, Inc.




·
                **GridSense****Systems
                    Inc.** Provides remote and control systems to electric utilities
                    and industrial facilities
                    worldwide.




The
      Company’s operations are based in the United States and Israel. Acorn’s shares
      are traded on the NASDAQ Global Market under the symbol ACFN.




(b)
      Accounting Principles




The
      consolidated financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of
      America.




(c)
      Use
      of Estimates in Preparation of Financial Statements




The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and the disclosure of contingent assets and liabilities
      as of the date of the financial statements, and the reported amounts of revenues
      and expenses during the reporting periods. Actual results could differ from
      those estimates.




(d)
      Amounts in the Footnotes in the Financial Statements




All
      amounts in the footnotes of the consolidated financial statements are in
      thousands except for net income (loss) per share data.




**NOTE
      2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Functional
      Currency and Foreign Currency Transactions**




The
      currency of the primary economic environment in which the operations of Acorn
      and its US subsidiaries are conducted is the United States dollar (“dollar”).
      Accordingly, the Company and all of its US subsidiaries use the dollar as their
      functional currency. The financial statements of the Company’s Israeli
      subsidiary whose functional currency is the New Israeli Shekel (“NIS”) have been
      translated in accordance with Statement of Financial Accounting Standards
      (“SFAS”) 52 of the Financial Accounting Standards Board of the United States
      (“FASB”) assets and liabilities are translated at year-end exchange rates, while
      operating results items are translated at the exchange rate in effect on the
      date of the transaction. Differences resulting from translation are presented
      in
      shareholders’ equity as accumulated other comprehensive income (loss). All
      exchange gains and losses denominated in non-functional currencies are reflected
      in finance expense, net, in the consolidated statement of operations when they
      arise.




F-7




**Principles
      of Consolidation and Presentation**




The
      consolidated financial statements of the Company include the accounts of all
      majority-owned subsidiaries. All intercompany balances and transactions have
      been eliminated. Minority interests in net losses are limited to the extent
      of
      their equity capital. Losses in excess of minority interest equity capital
      are
      charged against the Company.




**Cash
      Equivalents**




The
      Company considers all highly liquid investments, which include short-term bank
      deposits (up to three months from date of deposit) that are not restricted
      as to
      withdrawal or use, to be cash equivalents.





**Accounts
      Receivable**




Accounts
      receivable consists of trade receivables. Trade receivables are recorded at
      the
      invoiced amount.





**Allowance
      for Doubtful Accounts.**




The
      Company maintains allowances for doubtful accounts for estimated losses
      resulting from the inability of customers to make required payments. This
      allowance is based on specific customer account reviews and historical
      collections experience. If the financial condition of the Company’s funding
      parties or customers were to deteriorate, resulting in an impairment of their
      ability to make payments, additional allowances may be required. The Company
      performs ongoing credit evaluations of its customers and does not require
      collateral.




The
      allowance charged as an expense related to trade accounts receivable was $2,
      $0
      and $0 for the years ended December 31, 2005, 2006 and 2007, respectively.




**Inventory**




Inventories
      generally are comprised of chemicals used in the regeneration or rejuvenation
      of
      SCR modules. Inventories are stated at the lower of cost or market using the
      first-in, first-out method.




**Investment
      in Marketable Securities**




The
      Company’s investment in Comverge is accounted for as available for sale in
      accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115),
      Accounting for Certain Investments in Debt and Equity Securities. SFAS
      115
      establishes the accounting and reporting requirements for all debt securities
      and for investments in equity securities that have readily determinable fair
      values. All marketable securities must be classified as one of the following:
      held-to-maturity, available-for-sale, or trading. The Company classifies its
      marketable securities as available-for-sale and, as such, carries the
      investments at fair value, with unrealized holding gains and losses reported
      in
      shareholders’ equity as a separate component of accumulated other comprehensive
      income (loss). The cost of securities sold is determined based on the average
      cost method. Unrealized losses that are other than temporary are recognized
      in
      net income. The Company does not hold these securities for speculative or
      trading purposes




**Investments
      in Companies Accounted for Using the Equity or Cost Method**




Investments
      in other entities are accounted for using the equity method
      or
      cost basis depending upon the level of ownership and/or the Company's ability
      to
      exercise significant influence over the operating and financial policies of
      the
      investee. Investments of this nature are recorded at original cost and adjusted
      periodically to recognize the Company's proportionate share of the investees’
net income or losses after the date of investment. When net losses from an
      investment accounted for under the equity method exceed its carrying amount,
      the
      investment balance is reduced to zero and additional losses are not provided
      for. The Company resumes accounting for the investment under the equity method
      when the entity subsequently reports net income and the Company's share of
      that
      net income exceeds the share of net losses not recognized during the period
      the equity method
      was suspended. Investments are written down only when there is clear evidence
      that a decline in value that is other than temporary has occurred. When an
      equity accounted for investee issues its own shares, the subsequent reduction
      in
      the Company's proportionate interest in the investee is reflected in income
      as a
      deemed dilution gain proportionate interest in or loss on
      disposition.




F-8




The
      Company’s investment in Paketeria is accounted for by the equity method. The
      Company’s investments in both LPI and EnerTech is accounted for by the cost
      method. Capital gains or losses arising from the issuance of shares by
      associated companies to third parties are carried to income
      currently.




**Property
      and Equipment**




Property
      and equipment are presented at cost at the date of acquisition including
      capitalized labor costs, net of third party participation. Capital leases are
      recorded at the present value of the minimum lease payments. Depreciation and
      amortization is calculated based on the straight-line method over the estimated
      useful lives of the depreciable assets, or in the case of leasehold
      improvements, the shorter of the lease term or the estimated useful life of
      the
      asset. Improvements are capitalized while repairs and maintenance are charged
      to
      operations as incurred.




**Goodwill
      and Acquired Intangible Assets**




Goodwill
      represents the excess of cost over the fair value of net assets of businesses
      acquired. Under SFAS No. 142, goodwill and intangible assets determined to
      have
      an indefinite useful life are not amortized, but instead are tested for
      impairment at least annually. SFAS No. 142 also requires that intangible assets
      with estimable useful lives be amortized over their respective estimated useful
      lives to their estimated residual values, and reviewed for impairment in
      accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
      Long-Lived Assets”.




SFAS
      No.
      142 requires the Company to assess annually whether there is an indication
      that
      goodwill is impaired, or more frequently if events and circumstances indicate
      that the asset might be impaired during the year. The Company performs its
      annual impairment test at the conclusion of its annual budget process, in the
      fourth quarter of each year.  The
      Company has identified its operating segments as its reporting units for
      purposes of the impairment test. The Company’s existing goodwill and intangible
      assets are associated with its SCR and RT Solutions segments. The Company then
      determines the fair value of each reporting unit and compares it to the carrying
      amount of the reporting unit. Calculating the fair value of the reporting units
      requires significant estimates and assumptions by management. To the extent
      the
      carrying amount of a reporting unit exceeds the fair value of the reporting
      unit, there is an indication that the reporting unit goodwill may be impaired
      and a second step of the impairment test is performed to determine the amount
      of
      the impairment to be recognized, if any.




Other
      intangible assets that have finite useful lives, (i.e. purchased technology),
      are recorded at fair value at the time of the acquisition, and are carried
      at
      such value less accumulated amortization. The Company amortizes these intangible
      assets on a straight-line basis over their useful lives, estimated at ten
      years.




The
      costs
      of software licenses are presented at estimated fair value at acquisition date.
      These costs are amortized on a straight-line basis over the term of the license
      or estimated useful life of the software licenses, generally five years.




**Impairment
      of Long-Lived Assets**




Under
      SFAS No. 144, long-lived assets including certain intangible assets are to
      be reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable. Recoverability
      of
      assets to be held and used is measured by a comparison of the carrying amount
      of
      an asset to the undiscounted future net cash flows expected to be generated
      by
      the asset. If the carrying amount of an asset exceeds its estimated future
      undiscounted cash flows, an impairment charge is recognized by the amount by
      which the carrying amount of the asset exceeds the fair value of the asset.




F-9




**Treasury
      Stock**




Company
      shares held by the Company are presented as a reduction of shareholders’ equity,
      at their cost to the Company. Losses, from the reissuance of treasury stock
      are
      reflected in accumulated deficit.




**Revenue
      Recognition**




As
      prescribed in Staff Accounting Bulletin (“SAB”) 101 and 104, “Revenue
      Recognition in Financial Statements,” the Company recognizes revenue from when
      persuasive evidence of an arrangement exists, services have been rendered,
      the
      price is fixed or determinable, and collectibility is reasonably
      assured.




Revenues
      from management and consulting, time-and-materials service contracts,
      maintenance agreements and other services are recognized as services are
      provided.




In
      accordance with Statement of Position (“SOP”) No. 97-2 “Software Revenue
      Recognition”, revenues from fixed-price contracts which require significant
      production, modification and/or customization to customer specifications are
      recognized using the percentage-of-completion method in conformity with
      Accounting Research Bulletin (“ARB”) No. 45 “Long-Term Construction-Type
      Contracts” and SOP No. 81-1 “Accounting for Performance of Construction-Type and
      Certain Production-Type Contracts . The
      percentage-of-completion is determined based on labor hours incurred.
      Percentage-of-completion estimates are reviewed periodically, and any
      adjustments required are reflected in the period when such estimates are
      revised. Losses on contracts, if any, are recognized in the period in which
      the
      loss is determined.




In
      accordance with EITF Issue No. 99-19 “Recording Revenue Gross as a Principal
      Versus Net as an Agent”, revenue from drop-shipments of third-party hardware and
      software sales are recognized upon delivery, and recorded at the gross amount
      when the Company is responsible for fulfillment of the customer order, has
      latitude in pricing, has discretion in the selection of the supplier, customizes
      the product to the customer’s specifications and has credit risk from the
      customer.




Revenues
      related to SCR catalyst regeneration and cleaning services are recognized when
      the service is completed for each catalyst module. Customer acceptance is not
      required for regeneration and cleaning services in that CoaLogix’s contracts
      currently provide that services are completed upon receipt of testing by
      independent third parties confirming compliance with contract requirements.




From
      time
      to time, CoaLogix purchases spent catalyst modules, regenerates them and
      subsequently sells them to customers as refurbished units. In such cases,
      revenues are not recognized until the units are delivered to the
      customer.




Costs
      associated with performing SCR catalyst regeneration and cleaning services
      are
      expensed as incurred because of the close correlation between the costs
      incurred, the extent of performance achieved and the revenue recognized. In
      the
      situation where revenue is deferred due to collectibility uncertainties, the
      Company does not defer costs due to the uncertainties related to payment for
      such services.





**Unbilled
      Work-in-Process**




Revenues
      may be earned for those services in advance of amounts billable to the customer
      and are recognized when the service is complete, unless the contract terms
      will
      not result in invoice generation within six months from the date of completion
      of those services. Revenues recognized in excess of amounts billed are recorded
      as unbilled work-in-process. Such amounts are generally billed upon the
      completion of a project milestone.




**Warranty
      Provision**





DSIT
      generally grants its customers one to two year product warranty. No provision
      was made in respect of warranties based on the DSIT’s previous history. For
      certain projects, where the warranty period is included in the project contract
      amount, a portion of the contract amount is set aside and the revenue is not
      recognized until the warranty period begins.




F-10





Warranties
      provided for the Company’s SCR catalyst cleaning and regeneration services vary
      by contract, but typically provide limited performance guarantees. Estimated
      warranty obligations related to SCR catalyst cleaning and regeneration services
      are provided for as cost of revenues in the period in which the related revenues
      are recognized, established as a percentage of the previous twelve months SCR
      catalyst cleaning and regeneration services revenues based on management’s
      estimate of future potential warranty obligations and limited historical
      experience. Adjustments are made to accruals as warranty claim data and
      historical experience warrant. Historically, no warranty claims have ever been
      presented with respect to SCR catalyst cleaning and regeneration services.
      The
      Company’s warranty obligation may be materially affected by product or service
      failure rates and other costs incurred in correcting a product or service
      failure. Should actual product or service failure rates or other related costs
      differ from the Company's estimates, revisions to the accrued warranty liability
      would be required.





The
      following table summarizes the changes in accrued warranty liability from the
      year ended December 31, 2005 to the year ended December 31,
      2007:





Gross
                Carrying AmountBalance
                at December 31, 2005
            
            $
            —Warranties
                issued and adjustment of provision
            
            
            —Warranty
                claims
            
            
            —Balance
                at December 31, 2006
            
            $
            —Warranties
                issued and adjustment of provision
            
            
            —Warranty
                provision acquired in acquisition of SCR-Tech
            
            
            107Warranty
                claims
            
            
            —Balance
                at December 31, 2007
            
            $
            107




**Concentration
      of Credit Risk**




Financial
      instruments, which potentially subject the Company to concentrations of credit
      risk, consist principally of cash and cash equivalents and trade receivables.
      The Company uses local banks  to invest its excess cash in money market
      funds. The counter-party to a majority of the Company’s cash equivalent deposits
      is a major financial institution of high credit standing. The Company does
      not
      believe there is significant risk of non-performance by the counterparty. Related
      credit risk would result from a default by the financial institutions or issuers
      of investments to the extent of the recorded carrying value of these
      assets .
      Approximately 54% of the trade accounts receivable at December 31, 2007, were
      due from a customer that pays its receivables over usual credit periods (as
      to
      revenues from significant customers - see Note 20(d)). Credit risk with respect
      to the balance of trade receivables is generally diversified due to the number
      of entities comprising the Company’s customer base.




**Research
      and Development Expenses**




Research
      and development costs consisting primarily of labor and related costs are
      charged to operations as incurred. Participation by third parties in the
      Company’s research and development costs are netted against costs
      incurred.




**Advertising
      Expenses**




Advertising
      expenses are charged to operations as incurred. Advertising expense was $6,
      $3
      and $8 for the years ended December 31, 2005, 2006 and 2007, respectively.




**Stock-Based
      Compensation**




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




F-11




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





Year
                ended December 31, 2005Net
                loss from continuing operations as reported
            
            $
            (2,703
            )Plus:
                Stock-based employee compensation expense included in reported net
                loss
            
            
            —Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards - net of income taxes
            
            
            (275
            )Pro
                forma net loss from continuing operations
            
            $
            (2,978
            )Net
                income from discontinued operations as reported
            
            $
            1,385Plus:
                Stock-based employee compensation expense included in reported net
                income
            
            
            23Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards - net of income taxes
            
            
            (116
            )Pro
                forma net income from discontinued operations
            
            $
            1,292Pro
                forma net loss
            
            $
            (1,686
            )Basic
                and diluted net income (loss) per share - as reported:From
                continuing operations
            
            $
            (0.26
            )From
                discontinued operations
            
            
            0.10Basic
                and diluted
            
            $
            (0.16
            )Basic
                and diluted net income (loss) per share -pro forma:From
                continuing operations
            
            $
            (0.37
            )From
                discontinued operations
            
            
            0.16Basic
                and diluted
            
            $
            (0.21
            )




The
      Company accounts for stock-based compensation issued to non-employees on a
      fair
      value basis in accordance with SFAS No. 123R and EITF Issue No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services” and related
      interpretations.




F-12




Restricted
      stock awards are subject to risk of forfeiture and vesting conditions. Typically
      the vesting occurs over a prescribed period of time and requires continued
      service and employment by the recipient. Restricted stock is valued at fair
      market value at the date of grant and is amortized over the vesting period.




**Deferred
      Income Taxes**




Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes, as well as operating loss, capital
      loss and tax credit carryforwards. Deferred tax assets and liabilities are
      classified as current or non-current based on the classification of the related
      assets or liabilities for financial reporting, or according to the expected
      reversal dates of the specific temporary differences, if not related to an
      asset
      or liability for financial reporting. Valuation allowances are established
      against deferred tax assets if it is more likely than not that the assets will
      not be realized. Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply to taxable income in the years in which those
      temporary differences are expected to be recovered or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates or laws is
      recognized in operations in the period that includes the enactment
      date.




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. The Company's liability under
      SFAS No. 5 included interest and penalties, which were recognized as
      incurred within “Finance expense, net” in the Consolidated 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
      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. 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 the 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 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 expense, net” in the Consolidated
      Statements of Operations.




**Basic
      and Diluted Net Income (Loss) Per Share**




Basic
      net
      income (loss) per share is computed by dividing the net income (loss) by the
      weighted average number of shares outstanding during the year, excluding
      treasury stock. Diluted net income (loss) per share is computed by dividing
      the
      net income (loss) by the weighted average number of shares outstanding plus
      the
      dilutive potential of common shares which would result from the exercise of
      stock options and warrants or conversion of convertible
      securities. Convertible debentures are assumed to have been converted into
      ordinary shares, and net income is adjusted to eliminate the interest
      expense, less the tax effect. The dilutive effects of stock options,
      warrants and convertible securities are excluded from the computation of diluted
      net loss per share if doing so would be antidilutive. The number of options,
      warrants and Convertible Debentures that were excluded from the computation
      of
      diluted net income (loss) per share, as they had an antidilutive effect, were
      approximately 1,765,000, 1,945,000 and 85,000
      for the years ending December 31, 2005, 2006 and 2007,
      respectively.




F-13




**Comprehensive
      Income (Loss)**




The
      components of the Company’s comprehensive income (loss) for the periods
      presented are net income (loss), FAS 115 adjustments and differences from the
      translation of subsidiaries’ financial statements.





Components
                of accumulated other comprehensive income are as follows:
            
            As
                of December 31,2005
            
            2006
            
            2007Differences
                from translation of subsidiaries’ financial statements and investment in
                Paketeria
            
            $
            (32
            )
            $
            85
            
            $
            249Differences
                from translation of subsidiaries’ financial statements associated with
                sale of dsIT Technologies
            
            
            22
            
            
            —
            
            
            —Unrealized
                gain on investment in Comverge, net of deferred taxes
            
            
            —
            
            
            —
            
            
            29,555$
            (10
            )
            $
            85
            
            $
            29,804




**Recently
      Issued Accounting Principles**




In
      September 2006, the FASB issued SFAS Statement No. 157
      (“SFAS No. 157”), “Fair Value Measurements,” which addresses the
      measurement of fair value by companies when they are required to use a fair
      value measure for recognition or disclosure purposes under GAAP.
      SFAS No. 157 provides a common definition of fair value to be used
      throughout GAAP which is intended to make the measurement of fair value more
      consistent and comparable and improve disclosures about those measures.
 SFAS No. 157 is effective as of the beginning of the first fiscal year
      beginning after November 15, 2007.  The Company is currently
      evaluating the potential impact of this standard on its financial position,
      results of operations and cash flows.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159
      provides entities with the option to measure many financial instruments and
      certain other items at fair value that are not currently required to be measured
      at fair value, and also establishes presentation and disclosure requirements
      designed to facilitate comparisons between entities that choose different
      measurement attributes for similar types of assets and liabilities. This
      standard is intended to expand the use of fair value measurement, but does
      not
      require any new fair value measurements. FAS 159
      is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007. The Company is currently evaluating the potential impact
      of this standard on its financial position, results of operations and cash
      flows.




In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“FAS 141(R)”) and SFAS No. 160, “Non-controlling Interests in Consolidated
      Financial Statements” (“FAS 160”). FAS 141(R) requires the acquiring entity in a
      business combination to record all assets acquired and liabilities assumed
      at
      their respective acquisition-date fair values and changes other practices under
      FAS 141. FAS 141(R) also requires additional disclosure of information
      surrounding a business combination, such that users of the entity’s financial
      statements can fully understand the nature and financial impact of the business
      combination. FAS 160 requires entities to report non-controlling (minority)
      interests in subsidiaries as equity in the consolidated financial statements.
      The Company is required to adopt FAS 141(R) and FAS 160 simultaneously in its
      fiscal year beginning January 1, 2009. The provisions of FAS 141(R) will only
      impact the Company if it is party to a business combination after the
      pronouncement has been adopted. The Company is currently evaluating the effects,
      if any, that FAS 160 may have on its financial position, results of operations
      and cash flows.




In
      June
      2006, the Emerging Issues Task Force (EITF), reached a consensus on Issue
      No. 06-01, “Accounting for Consideration Given by a Service Provider to
      Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive
      Service from the Service Provider” (EITF No. 06-01). EITF 06-01 provides
      guidance on the accounting for consideration given to third party manufacturers
      or resellers of equipment which is required by the end-customer in order to
      utilize the service from the service provider. EITF 06-01 is effective for
      fiscal years beginning after June 15, 2007 (January 1, 2008, for the
      Company). An entity should recognize the effects of applying EITF 06-01 as
      a
      change in accounting principle through retrospective application to all prior
      periods unless it is impracticable to do so. The Company does not expect the
      adoption of EITF 06-01 to have a material impact on its results of operations
      and financial position.




F-14




In
      June
      2007, the Emerging Issues Task Force (EITF) reached Issue No. 07-03, "Accounting
      for Nonrefundable Advance Payments for Goods or Services Received to Be Used
      in
      Future Research and Development Activities" (EITF No. 07-03). EITF No. 07-03
      requires that nonrefundable advance payments for goods or services that will
      be
      used or rendered for future research and development activities be deferred
      and
      amortized over the period that the goods are delivered or the related services
      are performed, subject to an assessment of recoverability. The provisions of
      EITF 07-03 will be effective for financial statements issued for fiscal years
      beginning after December 15, 2007, and interim periods within those fiscal
      years
      (January 1, 2008, for the Company). The provisions of this EITF are applicable
      for new contracts entered into on or after the effective date. Earlier
      application is not permitted. The Company does not expect the adoption of EITF
      07-03 to have a material impact on its results of operations and financial
      position.




In
      December 2007, the FASB  ratified
      EITF Issue No. 07-01, "Accounting for Collaborative Arrangements "
      (" EITF
      07-01").  EITF 07-01 defines collaborative arrangements and
      establishes  reporting
      requirements for transactions between participants in a
      collaborative  arrangement
      and between participants in the arrangement and third parties. EITF 07-01 also
      establishes the appropriate income statement presentation and  classification
      for joint operating activities and payments between participants , as
      well
      as the sufficiency of the disclosures related to these arrangements . EITF
      07-01 is effective for fiscal years beginning after December 15,
      2008 ( January
      1, 2009, for the Company).  EITF 07-01 shall be applied using
      modified  version
      of retrospective transition for those arrangements in place at the  effective
      date. An entity should report the effects of applying this Issue as
      a  change
      in
      accounting principle through retrospective application to all prior  periods
      presented for all arrangements existing as of the effective date,
      unless  it
      is
      impracticable to apply the effects the change retrospectively. The Company
      does
      not expect the  adoption
      of EITF 07-01 to have a material impact on its results of operations  and
      financial position




**NOTE
      3— ACQUISITIONS**




(a)
      SCR-Tech




On
      November 7, 2007, the Company completed the purchase of SCR-Tech LLC
      (“SCR-Tech”) and other affiliated entities described below (collectively, the
“Acquired Companies”) from Catalytica Energy Systems, Inc. (“Catalytica”), a
      subsidiary of Renegy Holdings, Inc., for a purchase price of $9.6 million in
      cash. SCR-Tech and the other Acquired Companies are providers of catalyst
      regeneration technologies and management services for selective catalytic
      reduction systems used by coal-fired power plants to reduce nitrogen oxides
      (NOx) emissions.




The
      acquisition of the Acquired Companies was completed pursuant to a Stock Purchase
      Agreement (the “Purchase Agreement”), dated November 7, 2007, by and among the
      Company, Catalytica, Renegy Holdings, Inc. and CoaLogix Inc. (“CoaLogix”).
      CoaLogix is a newly-formed, wholly-owned subsidiary of the Company which was
      formed for the purpose of consummating the acquisition of the Acquired
      Companies.




The
      Purchase Agreement provides for the purchase by CoaLogix of all of the issued
      and outstanding capital stock of CESI-SCR, Inc. (“CESI-SCR”) and CESI-Tech
      Technologies, Inc. (“CESI-Tech”) from Catalytica for $9,600 plus a working
      capital adjustment (amounting to $714) and the assumption by the Company and/or
      CoaLogix of certain liabilities of Catalytica relating to the business
      (including certain obligations with respect to employment agreements previously
      entered into by the Acquired Companies). CESI-SCR owns all the issued and
      outstanding membership interests of SCR-Tech LLC (“SCR-Tech”), the primary
      operating entity of the Acquired Companies.




F-15




To
      provide financing for the purchase of the Acquired Companies, the Company
      entered into a Loan Agreement with CitiGroup Global Markets, Inc., dated as
      November 1, 2007 (the “Loan Agreement”). As security for the repayment of
      advances under the Loan Agreement, the Company pledged the 2,786,021 shares
      of
      Comverge, Inc. common stock it then held (see Note 4). On November 5, 2007,
      the
      Company drew down $14,000 under the Loan Agreement to finance the acquisition
      of
      the Acquired Companies. The $14,000 advanced to the Company under the Loan
      Agreement were payable upon demand by the lender. Interest was payable monthly
      on any amounts advanced under the Loan Agreement in accordance with the lender’s
      published rates and policies for securities margin accounts. The entire loan
      balance was repaid upon the sale by the Company of a portion of its investment
      in Comverge (see Note 4) and the pledge was withdrawn.




The
      transaction is accounted for as a purchase business combination. SCR-Tech’s
      results from operations for the period from acquisition to December 31, 2007
      have been included in the Company’s consolidated statement of
      operations.




The
      aggregate purchase price for SCR-Tech was $11,039, comprised of (i) $9,600
      representing the purchase price as per the Purchase Agreement (ii) $714
      representing the working capital adjustment, and (iii) $725 of transaction
      costs.




The
      Company has obtained preliminary valuation (which is subject to change) of
      intangible assets as of November 7, 2007, and has accordingly allocated the
      purchase price as follows:


Current
                  assets
              
              $
              2,120Property
                  and equipment
              
              
              813Intangible
                  assets
              
              
              5,511Goodwill
              
              
              3,714Other
                  non-current assets
              
              
              32Total
                  assets acquired
              
              
              12,190Current
                  liabilities
              
              
              1,110Non-current
                  liabilities
              
              
              12Deferred
                  tax liabilities created in acquisition
              
              
              29Total
                  liabilities assumed
              
              
              1,151Net
                  assets acquired
              
              $
              11,039


The
      intangible assets represent the fair value of technologies acquired (ten-year
      useful life). The goodwill resulting from the acquisition is not deductible
      for
      income tax purposes. The intangibles and goodwill acquired relating to the
      acquisition SCR-Tech was “pushed down” from the Company in accordance with
      Emerging Issues Task Force Issue No. D-97, *Push
      Down Accounting* .
      The
      intangible assets and the goodwill acquired were assigned to the Company’s new
      SCR segment.


The
        following are certain unaudited pro forma combined income data assuming that
        the
        acquisition by CoaLogix of the Acquired Companies occurred on January 1,
        2007
        and 2006, respectively. The unaudited pro forma financial information is
        not
        necessarily indicative of the combined results that would have been attained
        had
        the acquisitions of the Acquired Companies occurred as of January 1, 2007
        and
        2006, respectively, nor is it necessarily indicative of future
        results.




Year
                ended December 31,2006
            
            2007In
                thousands (expect per share data)(unaudited)
            
            (unaudited)****Sales
            
            $
            11,500
            
            $
            9,424Net
              income (loss)
            
            $
            (7,041
            )
            $
            29,289Net
              income (loss) per share - basic
            
            $
            (0.82
            )
            $
            2.97Net
              income (loss) per share - diluted
            
            $
            (0.82
            )
            $
            2.54




(b)
      DSIT
      Solutions




On
      November 29, 2007, the Company increased its holdings in DSIT by acquiring
      the
      shares of DSIT’s former CEO for $740 (transaction costs were immaterial). As a
      result of this acquisition, the Company increased its holdings in DSIT to
      approximately 72%. The purchase price is subject to upward adjustment if, in
      the
      event that at any time prior to December 31, 2009, the Company receives
      consideration for its shares in DSIT exceeding the value for DSIT implicit
      in
      the purchase price.




In
      addition, on November 29, 2007, the Company entered into a put option agreement
      with certain affiliates of the former CEO who are shareholders of DSIT pursuant
      to which such affiliates have the right to sell to the Company all but not
      less
      than all of the shares they hold in DSIT for an aggregate purchase price of
      $294. The Option is exercisable until December 31, 2008. As a precondition
      to
      the grant of the Option, the affiliates delivered to the Company an irrevocable
      proxy to vote their shares on any issue brought before the shareholders of
      DSIT.




The
      Company has obtained a preliminary valuation (which is subject to change) of
      intangible assets as of November 29, 2007 for the purposes of allocating the
      $740 purchase price to the assets, liabilities and the put option. The Company
      has tentatively assigned $557 of the purchase price to intangible assets
      representing the fair value of technology, backlog and customer relationships
      with the balance of $231 being assigned to goodwill and an offset of $48 for
      the
      put option. No amortization of the intangibles was recorded in 2007 due to
      immateriality. The goodwill resulting from the acquisition is not deductible
      for
      income tax purposes as the acquisition was done by an Israeli subsidiary and
      thus will not be amortized for financial statement purposes in accordance with
      SFAS No. 142. The intangible assets and the goodwill acquired were assigned
      to
      the Company’s RT Solutions segment.




F-16




**NOTE
      4—INVESTMENT IN COMVERGE**




On
      April
      7, 2003, the Company and its then consolidated Comverge subsidiary, signed
      and
      closed on a definitive agreement with a syndicate of venture capital firms
      raising an aggregate of $13,000 in capital funding. The Company purchased $3,250
      of Series A Convertible Preferred Stock issued by Comverge in the equity
      financing and incurred transaction costs of an additional $294. In connection
      with the transaction, the Company converted to equity intercompany balances
      of
      $9,673.




The
      Series A Convertible Preferred Stock was convertible into Comverge’s common
      stock initially on a one-for-one basis subject to adjustment for the achievement
      of certain performance criteria. Conversion was mandatory upon the closing
      of a
      firmly underwritten public offering of shares of Common Stock of Comverge at
      a
      per share price not less than five times the original per-share purchase price
      of the Preferred Stock.




As
      a
      result of the private equity financing transactions and other agreements
      described above, effective April 1, 2003, Comverge was no longer a controlled
      subsidiary of the Company, and the Company began to account for its investment
      in Comverge on the equity method.




In
      December 2003, the Company exercised its option and invested an additional
      $100
      in Series A-2 Convertible Preferred Stock which had the same rights as the
      Series A, except the Series A-2 Preferred Stock was junior in priority in
      liquidation to the Series A Preferred Stock.




In
      2006,
      the Company made an additional $210 investment in Comverge’s Series C Preferred
      Stock. The rights
      in
      the Series C Preferred Stock were similar to those of Series A Preferred
      Stock. As a
      result of the investment, the Company immediately recognized a loss equal to
      (i)
      its provision for unrecognized losses in Comverge of $173 as
      of
      December 31, 2005 and (ii) an additional $37 representing its equity share
      of
      Comverge’s losses.




In
      October 2006, Comverge filed a registration statement on Form S-1 with the
      Securities and Exchange Commission for an initial public offering of shares
      of
      its common stock.




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 owned 2,786,021 shares of Comverge common stock, which at the time
      represented approximately 15.9% of the then issued and outstanding capital
      stock
      of Comverge.




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. The lock-up period expired on October 18, 2007.




As
      a
      result of the Comverge offering, the Company recorded an increase in its
      investment in Comverge (from a negative value of $1,824) and recorded a non-cash
      gain of $16,169 in “Gain on public offering of Comverge”. Subsequent to the
      offering, the Company no longer accounted for its investment in Comverge under
      the equity method.




F-17




On
      December 12, 2007, as part of Comverge’s follow-on offering, the Company sold
      1,022,356 of its Comverge shares for $28,388, net of transaction costs and
      recorded a pre-tax gain of $23,124.




As
      of
      December 31, 2007, the remaining 1,763,665 of Comverge shares held by the
      Company are accounted for as “available-for-sale” under SFAS 115. Accordingly
      the Company recorded its investment in Comverge based on Comverge’s share price
      of $31.49 at December 31, 2007 and reflected an increase of $46,457 to its
      investment balance by recording those shares at fair market value (to $55,538)
      and recorded a deferred tax liability of $16,902 to Accumulated Other
      Comprehensive Income with respect to the recording those shares at fair market
      value. Subsequent to December 31, 2007, the share price of Comverge’s share
      price decreased significantly. See Note 22 - Subsequent Events.




**NOTE
      5—INVESTMENT IN PAKETERIA**




On
      August
      7, 2006, the Company entered into a Common Stock Purchase Agrement with
      Paketeria GmbH, a limited liability company incorporated under the laws of
      Germany, and certain Paketeria shareholders, for the purchase by the Company
      of
      an approximately 23% interest in Paketeria for a purchase price of approximately
      €598 ($776 at the then exchange rates) plus transaction fees of approximately
      $101.  Paketeria
      is a Berlin based store owner and franchisor whose stores provide post and
      parcels, eBay dropshop, mobile telephones, photocopying, printing, photo
      processing, office supplies and printer cartridge refilling services in Germany.




In
      addition to the Common Stock Purchase Agreement, the Company also entered into
      a
      Note Purchase Agreement with Paketeria’s founder and managing director. Under
      the Note Purchase Agrement, the Company agreed to purchase from the founder
      and
      managing director all or a portion of the €210 ($270 at the then exchange rate)
      convertible promissory note (the “Note”) issued by Paketeria and payable to him.
      The Note (which as described below has been fully converted) was convertible
      into shares of Paketeria at a conversion price of €50.70 per share ($65.30 per
      share at the then exchange rate), provided for accrual of interest at a rate
      of
      8% per annum, and a final maturity of August 7, 2009. The Note Purchase
      Agreement required the Company to purchase one third of the principal amount
      of
      the Note upon Paketeria’s achieving each of three franchise licensing
      milestones—the licensing of its 60th, 75th, and 115th franchises.





On
      October 30, 2006, the Company increased its ownership in Paketeria from 23%
      to
      approximately 33%. The increase was accomplished through (i) the purchase and
      conversion into 2,850 Paketeria shares pursuant to a Purchase Notice Conversion
      and Accession Agreement of €140 ($184 at the then exchange rates), representing
      two-thirds (plus accrued interest) the convertible note and (ii) an additional
      investment by the Company of approximately €183 ($235 at the then exchange
      rates) for the purchase of an additional 3,000 Paketeria shares plus transaction
      costs of $42. The Company’s total investment in Paketeria prior to the
      allocation of the purchase price was $1,338.




The
      Company allocated $31 of the purchase price to the fair market value of the
      call
      option to purchase the convertible note. In September 2007, in connection with
      the Paketeria Private Placement (see below) the Company exercised its call
      option




The
      Company allocated $30 of the purchase price to the fair value of the put option
      which requires the Company to purchase the principal amount of the convertible
      note. At December 31, 2006, the Company redetermined the fair value of the
      remaining put option and determined it to be $9 based upon Paketeria’s
      advancement on progress in achieving the milestones noted above. The reduction
      in the fair value of the put option was recorded as part of the Company’s equity
      loss in Paketeria.





The
      Company also entered into a Stock Purchase Agreement with two shareholders
      of
      Paketeria—one of whom is the Company’s President and Chief Executive Officer and
      the other of whom is a director of the Company. Pursuant to that agreement,
      the
      Company was entitled through August 2007 to purchase the shares of Paketeria
      equally held by the two Paketeria shareholders for an aggregate purchase price
      of the US dollar equivalent on the date of purchase of €598, payable in Company
      Common Stock and warrants on the same terms as the Company’s 2006 private
      placement (see Note 16b). The Company determined the fair value of the option
      to
      purchase the shares under the Stock Purchase Agreement to be $68 using a
      Black-Scholes calculation using a risk-free interest rate of 5.09 %, an expected
      life of one year, an annual volatility of 20% and no dividends. Such option
      was
      extended by both shareholders initially to November 5, 2007 and subsequently
      extended again only by the Company’s President and Chief Exective Officer on his
      share to March 31, 2008 and then again until June 30, 2008. If the Company
      exercised its option on these shares, its holdings in Paketeria would increase
      by approximately 5.6.%. At the current exchange rate the exercise of the option
      by the Company would result in the issuance of approximately 166,000 shares
      of
      Common Stock and warrants exercisable for approximately 41,500 shares of Common
      Stock. The warrants would have an exercise price of $2.78 per share and be
      exercisable for five years from their grant date.




F-18





The
      Company’s investment in Paketeria is accounted for using the equity method in
      accordance with APB Opinion No. 18, “The Equity Method of Accounting for
      Investments in Common Stock”. Based on an independent appraisal, the Company has
      allocated the remaining $1,269 balance of the investment in Paketeria as
      follows:





·
            $281
                to the value of the non-compete agreement given to Paketeria’s founder and
                managing director. The non-compete agreement is to be amortized using
                the
                straight-line method over four years.


·
            $185
                to the value of the franchise agreements at the date of the investment.
                The value of the franchise agreements is to be amortized using the
                sum-of-years digits method over the five-year life of the franchise
                agreements at acquisition.


·
            $446
                to the Paketeria brand name. The value associated with the brand
                name is
                deemed to be a intangible asset with an indefinite life and accordingly,
                is not amortized.


·
            $357
                to non-amortizing goodwill.





All
      the
      above components of the Company’s investment are not reflected separately as
      such in the consolidated balance sheet of the Company, but it is reflected
      as
      components of the Company’s investment in Paketeria.





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





On
      September 20, 2007, Paketeria completed a private placement of its shares
      raising approximately €1,733 ($2,457 at the then exchange rate). The shares were
      issued by Paketeria on the basis of a valuation of €133.33 per Euro share
      capital, representing a pre-money valuation of Paketeria of €8,000 ($11,344 at
      the then exchange rate).




In
      addition, concurrent with the private placement, the Company converted
      shareholder loans in the aggregate principal amount of €750 ($1,056 at the then
      exchange rate) plus accrued interest, into shares of Paketeria on the same
      basis
      as the private placement. At the same time the Company exercised its option
      under the August 2006 investment agreement to acquire the remaining portion
      of
      the convertible promissory note in the amount of €70 ($98 at the then exchange
      rate) plus accrued interest. The Company converted this balance plus accrued
      interest into shares of Paketeria on the basis of an evaluation of € 50.70
      nominal value per Euro share capital (the valuation from the August 2006
      investment agreement) upon the closing of the private placement. The increase
      in
      the Company’s investment in Paketeria from its additional investment was
      allocated as an increase in the goodwill component of the Company’s investment
      in Paketeria.




After
      the
      private placement and related transactions described above, the Company owned
      approximately 31% of Paketeria.




F-19




As
      a
      result of the Paketeria private placement, the Company recorded a non-cash
      loss
      of $37 in “Loss on Private Placement in Paketeria”.





On
      December 7, 2007 Paketeria converted from a GmbH company to an AG company and
      recapitalized its share capital with 1,296,000 shares outstanding of which
      the
      Company owns 406,425 shares.




On
      December 21, 2007, Paketeria’s shares were listed under the symbol “AOSTYL” on
      the Open Market (Freiverkehr) of the Frankfurt Stock Exchange and became
      eligible for trading. In connection with the listing, all the Paketeria
      shareholders (including the Company) placed in escrow and authorized a German
      investment bank to sell up to 10% of their shares (129,600 shares) for a period
      of six months following the initial listing at an initial he minimum ask price
      of €77.00 per share. The proceeds of any sales of shares by the investment bank
      are to be held in escrow under the terms of an escrow agreement for a period
      up
      to six months from the listing date after which the bank is to transfer 50%
      of
      the proceeds (net of transaction fees and commissions) of the sale of the shares
      of the shareholders (a minimum of €2.5 million) to the shareholders and the
      remaining 50% the proceeds of the sale of the shares (a minimum of €2.5 million)
      are to be used to subscribe for new shares of the company. In connection with
      the listing and the escrow arrangements the Paketeria shareholders agreed to
      lock up certain of their shares for upto one year from the listing date.
      Under the lock-up agreement, shareholders may not offer, pledge, allot, sell
      or
      otherwise transfer or dispose of directly or indirectly any shares of Paketeria.





There
      is
      currently a limited market for Paketeria’s shares on this market. From the
      listing date to December 31, 2007, 872 shares of Paketeria were
      sold.




Summary
      financial information for Paketeria as derived from Paketeria’s financial
      statements for the years ended December 31, 2006 and 2007 and for the period
      from August 8, 2006 to December 31, 2006, is as follows:




**Financial
                  Position**
              
              As
                  at
                December
                31,
                  2006
              
              As
                  at
                December
                31,
                  2007Cash
                  and cash equivalents
              
              $
              179
              
              $
              438Other
                  current assets
              
              
              1,100
              
              
              1,491Property
                  and equipment, net
              
              
              82
              
              
              556Other
                  assets
              
              
              12
              
              
              86Total
                  assets
              
              $
              1,373
              
              $
              2,571Short-term
                  debt (to related parties)
              
              $
              101
              
              $
              —Current
                  liabilities
              
              
              784
              
              
              1,209Other
                  non-current liabilities
              
              
              —
              
              
              179Total
                  liabilities
              
              
              885
              
              
              1,388Common
                  stock and paid-in capital
              
              
              2,001
              
              
              2,221Accumulated
                  deficit
              
              
              (1,513
              )
              
              (1,038
              )Total
                  liabilities and shareholders’ equity
              
              $
              1,373
              
              $
              2,571


**Results
                of Operations**
            
            
            Period
                from August 8, 2006 to December 31, 2006
            
            
            Year
                ended December 31, 2007Sales
            
            $
            1,518
            
            $
            3,555Gross
                profit (loss)
            
            $
            188
            
            $
            (472
            )Operating
                loss
            
            $
            (404
            )
            $
            (2,996
            )Net
                loss
            
            $
            (456
            )
            $
            (3,014
            )




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




Initial
                investment - August 2006
            
            $
            776Transaction
                costs of initial investment
            
            
            101Subsequent
                investment and exercise of first two options - October
                2006
            
            
            419Transaction
                costs of subsequent investment
            
            
            42Amortization
                of acquired non-compete and franchise agreements
            
            
            (52
            )Change
                in value of put option
            
            
            20Equity
                loss in Paketeria - period from August 7, 2006 to December 31,
                2006
            
            
            (127
            )Translation
                adjustment
            
            
            33Investment
                balance as of December 31, 2006
            
            $
            1,212Conversion
                of debt and accrued interest in connection with private placement
                (including transaction costs)
            
            
            1,189Adjustment
                of investment with respect to non-cash loss in connection with private
                placement
            
            
            (37
            )Amortization
                of acquired non-compete and franchise agreements and change in value
                of
                options
            
            
            (186
            )Company’s
                share of Paketeria’s losses
            
            
            (971
            )Translation
                adjustment
            
            
            232Investment
                balance as of December 31, 2007
            
            $
            1,439





F-20





See
      Note
      16(d)(3) with respect to the options granted to Paketeria’s founder and managing
      director as part of the Company’s investment in Paketeria. During the years
      ended December 31, 2007 and 2006, the Company recorded $49 and $265,
      respectively, of SFAS 123R stock compensation expense as part of its Share
      in
      Losses of Paketeria.




The
      percentage share of Paketeria’s loss recognized by the Company as equity loss
      against its investment in 2006 can be found in the table below:





Percentage
                of Paketeria Losses Recognized Against Investment in
                PaketeriaAugust
                7, 2006 - October 30, 2006
            
            
            23
            %October
                31, 2006 - September 20, 2007
            
            
            33
            %September
                21, 2007 - December 31, 2007
            
            
            31
            %




**NOTE
      6—OTHER INVESTMENTS**




(a)
            Local
                Power




On
      July
      31, 2007, the Company invested $250 (plus $18 of transaction costs) in Local
      Power, Inc. (LPI), for 10% (fully diluted) of LPI. LPI is a newly created
      company located in California which provides consultation services for Community
      Choice Aggregation, a revolution in renewable power and retail markets for
      electricity. Under the terms of its investment agreement, the Company has an
      option until July 31, 2008 (extended in February 2008 to January 31, 2009 in
      exchange for the Company providing a loan to LPI) to acquire (in whole or in
      part) additional shares representing 41% of LPI’s fully diluted equity at an
      aggregate price of $2,750.




The
      Company accounts for its investment in LPI under the cost method.




(b)
            EnerTech
                III




In
      August
      2007, the Company committed to invest up to $5,000 over a ten-year period in
      EnerTech Capital Partners III L.P. (“EnerTech III”), a proposed $250 million
      venture capital fund targeting early and expansion stage energy and clean energy
      technology companies that can enhance the profits of the producers and consumers
      of energy. To date, the Company had received and funded a capital call of $400
      to EnerTech III.




The
      Company accounts for its investment in EnerTech III under the cost
      method.




**NOTE
      7—DISCONTINUED OPERATIONS**




(a)
      Sale
      of Databit




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




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




F-21




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




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




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




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




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




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




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




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




As
      a
      result of the transaction, the Company transferred the following assets and
      liabilities at March 9, 2006:




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




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




Results
      of operations of the discontinued operations of Databit were as
      follows:





Year
                ended December 31, 2005
            
            Period
                ended March 9, 2006Sales-
                Products
            
            $
            17,677
            
            $
            2,949Cost
                of sales - Products
            
            
            14,501
            
            
            2,316Gross
                profit
            
            
            3,176
            
            
            633Selling,
                marketing, general and administrative expenses
            
            
            3,126
            
            
            558Income
                from operations
            
            
            50
            
            
            75Other
                income, net
            
            
            —
            
            
            3Finance
                expense, net
            
            
            5
            
            
            —Net
                income before income taxes
            
            
            45
            
            
            78Income
                tax benefit
            
            
            1
            
            
            —Net
                income from discontinued operations
            
            $
            46
            
            $
            78






As
      a
      result of the transaction, the Company recorded a loss of $2,298 in the first
      quarter of 2006. In addition, cash, which had previously been restricted with
      respect to the GM Employment Agreement, was no longer restricted. Subsequent
      to
      the first quarter of 2006, the Company no longer has any activity in its
      Computer Hardware segment. In the fourth quarter of 2006, following a subsequent
      review of prior year’s expense allocations between the Company and Databit,
      Databit agreed to reimburse the Company for these costs. The adjustment of
      $229
      is presented as a reduction in the loss on the sale of Databit and contract
      settlement. The total net loss from the sale of Databit and contact settlement
      was $2,069. As at December 31, 2006, the Company had a receivable balance from
      Databit of $116 which is included in Other Current Assets. As of December 31,
      2007 the unpaid balance was $5.





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





Excess
                of assets over liabilities transferred
            
            $
            1,204Contract
                settlement costs
            
            
            600Stock
                compensation expense
            
            
            315Professional
                fees and other transaction costs
            
            
            179Adjustment
                of prior years expense allocations
            
            
            (229
            )Total
                loss on the sale of Databit and contract settlement
            
            $
            2,069






F-22




(b)
      Sale
      of dsIT Technologies Ltd.




In
      August
      2005, the Company completed the sale of its 68% owned dsIT Technologies Ltd.
      (“Technologies”) subsidiary and its associated outsourcing consulting business.
      The operations that were sold are comprised of Technologies’ business of
      providing computer software and systems professionals on a time and materials
      basis to clients in Israel. In connection with the transaction, the Company
      increased its holdings in dsIT to 80%. Total proceeds of the transaction were
      approximately $3,661 (not including transaction costs of approximately $230).
      As
      a result of the transaction, the Company recorded a gain from the sale of
      discontinued operations of $541, net of taxes of $373. As part of the
      transaction, goodwill of $4,358 (net of associated cumulative translation
      adjustment of $22) associated with Technologies was allocated to the
      discontinued component based on the fair value of Technologies and dsIT.
      Together with the transaction, the Company issued to the purchaser a warrant
      to
      purchase 10% of dsIT for $200. The warrant expires August 18, 2012. The fair
      value of the warrant was estimated using the Black-Scholes model to be of an
      immaterial amount. Although the Company continues to provide certain
      professional time and materials services to clients in Israel on a limited
      basis, these continuing activities are limited to existing customers and are
      not
      material and accordingly, the classification of dsIT Technologies is as a
      discontinued operation under SFAS No. 144.




Results
      of operations of the discontinued operations associated with Technologies were
      as follows:




Period
                from January 1 to August 18, 2005Sales
            
            $
            5,636Cost
                of sales
            
            
            4,440Gross
                profit
            
            
            1,196Operating
                income
            
            
            1,001Interest
                expense, net
            
            
            59Net
                income from discontinued operations, net of income taxes
            
            $
            798




**NOTE
      8-ACCOUNTS RECEIVABLE, NET**




Accounts
                receivable, net, consists of the following:
            
            As
                of December 31,2006
            
            2007Trade
                accounts receivable
            
            $
            1,387
            
            $
            1,791Allowance
                for doubtful accounts
            
            
            (14
            )
            
            (16
            )Accounts
                receivable, net
            
            $
            1,373
            
            $
            1,775




**NOTE
      9-OTHER CURRENT ASSETS**




Other
                current assets consist of the following:
            
            As
                of December 31,2006
            
            2007Prepaid
                expenses and deposits
            
            $
            154
            
            $
            357Debt
                origination costs (see Note 12)
            
            
            —
            
            
            895Employees
            
            
            43
            
            
            34Due
                from Local Power
            
            
            —
            
            
            25Due
                from Databit
            
            
            116
            
            
            5Other
            
            
            3
            
            
            75$
            316
            
            $
            1,391




**NOTE
      10-PROPERTY AND EQUIPMENT, NET**




Property
      and equipment consist of the following:




Estimated
                Useful Life (in years)
            
            As
                of December 31,Cost:
            
            
            
            2006
            
            2007Computer
                hardware and software
            
            
            3
                - 5
            
            $
            1,231
            
            $
            934Equipment
            
            
            4-10
            
            
            383
            
            
            974Vehicles
            
            
            4-7
            
            
            25
            
            
            41Leasehold
                improvements
            
            
            Term
                of lease
            
            
            176
            
            
            3631,815
            
            
            2,312Accumulated
                depreciation and amortizationComputer
                hardware and software
            
            
            
            
            
            956
            
            
            502Equipment
            
            
            
            
            
            283
            
            
            281Vehicles
            
            
            
            
            
            15
            
            
            22Leasehold
                improvements
            
            
            
            
            
            116
            
            
            1721,370
            
            
            977Property
                and equipment, net
            
            
            
            
            $
            445
            
            $
            1,335




Depreciation
      and amortization in respect of property and equipment amounted to $1 99,
      $161 and
      $195
      for 2005, 2006 and 2007, respectively. During 2007, the Company wrote off $748
      of fully depreciated assets.




Property
      and equipment is presented net of third party participation received of $78
      and
      $75 in the years ended December 31, 2007 and 2006, respectively.




**NOTE
      11—GOODWILL AND OTHER INTANGIBLE ASSETS**




During
      the year ended December 31, 2007, the Company recorded additions to goodwill
      in
      both its SCR segment and its RT Solutions segment as a result of its acquisition
      of SCR-Tech and its additional investment in DSIT (See Notes 3(a) and 3(b)).




The
      changes in the carrying amounts of goodwill by segment from the year ended
      December 31, 2005 to the year ended December 31, 2007 were as follows:




SCR
            
            RT
                Solutions
            
            Other
            
            TotalBalance
                as of December 31, 2005
            
            $
            —
            
            $
            40
            
            $
            89
            
            $
            129Goodwill
                impairment
            
            
            —
            
            
            (40
            )
            
            —
            
            
            (40
            )Cumulative
                translation adjustment
            
            
            —
            
            
            —
            
            
            8
            
            
            8Balance
                as of December 31, 2006
            
            
            —
            
            
            —
            
            
            97
            
            
            97Goodwill
                created in acquisition of SCR-Tech (see Note 3(a))
            
            
            3,714
            
            
            —
            
            
            —
            
            
            3,714Goodwill
                in additional investment in DSIT (see Note 3(b))
            
            
            —
            
            
            231
            
            
            —
            
            
            231Goodwill
                impairment
            
            
            —
            
            
            —
            
            
            (89
            )
            
            (89
            )Cumulative
                translation adjustment
            
            
            —
            
            
            —
            
            
            (8
            )
            
            (8
            )Balance
                as of December 31, 2007
            
            $
            3,714
            
            $
            231
            
            
            —
            
            $
            3,945




As
      required by SFAS No. 142, the Company performs an annual impairment test of
      recorded goodwill (during the fourth quarter of each year), or more frequently
      if impairment indicators are present. The fair value of the each segment was
      determined by applying a market-rate multiple to the estimated near-term future
      revenue stream expected to be produced by the segment. In the year ended
      December 31, 2005, the Company performed its annual impairment test and no
      goodwill impairment resulted. In 2006, the Company recorded an impairment of
      $40
      with respect to the goodwill in its RT Solutions segment. In 2007, the Company
      recorded an impairment of $89 with respect to the goodwill in its Other segment.




F-23




The
      changes in the carrying amounts and accumulated amortization of intangible
      assets from the year ended December 31, 2005 to the year ended
      December 31, 2007 were as follows (in thousands):


SCR
                  Technologies
              
              RT
                  Solutions Intangibles
              
              Software
                  Licenses
              
              NetCost
              
              Accumulated
                  amortization
              
              Cost
              
              Accumulated
                  amortization
              
              Cost
              
              Accumulated
                  amortizationBalance
                  as of December 31, 2005
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              224
              
              $
              (138
              )
              $
              87Amortization
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (39
              )
              
              (39
              )Balance
                  as of December 31, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              224
              
              
              (177
              )
              
              48Intangibles
                  created in acquisition of SCR-Tech (see Note 3(a))
              
              
              5,511
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,511Intangibles
                  in additional investment in DSIT (see Note 3(b))
              
              
              —
              
              
              —
              
              
              557
              
              
              —
              
              
              —
              
              
              —
              
              
              557Impairment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (23
              )
              
              —
              
              
              (23
              )Amortization
              
              
              —
              
              
              (81
              )
              
              —
              
              
              —
              
              
              —
              
              
              (24
              )
              
              (105
              )Balance
                  as of December 31, 2007
              
              $
              5,511
              
              $
              (81
              )
              $
              557
              
              
              --
              
              $
              201
              
              $
              (201
              )
              $
              5,987




Amortization
      in respect of intangible assets amounted to $34, $39 and $105 for 2005, 2006
      and
      2007, respectively.




Amortization
      expense with respect to intangible assets is estimated to be $552 per year
      for
      each of the years ending December 31, 2008 through 2012.




**NOTE
      12—SHORT-TERM BANK CREDIT, CONVERTIBLE DEBENTURES AND OTHER
      DEBT**




(a)
      Lines
      of credit




At
      December 31, 2007, the Company had approximately $244 in Israeli credit lines
      available to DSIT by an Israeli bank, all of which were then being used. In
      addition, the bank has allowed DSIT to utilize an additional $346 of credit
      which is secured by deposits made by the Company (see Note 15(b)). These credit
      lines are generally for a term of one year, denominated in NIS and bear interest
      at a weighted average rate of the Israeli prime rate per annum
      plus 1.5% (at December 31, 2006, plus 2.2%). The Israeli prime rate fluctuates
      and as of December 31, 2007 was 5.5% (December 31, 2006, 6.0%).




At
      December 31, 2007, DSIT was in technical violation of covenants under its line
      of credit. 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.




F-24




(b)
      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. In December 2007, the Company decided to redeem all of the
      outstanding debentures. On December 18, 2007, the Company decided to redeem
      all
      outstanding Debentures. All the unconverted Debentures outstanding were redeemed
      on January 29, 2008 (see Note 22 - Subsequent Events).




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. During 2007,
      $480 of the Debentures were converted into shares of the Company’s Common Stock
      resulting in the issuance of 126,263 shares.




The
      Company determined the fair value of the beneficial conversion feature of the
      Debentures issued to be $2,570 for both the initial and second closings. In
      accordance with applicable accounting principles, the beneficial conversion
      feature is reflected as a discount to the total Debenture amount and is charged
      to interest expense over the four-year period of the Debenture. The period
      of
      amortization of the beneficial conversion feature was accelerated in December
      2007 as a result of the previously noted decision to redeem all the outstanding
      Debentures in 2008. With respect to the beneficial conversion feature, the
      Company recorded interest expense of $747 in the year ended December 31,
      2007.




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 $531 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 was initially charged to interest expense over the
      four-year life of the Debenture. The period of amortization of the warrants
      was
      accelerated in December 2007 as a result of the previously noted decision to
      redeem all the outstanding Debentures in 2008. In the year ended December 31,
      2007, the Company recorded interest expense of $186 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%. As noted
      above, all the unconverted Debentures outstanding were redeemed on January
      29,
      2008 (see Note 22 - Subsequent Events).




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 were initially
      charged to interest expense over the four year life of the Debentures. The
      period of amortization of the debt origination costs was accelerated in December
      2007 as a result of the previously noted decision to redeem all the outstanding
      Debentures in 2008. In the year ended December 31, 2007, the Company recorded
      interest expense of $364 with respect to these debt origination costs. At
      December 31, 2007, the net balance of the debt origination costs of $895 is
      included in Other Current Assets (see Note 9).




F-25




(b)
      Short
      and Long-Term Debt





Short
      and
      long-term debt includes bank debt representing loans received by DSIT from
      Israeli banks denominated in NIS and capital lease obligations. In 2006, other
      debt relates to a note payable to the Company’s CEO (see Note 19(d) for terms).
      Such debt was repaid in 2007.




As
                of December 31,2006
            
            2007Bank
                debt
            
            $
            26
            
            $
            167Capital
                lease obligations
            
            
            —
            
            
            16Debt
                payable from related party
            
            
            300
            
            
            —Total
                debt
            
            
            326
            
            
            183Less:
                current portion
            
            
            (326
            )
            
            (171
            )Long-term
                bank debt
            
            $
            —
            
            $
            12




At
      December 31, 2006 and 2007, the bank debt bears a weighted average interest
      rate
      of 7.9%. At December 31, 2006 and 2007, all bank debt was denominated in NIS
      and
      was unlinked. At December 31, 2006, Debt payable from related party had a
      weighted average interest rate of 9.5%. In connection with the bank debt and
      lines of credit (see (a) above), a lien in favor of the Israeli banks was placed
      on dsIT’s assets. In addition, the Company has guaranteed DSIT’s lines of credit
      to Israeli banks up to $590.





At
      December 31, 2007, future payments under debt agreements and capital leases
      approximate $171 in 2008 and $4 per year in 2009 and 2010.




**NOTE
      13—OTHER CURRENT LIABILITIES**




Other
      current liabilities consist of the following:




As
                of December 31,2006
            
            2007Taxes
                payable
            
            $
            906
            
            $
            1,107Advances
                from customers
            
            
            93
            
            
            77Accrued
                expenses
            
            
            575
            
            
            2,485Warranty
                provision
            
            
            —
            
            
            107Other
            
            
            126
            
            
            68$
            1,700
            
            $
            3,844




**NOTE
      14—LIABILITY FOR EMPLOYEE TERMINATION BENEFITS**




(a)
            Israeli
                labor law and certain employee contracts generally require payment
                of
                severance pay upon dismissal of an employee or upon termination of
                employment in certain other circumstances. The Company has recorded
                a
                severance pay liability for the amount that would be paid if all
                its
                Israeli employees were dismissed at the balance sheet date, on an
                undiscounted basis, in accordance with Israeli labor law. This liability
                is computed based upon the employee’s number of years of service and
                salary components, which in the opinion of management create entitlement
                to severance pay in accordance with labor agreements in
                force.




F-26


The
      liability is partially offset by sums deposited in dedicated funds in respect
      of
      employee termination benefits. The Company may only utilize the insurance
      policies for the purpose of disbursement of severance pay. For certain Israeli
      employees, the Company’s liability is covered mainly by regular contributions to defined
      contribution plans. The amounts funded as above are not reflected in the balance
      sheets, since they are not under the control and management of the
      Company.




(b)
            Severance
                pay expenses amounted toapproximately,
                $463, $412 and $235 forthe years ended December 31, 2005, 2006 and 2007,
                respectively.




(c)
            The
                Company expects to contribute approximately $218 to the insurance
                policies
                in respect of its severance pay obligations in the year ending December
                31, 2008.




(d)   The
      Company expects to pay the following future benefits to its employees upon
      their
      normal retirement age in the next ten years:




‏Years
                  ending December 31,2008
              
              $
              —2009
              
              
              —2010
              
              
              —2011
              
              
              —2012
              
              
              —2013
                  - 2017
              
              
              1,188$
              1,188




The
      liability as at December 31, 2007 for future benefit payments in the next ten
      years is included in these financial statements in “liability for employee
      termination benefits”. The liability for future benefits does not reflect any
      amounts already deposited in dedicated funds with respect to those employees
      (see “a” above). The above amounts were determined based on the employees’
current salary rates and the number of service years that will be accumulated
      upon their retirement date. These amounts do not include amounts that might
      be
      paid to employees that will cease working with the Company before their normal
      retirement age.




**NOTE
      15—COMMITMENTS AND CONTINGENCIES**




(a)
      Leases of Property and Equipment




Office
      rental and automobile
      leasing expenses, for 2005, 2006 and 2007, were $ 576,
      $586 and
      $ 560,
      respectively. The Company
      and its subsidiaries lease office space and equipment under operating lease
      agreements. Those leases will expire on different dates
      from 2009 to 2012. Future minimum
      lease payments on non-cancelable operating leases as of December 31, 2006 are
      as
      follows:


Year
                  ending December 31,2008
              
              $
              7742009
              
              
              6672010
              
              
              4202011
              
              
              3092012
              
              
              3142013
                  and thereafter
              
              
              —$
              2,484




(b)
      EnerTech III




In
      August
      2007, the Company committed to invest up to $5,000 over a ten-year period in
      EnerTech III. To date, the Company had received and funded a capital call of
      $400 to EnerTech III. (See Note 6b)




(c)
      Guarantees




The
      Company’s subsidiary has provided various performance, advance and tender
      guarantees as required in the normal course of its operations. As at December
      31, 2007, such guarantees totaled approximately $1,630 and were due to expire
      through 2010. As a security for a portion of these guarantees, the Company
      has
      deposited with an Israeli bank $1,517 which is shown as restricted cash on
      the
      Company’s Consolidated Balance Sheets. The Company expects the restricted cash
      to be released in early 2009.




F-27




See
      Note
      12(a) with respect to guarantees on the Company’s lines of credit.




(d)
      Litigation




The
      Company is involved in various other legal actions and claims arising in the
      ordinary course of business.
      In the opinion of management and its legal counsel, the ultimate disposition of these matters
      will
      not have a material adverse effect on the Company’s consolidated financial
      position, results of operations or cash flow.




In
      March
      2006, the Company reached a settlement agreement with an Israeli bank with
      respect to the Company’s claims against the bank and the bank’s counterclaims
      against the Company. As part of the settlement agreement, all claims and
      counterclaims by the parties were dismissed. The bank returned to the Company
      approximately $94 plus interest and CPI adjustments of attorney fees and court
      costs previously paid by the Company. As a result of the settlement agreement,
      the Company recorded $330 of other income in the first quarter of
      2006.




**NOTE
      16-SHAREHOLDERS’ EQUITY**




(a)  General





The
      Company is authorized to issue 20,000,000 shares of Common Stock. At December
      31, 2007, the Company has 11,134,795 shares of Common Stock issued and
      outstanding, par value $0.01 per share. Holders of Common Stock are entitled
      to
      receive dividends when, as and if declared by the Board and to share ratably
      in
      the assets of the Company legally available for distribution in the event of
      a
      liquidation, dissolution or winding up of the Company. Holders of Common Stock
      do not have subscription, redemption, conversion or other preemptive rights.
      Holders of the Common Stock are entitled to elect all of the Directors on the
      Company’s Board. Holders of the Common Stock do not have cumulative voting
      rights, meaning that the holders of more than 50% of the Common Stock can elect
      all of the Company’s Directors. Except as otherwise required by Delaware General
      Corporation Law, all stockholder action is taken by vote of a majority of shares
      of Common Stock present at a meeting of stockholders at which a quorum (a
      majority of the issued and outstanding shares of Common Stock) is present in
      person or by proxy or by written consent pursuant to Delaware law (other than
      the election of Directors, who are elected by a plurality vote).





The
      Company is not authorized to issue preferred stock. Accordingly, no preferred
      stock is issued or outstanding.




(b)  Private
      Placement of Common Stock




In
      July
      and August 2006, the Company completed private placements of its Common Stock
      and associated warrants to purchase Common Stock, resulting in the issuance
      of
      1,216,135 shares of Common Stock. In connection with the placement, the Company
      entered into subscription agreements with certain accredited investors for
      the
      purchase of the shares at a purchase price of $2.65 per share, resulting in
      gross proceeds to the Company of $3,223. By the terms of the subscription
      agreements, each subscriber, in addition to the Common Stock purchased, received
      a warrant exercisable for the purchase of 25% of the number of shares purchased,
      resulting in the issuance of warrants to purchase 304,038 shares. The warrants
      are exercisable for shares of the Company’s Common Stock for a period of five
      years at an exercise price of $2.78 per share and are cancelable by the Company
      in certain circumstances.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the warrants to purchase 304,038 shares of common stock of the Company, using
      a
      risk free interest rate of 5.1%, its contractual life of five years, an annual
      volatility of 102% and no expected dividends. The Company estimated the fair
      value of the warrants to be approximately $503.




In
      connection with the offering in July 2006, the Company retained a registered
      broker-dealer to serve as placement agent. In accordance with the terms of
      the
      agreement, the placement agent received a 7% selling commission, 3% management
      fee, and 1% advisory fee of the gross proceeds of the offering. In addition,
      the
      placement agent received warrants with the same terms as those issued to the
      subscribers exercisable for the purchase of 10% of the number of shares
      purchased in the offering.




F-28




Out
      of
      the gross proceeds received at the closings, the Company paid the placement
      agent commissions and expenses of approximately $366 and incurred legal and
      other costs of approximately $349 .
      In
      addition, the Company issued to the placement agent warrants to purchase 120,001
      shares of Common Stock on the same terms as those issued to the
      subscribers.




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




(c)  Employee
      Stock Options




The
      Company’s stock option plans provide for the grant to officers, directors and
      other key employees of options to purchase shares of common stock. The purchase
      price must be paid in cash. Each option is exercisable to one share of the
      Company’s common stock. All options expire within five to ten years from the
      date of the grant, and generally vest over three year period from the date
      of
      the grant. At December 31, 2007, 295,000 options were available for grant under
      the 2006 Stock Incentive Plan and 120,000 options were available for grant
      under
      the 2006 Director Plan.




A
      summary
      of the Company’s option plans with respect to employees as of December 31, 2005,
      2006 and 2007, as well as changes during each of the years then ended, is
      presented below:




2005
            
            2006
            
            2007Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of year
            
            
            1,710,435
            
            $
            2.89
            
            
            1,565,335
            
            $
            2.49
            
            
            1,867,835
            
            $
            2.51Granted
                at market price
            
            
            30,000
            
            $
            1.80
            
            
            740,000
            
            $
            2.84
            
            
            201,000
            
            $
            4.44Granted
                at discount to market price
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            79,000
            
            $
            3.50Exercised
            
            
            —
            
            
            —
            
            
            (165,833
            )
            $
            1.72
            
            
            (538,168
            )
            $
            1.48Forfeited
                or expired
            
            
            (175,100
            )
            $
            6.33
            
            
            (271,667
            )
            $
            3.84
            
            
            (206,667
            )
            $
            3.63Outstanding
                at end of year
            
            
            1,565,335
            
            $
            2.49
            
            
            1,867,835
            
            $
            2.51
            
            
            1,403,000
            
            $
            3.07Exercisable
                at end of year
            
            
            1,054,485
            
            $
            3.28
            
            
            1,501,157
            
            $
            2.43
            
            
            1,182,665
            
            $
            2.81




In
      connection with the stock option exercises during the years ended December
      31,
      2006 and 2007, the Company received proceeds of $285 and $795, respectively.
      Of
      the 165,833 shares issued as a result of stock option exercises in the year
      ended December 31, 2006, 43,333 were issued from treasury stock and 122,500
      were
      newly issued shares. During the year ended December 31, 2006, the Company
      recorded an increase of $160 to its accumulated deficit with respect to the
      treasury shares issued from option exercises. During the year ended December
      31,
      2007, all 538,168 shares issued in connection with options exercises were newly
      issued shares. The intrinsic value of options exercised in 2006 and 2007 were
      $195 and $1,945, respectively.




The
      Company granted 740,000 and 176,000 options to employees who are related parties
      in the years ended December 31, 2006 and 2007, respectively, under various
      option plans. No options were granted to related parties in 2005. No options
      were exercised by related parties to purchase shares of common stock of the
      Company, during 2005, 2006 or 2007 and as of December 31, 2005, 2006 and 2007,
      the number of outstanding options held by the related parties was 797,500,
      1,439,000 and 1,243,500 options, respectively.




F-29




The
      weighted average grant-date fair value of the options granted to employees
      and
      directors during 2005, 2006 and 2007, amounted to $0.57, $2.10 and $1.91 per
      option, respectively. The Company utilized the Black-Scholes option-pricing
      model to estimate fair value, utilizing the following assumptions for the
      respective years (all in weighted averages):




2005
            
            2006
            
            2007Risk-free
                interest rate
            
            
            4.3
            %
            
            4.8
            %
            
            4.4
            %Expected
                term of options, in years
            
            
            1.1
            
            
            3.7
            
            
            2.8Expected
                annual volatility
            
            
            120
            %
            
            109
            %
            
            59
            %Expected
                dividend yield
            
            
            None
            
            
            None
            
            
            None




The
      expected term of the options is the length of time until the expected date
      of
      exercising the options. With respect to determining expected exercise behavior,
      the Company has grouped its option grants into certain groups in order to track
      exercise behavior and create establish historical rates. Currently, as permitted
      by SAB 107, the Company used the simplified method to compute the expected
      option term for options granted in 2006 and 2007 since the Company’s history of
      option exercises is too brief to have established historical rates. The Company
      estimated volatility by considering historical stock volatility. The risk-free
      interest rates are based on the U.S. Treasury yields for a period consistent
      with the expected term. Additionally, the Company expects no dividends to be
      paid. The Company believes that the valuation technique and the approach
      utilized to develop the underlying assumptions are appropriate in determining
      the estimated fair value of the Company’s stock options granted in the year
      ended December 31, 2007. Estimates of fair value are not intended to predict
      actual future events or the value ultimately realized by persons who receive
      equity awards.




Stock-based
      compensation expense included in the Company’s statements of operations with
      respect to employees and directors was:





Year
                ended December 31, 2006
            
            Year
                ended December 31, 2007Cost
                of sales
            
            $
            24
            
            $
            25Selling,
                marketing, general and administrative
            
            
            1,025
            
            
            551Loss
                on the sale of discontinued operations and contract settlement
            
            
            315
            
            
            —Total
                stock based compensation expense
            
            $
            1,364
            
            $
            576





As
      at
      December 31, 2007, the Company had a total of approximately $451 of compensation
      expense not yet recognized with respect to employee stock options to be
      recognized over a period of approximately three years.





During
      the year ended December 31, 2007, the Company modified the terms of numerous
      options with its employees. The Company recognized as compensation expense
      the
      incremental increase in the value of the options of $6 in selling, marketing,
      general and administrative expense.





During
      the year ended December 31, 2006, the Company modified the terms of numerous
      options with its employees. In connection with the Company’s sale of Databit
      (see Note 7(a)), the Company modified the expiration date for the options held
      by Databit employees. No incremental compensation cost was recorded as a result
      of the modification. Also in connection with the Company’s sale of Databit and
      contract settlement, the Company modified the expiration date and vesting date
      of options held by Shlomie Morgenstern (President of Databit) and George
      Morgenstern (our then CEO). As a result of the modifications, the Company
      recognized an incremental compensation cost of $276, which was included in
      the
      loss recorded on the sale of Databit and contract settlement.





During
      2006, the Company also modified the expiration date of options for certain
      employees, former employees and a former director. As a result of the
      modification, the Company recognized as compensation expense the incremental
      increase in value of the options of $102 which is included in cost of sales
      ($17) and selling, marketing, general and administrative expense ($85).




F-30




(d)
      Non-employee Stock Options




(1)
            General




In
      2007,
      all options granted to non-employees were from the 2006 Stock Incentive Plan
      which permits grants to non-employees. Previously, options granted to employees
      were non-plan grants or were granted from option plans which have since expired.




(2)
            Non-Performance
                Based Options




In
      December 2007, the Company agreed to grant options to purchase 50,000 shares
      of
      the Company’s Common Stock to a financial advisor to the Company for past
      services. The options vested immediately, have an exercise price of $4.95 and
      expire in December 2012.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the options to purchase the 50,000 shares of Common Stock of the Company, using
      a risk free interest rate of 3.5%, an expected term of five years, an annual
      volatility of 72% and no expected dividends. The Company estimated the fair
      value of the option to be approximately $153. During the year ended December
      31,
      2007, the Company recorded the $153 to selling, marketing, general and
      administrative expenses with respect to the options granted to the financial
      advisor.




In
      July
      2006, the Company entered into an agreement with an investor relations firm
      for
      investor relation and strategic planning services. In exchange for these
      services, the Company agreed to pay an annual fee of $138 for a period of one
      year and to provide the investor relations firm an option for the purchase
      of
      120,000 shares of the Company’s Common Stock. The options vested with respect to
      40,000 shares immediately upon the grant, with the balance vesting at a rate
      of
      5,000 per month. The options have an exercise price of $2.96 and expire after
      five years. In July 2007, the Company terminated its agreement with the investor
      relations firm. In the year ended December 31, 2007, 35,000 options to purchase
      the Company’s Common Stock vested up until the termination of the agreement with
      the investor relations firm.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the option to purchase the 35,000 shares which vested over the period from
      the
      January 1, 2007 through the termination of the agreement. The Company used
      a
      weighted average risk free interest rate of 4.8%, an expected life of five
      years, an annual volatility of 79% and no expected dividends to determine the
      value the options granted. The Company estimated the fair value of the options
      granted to be approximately $117 and recorded that amount to selling, marketing,
      general and administrative expenses with respect to the option granted to the
      investor relations firm in the year ended December 31, 2007.




(3)
            Performance
                Based Options




In
      August
      2006, as part of the Company’s acquisition of Paketeria (see Note 5), the
      Company granted the founder and managing director of Paketeria an option to
      purchase 150,000 shares of the Company’s Common Stock. The option has an
      exercise price of $2.80, a contractual life of five years and vests one-third
      upon the achievment of each of the three milestones described above in Note
      5.
      The first of the three milestones was met in the fourth quarter of 2006 and
      the
      second milestone was met in the third quarter of 2007.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the options to purchase the 150,000 shares of Common Stock of the Company,
      using
      a risk free interest rate of 5.0%, an expected life of five years, an annual
      volatility of 103% and no expected dividends. At December 31, 2006, the Company
      estimated the fair value of the options to be approximately $385. During the
      years ended December 31, 2007 and 2006, the Company recorded $49 and $265,
      respectively to its Share in losses of Paketeria with respect to the option
      granted to the founder and managing director of Paketeria based on performance
      towards the milestones described above in Note 5. As each additional tranche
      of
      50,000 options vests, the Company will record additional selling, marketing,
      general and administrative expense based on an updated Black-Scholes valuation
      for each tranche.




F-31




(4)
            Summary
                Information




A
      summary
      of the Company’s option plans with respect to non-employees as of December 31,
      2005, 2006 and 2007, as well as changes during each of the years then ended,
      is
      presented below:





2005
            
            2006
            
            2007Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of year
            
            
            10,000
            
            $
            0.91
            
            
            10,000
            
            $
            0.91
            
            
            305,000
            
            $
            2.81Granted
                at market price
            
            
            —
            
            
            —
            
            
            145,000
            
            $
            2.94
            
            
            50,000
            
            $
            4.95Granted
                at discount to market price
            
            
            —
            
            
            —
            
            
            150,000
            
            $
            2.80
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (54,000
            )
            $
            2.96Forfeited
                or expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (20,000
            )
            $
            2.96Outstanding
                at end of year
            
            
            10,000
            
            $
            0.91
            
            
            305,000
            
            $
            2.81
            
            
            281,000
            
            $
            3.15Exercisable
                at end of year
            
            
            6,666
            
            $
            0.91
            
            
            125,000
            
            $
            2.73
            
            
            214,333
            
            $
            3.95




The
      weighted average grant-date fair value of the options granted to non-employees
      during 2006 and 2007, amounted to $2.47 and $3.05 per option, respectively.
      The
      Company utilized the Black-Scholes option-pricing model to estimate fair value,
      utilizing the following assumptions for the respective years (all in weighted
      averages):




2006
            
            2007Risk-free
                interest rate
            
            
            5.0
            %
            
            3.5
            %Expected
                term of options, in years
            
            
            4.0
            
            
            5.0Expected
                annual volatility
            
            
            105
            %
            
            72
            %Expected
                dividend yield
            
            
            None
            
            
            None




(5)
            In
                the years ended December 31, 2007 and 2006, the Company included
                $270 and
                $473, respectively, of stock-based compensation expense selling,
                marketing, general and administrative expense in its statements of
                operations.




(e)
      Summary Information of Employee and Non-Employee Options




A
      summary
      of the Company’s option plans with respect to employees and non-employees as of
      December 31, 2005, 2006 and 2007, as well as changes during each of the years
      then ended, is presented below:




2005
            
            2006
            
            2007Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of year
            
            
            1,720,435
            
            $
            2.88
            
            
            1,575,335
            
            $
            2.48
            
            
            2,172,835
            
            $
            2.55Granted
                at market price
            
            
            30,000
            
            $
            1.80
            
            
            885,000
            
            $
            2.86
            
            
            251,000
            
            $
            4.54Granted
                at discount to market price
            
            
            —
            
            
            —
            
            
            150,000
            
            $
            2.80
            
            
            79,000
            
            $
            3.50Exercised
            
            
            —
            
            
            —
            
            
            (165,833
            )
            $
            1.30
            
            
            (592,168
            )
            $
            1.61Forfeited
                and expired
            
            
            (175,100
            )
            $
            6.33
            
            
            (271,667
            )
            $
            4.82
            
            
            (226,667
            )
            $
            3.57Outstanding
                at end of year
            
            
            1,575,335
            
            $
            2.48
            
            
            2,172,835
            
            $
            2.55
            
            
            1,684,000
            
            $
            3.09Exercisable
                at end of year
            
            
            1,061,151
            
            $
            3.27
            
            
            1,626,157
            
            $
            2.46
            
            
            1,396,998
            
            $
            2.96




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


Year
                ended December 31, 2006
            
            Year
                ended December 31, 2007Cost
                of sales
            
            $
            24
            
            $
            25Selling,
                marketing, general and administrative
            
            
            1,233
            
            
            820Share
                in losses of Paketeria
            
            
            265
            
            
            49Loss
                on the sale of discontinued operations and contract settlement
            
            
            315
            
            
            —Total
                stock based compensation expense
            
            $
            1,837
            
            $
            894




F-32




(f)
      DSIT
      Stock Option Plan




In
      November 2006, the Company adopted a Key Employee Stock Option Plan (the “Plan”)
      for its DSIT subsidiary to be administrated by a committee of board members
      of
      DSIT, to initially be comprised of the entire board of directors of DSIT.




On
      December 31, 2006, DSIT granted options to purchase 3,914 of its ordinary
      shares, to senior management and employees of DSIT under the Plan. The options
      were granted with an exercise price of NIS 1.00 ($0.24) per share and are
      exercisable for a period of seven years. The options were fully vested and
      exercisable at the date of grant. The options were exercised in February 2007
      and as a result, the Company’s holdings in DSIT were reduced to 58%. In November
      2007, the Company acquired the shares of DSIT that were held by its former
      CEO
      and increased its holdings in DSIT to 72% (see Note 3(b)).




Also
      on December 31, 2006, DSIT granted options to purchase 2,260 of its ordinary
      shares to senior management and employees of DSIT at exercise prices ranging
      from NIS 1.00 ($0.24) to $126.05 per share and exercisable for a period of
      seven
      years. These options vest and become exercisable only upon the occurrence of
      an
      initial public offering of DSIT or a merger, acquisition, reorganization,
      consolidation or similar transaction involving DSIT. Upon exercise of these
      options, the Company’s holdings in DSIT will be diluted to approximately
      65%.




The
      purpose of the Plan for the DSIT subsidiary and associated grants is to provide
      incentives to key employees of DSIT to further the growth, development and
      financial success of DSIT.




A
      summary
      status of the Plan as of December 31, 2006 and 2007, as well as changes during
      the year then ended, is presented below:




2006
            
            2007Number
                of Options (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Options (in shares)
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of year
            
            
            —
            
            $
            —
            
            
            6,174
            
            $
            32.05Granted
                at fair value
            
            
            6,174
            
            $
            32.05
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            3,914
            
            $
            0.24Forfeited
            
            
            —
            
            
            —
            
            
            736
            
            $
            27.36Outstanding
                at end of year
            
            
            6,174
            
            $
            32.05
            
            
            1,524
            
            $
            118.11Exercisable
                at end of year
            
            
            3,914
            
            $
            0.24
            
            
            —
            
            
            —





F-33




Summary
      information regarding the options under the Plan outstanding and exercisable
      at
      December 31, 2007 is as follows:




Outstanding
            
            ExercisableRange
                of Exercise Prices
            
            Number
                Outstanding
            
            Weighted
                Average Remaining Contractual Life
            
            Weighted
                Average Exercise Price
            
            Number
                Exercisable
            
            Weighted
                Average Exercise Price(in
                shares)
            
            (in
                years)
            
            
            
            (in
                shares)$105.26
                - 112.04
            
            
            547
            
            
            6.0
            
            $
            109.68
            
            
            —
            
            
            —$119.05
                - $121.21
            
            
            501
            
            
            6.0
            
            $
            119.76
            
            
            —
            
            
            —$126.05
            
            
            476
            
            
            6.0
            
            $
            126.05
            
            
            —
            
            
            —1,524
            
            
            
            
            $
            118.11
            
            
            —
            
            
            —




In
      2006,
      the Company granted an officer 759 options with a weighted average exercise
      price of $26.53 in the year ended December 31, 2006 under the Plan. During
      2007,
      569 options with an exercise price of $0.24 were exercised.




(g)
      Warrants




The
      Company has issued warrants at exercise prices equal to or greater than market
      value of the Company’s common stock at the date of issuance. A summary of
      warrant activity follows:




2005
            
            2006
            
            2007Number
                of Warrants (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Warrants (in shares)
            
            Weighted
                Average Exercise Price
            
            Number
                of Warrants (in shares)
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of year
            
            
            435,000
            
            $
            3.06
            
            
            190,000
            
            $
            2.81
            
            
            614,039
            
            $
            2.79Granted
            
            
            —
            
            $
            —
            
            
            474,039
            
            $
            2.80
            
            
            634,258
            
            $
            4.50Exercised
            
            
            —
            
            $
            —
            
            
            —
            
            
            —
            
            
            (261,791
            )
            $
            2.80Expired
                or forfeited
            
            
            (245,000
            )
            $
            3.24
            
            
            (50,000
            )
            $
            3.00
            
            
            —
            
            
            —Outstanding
                and exercisable at endof
                year
            
            
            190,000
            
            $
            2.81
            
            
            614,039
            
            $
            2.79
            
            
            986,506
            
            $
            3.89




The
      following table summarized information about warrants outstanding and
      exercisable at December 31, 2007:




Exercise
                Price
            
            Number
                Outstanding
            
            Weighted
                Average Remaining Contractual Life(in
                shares)
            
            (in
                years)$2.78
            
            
            352,248
            
            
            3.53$4.50
            
            
            634,258
            
            
            4.27986,506




(h)
      Stock
      Repurchase Program




In
      September 2000, the Company’s Board of Directors authorized the purchase of up
      to 500,000 shares of the Company’s common stock. In August 2002, the Company’s
      Board of Directors authorized the purchase of up to 300,000 more shares of
      the
      Company’s common stock. During 2006, the Company issued 43,333 of its treasury
      shares with respect to options exercised and at December 31, 2007 owned in
      the
      aggregate 777,371 of its own shares.




F-34




**NOTE
      17—FINANCE EXPENSE, NET**




Finance
      expense, net consists of the following:




Year
                Ended December 31,2005
            
            2006
            
            2007Interest
                income
            
            $
            28
            
            $
            39
            
            $
            163Interest
                expense*
            
            
            (90
            )
            
            (27
            )
            
            (1,775
            )Exchange
                gain (loss), net
            
            
            50
            
            
            (42
            )
            
            27$
            (12
            )
            $
            (30
            )
            
            ($1,585
            )




* In
      2007,
      includes $1,297 of non-cash interest expense with respect to the amortization
      of
      debt origination costs, beneficial conversion feature and warrants associated
      with the Company’s Private
      Placement of Convertible Redeemable Subordinated Debentures (see Note 12(b))
      and
      a non-cash reversal of interest expense ($209) associated with a reduction
      of a
      provision made for interest due upon the Company’s adoption of FIN 48 (see Note
      18(f)).




**NOTE
      18—INCOME TAXES**




(a)  Composition of income (loss) from continuing operations before income taxes
      is
      as follows:




Year
                Ended December 31,2005
            
            2006
            
            2007Domestic
            
            $
            (1,460
            )
            $
            (2,469
            )
            $
            34,441Foreign
            
            
            (827
            )
            
            (859
            )
            
            (1,163
            )$
            (2,287
            )
            $
            (3,328
            )
            $
            33,278




Income
      tax expense (benefit) consists of the following:




Year
                Ended December 31,2005
            
            2006
            
            2007Current:Federal
            
            $
            —
            
            $
            —
            
            $
            850State
                and local
            
            
            —
            
            
            —
            
            
            225Foreign
            
            
            100
            
            
            183
            
            
            (627
            )100
            
            
            183
            
            
            448Deferred:Federal
            
            
            —
            
            
            —
            
            
            (893
            )State
                and local
            
            
            —
            
            
            —
            
            
            —Foreign
            
            
            (137
            )
            
            —
            
            
            —(137
            )
            
            —
            
            
            —Total
                income tax expense (benefit)
            
            $
            (37
            )
            $
            183
            
            $
            (445
            )




(b)
      Effective Income Tax Rates




Set
      forth
      below is reconciliation between the federal tax rate and the Company’s effective
      income tax rates with respect to continuing operations:




Year
                Ended December 31,2005
            
            2006
            
            2007Statutory
                Federal rates
            
            
            34
            %
            
            34
            %
            
            34
            %Increase
                (decrease) in income tax rate resulting from:Non-deductible
                expenses
            
            
            (1
            )
            
            (1
            )
            
            1Deferred
                compensation expense
            
            
            —
            
            
            (19
            )
            
            1State
                income taxes, net
            
            
            (1
            )
            
            1
            
            
            1Other
            
            
            (1
            )
            
            3
            
            
            —Tax
                benefit on sale of dsIT Technologies
            
            
            16
            
            
            —
            
            
            —Valuation
                allowance
            
            
            (45
            )
            
            (23
            )
            
            (38
            )Effective
                income tax rates
            
            
            2
            %
            
            (5
            )%
            
            (1
            )%




F-35


(c)
      Analysis of Deferred Tax Assets and (Liabilities)




Deferred
                tax assets consist of the following:
            
            As
                of December 31,2006
            
            2007Employee
                benefits and deferred compensation
            
            $
            916
            
            $
            954Investments
            
            
            7,045
            
            
            —Other
                temporary differences
            
            
            441
            
            
            360Net
                operating loss carryforwards
            
            
            5,516
            
            
            89113,918
            
            
            2,205Valuation
                allowance
            
            
            (13,912
            )
            
            (1,313
            )Net
                deferred tax assets
            
            
            6
            
            
            892Deferred
                tax liabilities consist of the following:Investments
            
            
            —
            
            
            (16,902
            )Intangible
                asset basis differences
            
            
            (6
            )
            
            (28
            )Net
                deferred tax assets (liabilities), net
            
            $
            —
            
            $
            (16,038
            )




Valuation
      allowances relate principally to book-tax basis differences and net operating
      loss carryforwards related to Israeli companies.  The
      change in the valuation allowance was an increase of $1,737 and a decrease
      of
      $12,599 in 2006 and 2007, respectively. The increase in 2006 was primarily
      attributable to losses and FAS 123R expenses whereas the decrease in 2007 was
      primarily attributable to the adjustment of the Company’s investment in Comverge
      to market value in accordance with FAS 115 and the utilization of net loss
      carryforwards from current year income.




(d)
      Summary of Tax Loss Carryforwards




As
      of
      December 31, 2007, the Company had various net operating loss carryforwards
      expiring as follows:




Expiration
            
            Federal
            
            State
            
            Foreign2024-2028
            
            $
            5,053
            
            $
            —
            
            $
            —Unlimited
            
            
            —
            
            
            —
            
            
            3,425Total
            
            $
            5,053
            
            $
            —
            
            $
            3,425




(e)
      Tax
      Reform in the United States




On
      October 22, 2004, The American Jobs Creation Act (the “Act”) was signed into
      law. The Act includes a deduction of 85% of certain foreign earnings that are
      repatriated, as defined in the Act. The Company’s foreign earnings are solely
      derived from the Company’s Israeli subsidiaries. Due to Israeli tax and company
      law constraints, the significant minority interest in DSIT and DSIT’s own cash
      and finance needs, the Company does not expect any foreign earnings to be
      repatriated to the Company in the near future.




(f)
      Tax
      Reform in Israel




The
      income of the Company’s Israeli subsidiaries is taxed at the regular Israeli
      corporate tax rates. In August 2005, Amendment No. 147 to the Income Tax
      Ordinance was published, which reduced corporate tax rates. As a result of
      the
      amendment, the corporate tax rates are as follows: 2005 - 34%, 2006 - 31% 2007
      -
      29%, 2008 - 27%, 2009 - 26% and for 2010 and thereafter - 25%.




(g)
      Uncertain Tax positions (UTP):




As
      described in Note 2 above, the Company adopted the provisions of FIN 48 as
      of
      January 1, 2007.




As
      a result of the adoption of FIN 48, as of that date, the Company recognized
      a
      current liability for unrecognized tax benefits in amount of $18. In addition,
      as of January 1, 2007 the Company recognized interest and penalties expense,
      related to unrecognized tax benefits in the amounts of $152 and $135,
      respectively. These changes were accounted for as a cumulative effect of a
      change in accounting principle that is reflected in the financial statements
      as
      an increase of $305 in the balance of accumulated deficit as of January 1,
      2007.
      In December 2007 the initial balance of $18 for unrecognized tax benefits
      eliminated and the amounts recorded with respect to interest and penalties
      expense were reduced by $111 and $98, respectively. As of December 31, 2007
      the
      amount of interest and penalties accrued on the balance sheet was $78 and is
      included in Other Liabilities.




F-36




Following
      is a reconciliation of the total amounts of the company's unrecognized tax
      benefits at the beginning and the end of the year ended December 31,
      2007:




Balance
                at January 1, 2007
            
            $
            918Increases
                in unrecognized tax benefits and associated interest and penalties
                as a
                result of tax positions taken during a prior period
            
            
            —Decreases
                in unrecognized tax benefits and associated interest and penalties
                as a
                result of tax positions taken during a prior period
            
            
            —Increases
                in unrecognized tax benefits and associated interest and penalties
                as a
                result of tax positions taken during the current period
            
            
            —Decreases
                in unrecognized tax benefits and associated interest and penalties
                as a
                result of tax positions taken during the current period
            
            
            (671
            )Decreases
                in the unrecognized tax benefits and associated interest and penalties
                relating to settlements with taxing authorities
            
            
            —Reductions
                to unrecognized tax benefits as a result of a lapse of applicable
                statute
                of limitations
            
            
            —Balance
                at December 31, 2007
            
            $
            247




The
      Company is subject to U.S. federal income tax as well as state income tax and
      Israeli income tax.  As of January 1, 2008, the Company is no longer
      subject to examination by U.S. Federal taxing authorities for years before
      2004
      and for years before 2003 for state and Israeli income taxes.




**NOTE
      19—RELATED PARTY BALANCES AND TRANSACTIONS**




(a)  The
      Company paid consulting and other fees to directors of $64, $136 and $226
      for the years ended December 31, 2005, 2006 and 2007, respectively, which are
      included in selling, general and administrative expenses.




(b)  The
      Company paid legal fees for services rendered and out-of-pocket disbursements
      to
      a firm in which a principal is a former director and is the son-in-law of the
      Company’s Chairman of the Board, of approximately $360, $473 and $654 for the
      years ended December 31, 2005, 2006 and 2007, respectively. Approximately $86
      and $507 was owed to this firm as of December 31, 2006 and 2007, respectively,
      and is included in other current liabilities and trade accounts payable.




(c)  The
      former chief executive officer of the Company’s Israeli subsidiary had a loan
      from the subsidiary that was acquired in 2001. The loan and accrued interest
      balance at December 31, 2006 was $104. On November 29, 2007, as part of the
      Company acquisition of the former chief executive officer’s shares in DSIT (see
      Note 3(b)), the loan was repaid. The loan was denominated in NIS, was linked
      to
      the Index and bore interest at 4%. The Company recorded interest income of
      $4 in
      each of the years ended December 31, 2005, 2006 and 2007, respectively, with
      respect to the loan.




(d)  In
      December 2006, the Company’s CEO loaned the Company $300 for a period of six
      months on a note payable. The note bore interest at the rate of 9.5%. The
      Company had the right to repay the note at any time prior to maturity. The
      note
      was repaid in April 2007. The Company paid interest of $7 in the year ended
      December 31, 2007 with respect to the note.




(e)  During
      2006, the Company paid $5 of rent to a company in which the CEO is Chairman
      of
      the Board.




(f)  During
      2005, the president of the Company’s Databit subsidiary and son of the Chief
      Executive officer loaned the Company $425 on a note payable. The note bore
      interest at the rate of prime plus 3% during the time it was outstanding. The
      note was repaid in full during 2005. The Company paid $3 of interest with
      respect to the note in 2005.




F-37




See
      Note
      5 with respect to the Stock Purchase Agreement with two shareholders of
      Paketeria—one of whom is the Company’s President and Chief Executive Officer and
      the other is one of the Company’s current directors.




See
      Note
      7(a) with respect to the sale of the Company’s Databit subsidiary to a related
      party in March 2006.




See
      Note
      16 for information related to options and stock awards to related
      parties.




**NOTE
      20—SEGMENT REPORTING AND GEOGRAPHIC INFORMATION**




(a)
            General
                Information




As
      of
      December 31 2007, the Company’s current operations are based upon two operating
      segments:




(i)
      RT
      Solutions whose activities are focused on two areas - naval solutions and other
      real-time and embedded hardware & software development. RT Solutions
      activities are provided through
      the Company’s DSIT Solutions Ltd. subsidiary.




(ii)
      SCR
      (Selective Catalytic Reduction) Catalyst and Management Services conducted
      through the Company’s recently created CoaLogix subsidiary which provides
      catalyst regeneration technologies and management services for selective
      catalytic reduction (SCR) systems used by coal-fired power plants to reduce
      nitrogen oxides (NOx) emissions.




The
      Company’s OncoPro activities were previously presented as a separate segment.
      The Company no longer considers its OncoPro activities to be a separate
      segment since its operating results are no longer separately reviewed by
      the Chief Operating Decision Maker and management’s reduced strategic focus
      on those activities. As a result of the Company’s decision to change its
      strategic focus regarding OncoPro, its activities have been combined with other
      non-strategic activities and are currently included in the Company’s “Other”
segment.




The
      Company’s reportable segments are strategic business units, offering different
      products and services and are managed separately as each business requires
      different technology and marketing strategies. Similar operating segments
      operating in different countries are aggregated into one reportable
      segment.




(b)
            Information
                about Profit or Loss and Assets




The
      accounting policies of all the segments are those described in the summary
      of
      significant accounting policies. The Company evaluates performance based on
      operating profit or loss.




The
      Company does not systematically allocate assets to the divisions of the
      subsidiaries constituting its consolidated group, unless the division
      constitutes a significant operation. Accordingly, where a division of a
      subsidiary constitutes a segment that does not meet the quantitative thresholds
      of SFAS No. 131, depreciation expense is recorded against the operations of
      such
      segment, without allocating the related depreciable assets to that segment.
      However, where a division of a subsidiary constitutes a segment that does meet
      the quantitative thresholds of SFAS No. 131, related depreciable assets, along
      with other identifiable assets, are allocated to such division.




F-38




The
      following tables represent segmented data for the years ended December 31,
      2007,
      2006 and 2005:




**RT
                Solutions**
            
            **SCR****(*)**
            
            **Other
                (**)**
            
            **Total**Year
                ended December 31, 2007:Revenues
                from external customers
            
            $
            3,472
            
            $
            797
            
            $
            1,391
            
            $
            5,660Depreciation
                and amortization
            
            
            78
            
            
            129
            
            
            59
            
            
            266Segment
                gross profit
            
            
            1,139
            
            
            116
            
            
            157
            
            
            1,412Impairment
                of goodwill and intangible assets
            
            
            —
            
            
            —
            
            
            (112
            )
            
            (112
            )Segment
                loss
            
            
            (309
            )
            
            (140
            )
            
            (799
            )
            
            (1,248
            )Segment
                assets
            
            
            1,149
            
            
            11,827
            
            
            84
            
            
            13,060Expenditures
                for segment assets
            
            
            889
            
            
            —
            
            
            39
            
            
            928Year
                ended December 31, 2006:Revenues
                from external customers
            
            $
            2,797
            
            $
            —
            
            $
            1,320
            
            $
            4,117Depreciation
                and amortization
            
            
            94
            
            
            —
            
            
            73
            
            
            167Segment
                gross profit
            
            
            1,004
            
            
            —
            
            
            350
            
            
            1,354Impairment
                of goodwill
            
            
            (40
            )
            
            —
            
            
            —
            
            
            (40
            )Segment
                loss
            
            
            (155
            )
            
            —
            
            
            (296
            )
            
            (451
            )Segment
                assets
            
            
            345
            
            
            —
            
            
            325
            
            
            670Expenditures
                for segment assets
            
            
            125
            
            
            —
            
            
            16
            
            
            141Year
                ended December 31, 2005:Revenues
                from external customers
            
            $
            2,873
            
            $
            —
            
            $
            1,314
            
            $
            4,187Depreciation
                and amortization
            
            
            101
            
            
            —
            
            
            52
            
            
            153Segment
                gross profit
            
            
            834
            
            
            —
            
            
            408
            
            
            1,242Segment
                income
            
            
            54
            
            
            —
            
            
            47
            
            
            101Segment
                assets
            
            
            358
            
            
            —
            
            
            330
            
            
            688Expenditures
                for segment assets
            
            
            62
            
            
            —
            
            
            77
            
            
            139




(*)  SCR
      activities were acquired on November 7, 2007. Accordingly, the segment
      information above represents SCR activity only from the time since
      acquisition.




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




F-39




(c)  The
      following tables represent a reconciliation of the segment data to consolidated
      statement of operations and balance sheet data for the years ended and as of
      December 31, 2005, 2006 and 2007:




Year
                Ended December 31,2005
            
            2006
            
            2007Revenues:Total
                consolidated revenues for reportable segments
            
            $
            2,873
            
            $
            2,797
            
            $
            4,269Other
                operational segment revenues
            
            
            1,314
            
            
            1,320
            
            
            1,391Total
                consolidated revenues
            
            $
            4,187
            
            $
            4,117
            
            $
            5,660Income
                (loss)Total
                income (loss) for reportable segments
            
            $
            54
            
            $
            (155
            )
            $
            (449
            )Other
                operational segment operating income (loss)
            
            
            47
            
            
            (296
            )
            
            (799
            )Total
                operating income (loss)
            
            
            101
            
            
            (451
            )
            
            (1,248
            )Unallocated
                cost of corporate and DSIT headquarters*
            
            
            (2,388
            )
            
            (3,207
            )
            
            (4,730
            )Other
                income, net
            
            
            —
            
            
            330
            
            
            —Income
                tax benefit (expense)
            
            
            37
            
            
            (183
            )
            
            445Minority
                interests
            
            
            (73
            )
            
            —
            
            
            —Equity
                loss in Paketeria and loss on private placement of
                Paketeria
            
            
            —
            
            
            (424
            )
            
            (1,243
            )Equity
                loss in Comverge
            
            
            (380
            )
            
            (210
            )
            
            —Gain
                on sale of shares in Comverge
            
            
            —
            
            
            —
            
            
            23,124Gain
                on IPO of Comverge
            
            
            —
            
            
            —
            
            
            16,169Discontinued
                operations, net of tax
            
            
            844
            
            
            78
            
            
            —Gain
                (loss) on sale of discontinued operations, net of tax
            
            
            541
            
            
            (2,069
            )
            
            —Consolidated
                income (loss)
            
            $
            (1,318
            )
            $
            (6,136
            )
            $
            32,517





* 
      In 2007, includes $1,297 of non-cash interest expense associated with the
      Company’s Debentures (see Note 12(b)) and $821 of FAS 123R stock compensation
      expense. In 2006, includes $1,229 of FAS 123R stock compensation
      expense





As
                of December 31,2005
            
            2006
            
            2007Assets:Total
                assets for reportable segments
            
            $
            688
            
            $
            670
            
            $
            13,060Net
                assets of Databit (see Note 7(a))
            
            
            3,451
            
            
            —
            
            
            —Unallocated
                assets of DSIT headquarters
            
            
            4,040
            
            
            4,018
            
            
            5,722Unallocated
                assets of corporate headquarters *
            
            
            1,994
            
            
            2,570
            
            
            78,185Total
                consolidated assets
            
            $
            10,173
            
            $
            7,258
            
            $
            96,967







*
        In
        2007, includes $55,538 representing the value the Company’s investment in
        Comverge and $19,478 of unrestricted cash.




F-40




Other
                Significant Items
            
            Segment
                Totals
            
            Adjustments
            
            Consolidated
                TotalsYear
                ended December 31, 2007Depreciation
                and amortization
            
            $
            266
            
            
            34
            
            $
            300Expenditures
                for assets*
            
            
            928
            
            
            40
            
            
            968Year
                ended December 31, 2006Depreciation
                and amortization
            
            $
            167
            
            $
            37
            
            $
            204Expenditures
                for assets
            
            
            141
            
            
            8
            
            
            149Year
                ended December 31, 2005Depreciation
                and amortization
            
            $
            153
            
            $
            101
            
            $
            254Expenditures
                for assets
            
            
            139
            
            
            137
            
            
            276




*
      Includes $740 for the acquisition of additional shares in DSIT, all of which
      was
      allocated to the RT Solutions segment (see Note 3(b)).




The
      reconciling items are all corporate headquarters data, which are not included
      in
      the segment information. None of the other adjustments are significant.




Year
                Ended December 31,2005
            
            2006
            
            2007Revenues
                based on location of customer:Israel
            
            $
            3,575
            
            $
            4,034
            
            $
            4,579USA
            
            
            —
            
            
            —
            
            
            797Other
            
            
            612
            
            
            83
            
            
            284$
            4,187
            
            $
            4,117
            
            $
            5,660






As
                at December 31,Long-lived
                assets located in the following countries:
            
            2005
            
            2006
            
            2007Israel
            
            $
            418
            
            $
            445
            
            $
            560United
                States
            
            
            82
            
            
            —
            
            
            775$
            500
            
            $
            445
            
            $
            1,335




(d)
            Revenues
                from Major Customers




Consolidated
                Sales
              Year
                Ended December 31,2005
            
            2006
            
            2007Customer
            
            Segment
            
            Revenues
            
            %
                of Total
              Revenues
            
            Revenues
            
            %
                of
              Total
              Revenues
            
            Revenues
            
            %
                of Total
              RevenuesA
            
            
            RT
                Solutions
            
            $
            474
            
            
            11
            %
            $
            881
            
            
            21
            %
            $
            569
            
            
            10
            %B
            
            
            RT
                Solutions
            
            $
            963
            
            
            23
            %
            $
            842
            
            
            20
            %
            $
            648
            
            
            11
            %C
            
            
            Other
            
            $
            715
            
            
            17
            %
            $
            687
            
            
            17
            %
            $
            555
            
            
            10
            %D
            
            
            RT
                Solutions
            
            $
            612
            
            
            15
            %
            $
            83
            
            
            2
            %
            
            —
            
            
            —E
            
            
            SCR
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            624
            
            
            11
            %F
            
            
            RT
                Solutions
            
            $
            70
            
            
            2
            %
            $
            173
            
            
            6
            %
            $
            1,365
            
            
            24
            %




F-41




**NOTE
      21—FINANCIAL INSTRUMENTS**




Fair
      values of financial instruments included in current assets and current
      liabilities are estimated to approximate their book values, due to the short
      maturity of such instruments.




**NOTE
      2** **2—SUBSEQUENT
      EVENTS**





**Redemption
      of Convertible Redeemable Subordinated Debentures**




On
      January 29, 2008, the Company completed the redemption of all of its outstanding
      10% Convertible Redeemable Subordinated Debentures due March 2011. Subsequent
      to
      the Company’s announcement of redemption, the holders of the debentures elected
      to convert approximately $3.0 million into approximately 780,000 shares of
      our
      common stock, at a conversion price of $3.80 per share. The remaining $3.4
      million principal amount of Debentures was redeemed in accordance with the
      notice of redemption. As a result of the early redemption of the Debentures,
      the
      remaining balance of unamortized beneficial conversion features, warrants and
      debt origination costs of $3,064 will be written off to interest expense in
      the
      first quarter of 2008.





**Sale
      of 15% Interest in CoaLogix**




On
      February 29, 2008, the Company entered into a Common Stock Purchase Agreement
      (the “Stock Purchase Agreement”) with the Company’s wholly-owned CoaLogix Inc.
      subsidiary (“CoaLogix”) and EnerTech Capital Partners III L.P. (“EnerTech”)
      pursuant to which EnerTech purchased from CoaLogix a 15% interest in CoaLogix
      for $1.95 million. The Company owns 85% of CoaLogix following the
      transaction.




In
      connection with completing the transaction under the Stock Purchase Agreement,
      the Company, CoaLogix, EnerTech and the senior management of CoaLogix entered
      into a Stockholders’ Agreement dated as of February 29, 2008 (the “Stockholders’
Agreement”). Under the Stockholders’ Agreement, EnerTech is entitled to a
      designate a member of the Board of Directors of CoaLogix. In addition, the
      Stockholders’ Agreement provides the Company and EnerTech with reciprocal rights
      of first refusal and co-sale in connection with proposed transfers of their
      CoaLogix stock.




Pursuant
      to the Stockholders’ Agreement, EnerTech also has a right to purchase additional
      stock to maintain its percentage interest in CoaLogix in the event of dilutive
      transactions. The right may be exercised until such time as the Company’s
      ownership in CoaLogix is reduced to 75% or CoaLogix completes an initial public
      offering.





**Investment
      in GridSense Systems Inc.**




On
      January 2, 2008, the Company participated in a private placement financing
      for
      gross proceeds of C$1,700 (approximately $1,700) for GridSense Systems Inc.
      (CDNX: GSN.V )
      (“GridSense”). The placement consisted of 24,285,714 units at $0.07 per unit,
      each unit being comprised of one common share and one share purchase warrant.
      Each warrant entitles the holder to acquire an additional common share at $0.10
      per share until July 2, 2008. The shares, and any shares acquired on exercise
      of
      the warrants, are subject to a four month hold period expiring May 3, 2008.




The
      Company was the lead investor in the placement acquiring 15,714,285 shares
      and
      15,714,285 warrants for C$1,100 (approximately $1,100). The 15,714,285 shares
      acquired by the Company in the placement represent 24.52% of GridSense's issued
      and outstanding shares. If the Company exercises all of the 15,714,285 warrants
      acquired in the placement, it will own 31,428,570 GridSense common shares,
      representing 39.37% of GridSense's issued and outstanding shares.




F-42





**Investment
      in Comverge**




On
      December 31, 2007, the market share price of the Company’s 1,763,665
      shares of Comverge
      was $31.49 per share and the value of our investment in Comverge was
      approximately $55, 538
      (before deferred taxes). As at April 9, 2008, the market share price had dropped
      to $11.17 and the value
      of
      our investment in Comverge accordingly was approximately $19,700 (before
      deferred taxes).




F-43


**Report
      of Independent** **Registered
      Public Accounting Firm**


**on**


**Financial
      Statement Schedule**







To
      the
      Board of Directors of Acorn Energy, Inc.:




Our
      audits of the consolidated financial
      statements referred to in our report dated April 15, 2008 of Acorn
      Energy, Inc. related
      to the consolidated financial statements of Acorn Energy, Inc. which are included in this Annual
      Report on Form 10-K also included an audit of the financial statement schedule
      listed in Item 15(a)(2) of this Annual Report on Form 10-K. In our opinion, this
      financial statement schedule presents fairly,
      in all material respects, the information set forth therein when read in
      conjunction with the related consolidated
      financial statements.




April
              15,
              2008/s/
              Kesselman
              & KesselmanCertified
                Public Accountants
              A
                member of PricewaterhouseCoopers International Limited
              Tel
                Aviv, Israel




F-44




**ACORN
      ENERGY, INC.**


**SCHEDULE
      II**


**VALUATION
      AND QUALIFYING ACCOUNTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(in
      thousands)**




**Description**
            
            **Balance
                at the Beginning of the Year**
            
            **Charged
                to Costs and Expenses**
            
            **Other
                Adjustments**
            
            **Balance
                at the End of the Year**Allowance
                for doubtful accountsYear
                ended December 31, 2005
            
            
            32
            
            
            5
            
            
            (19
            )
            
            18Year
                ended December 31, 2006
            
            
            18
            
            
            —
            
            
            (14
            )
            
            14Year
                ended December 31, 2007
            
            
            14
            
            
            —
            
            
            2
            
            
            16Valuation
                allowance for deferred tax assetsYear
                ended December 31, 2005
            
            
            14,401
            
            
            298
            
            
            (2,518
            )
            
            12,181Year
                ended December 31, 2006
            
            
            12,181
            
            
            —
            
            
            1,731
            
            
            13,912Year
                ended December 31, 2007
            
            
            13,912
            
            
            12,559
            
            
            —
            
            
            1,313





F-45