**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, 2006**
                **Commission
                    file number 0-19771**
 
  **ACORN
          FACTOR, 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.)****200
                    Route 17, Mahwah, New Jersey**
                **07430****(Address
                    of principal executive offices)**
                **(Zip
                    Code)**
  **(201)
          529-2026**
  **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, or a non-accelerated filer. See definition of “accelerated
          filer and large accelerated filer” in Rule 12b-2 of the Exchange
          Act.
 Large
                    accelerated filero
                Accelerated
                    filero
                Non-accelerated
                    filer     x
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act).
 Yes
o No x
  As
          of
          last day of the second fiscal quarter, the aggregate market value of the
          registrant’s common stock held by non-affiliates of the registrant was
          approximately $23 million based on the closing sale price on that date
          as
          reported on the Over-the-Counter Bulletin Board.
  As of
          April
          10, 2007 there were 9,561,659 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
                5Item
                    1B.
                Unresolved
                    Staff Comments
                10Item
                    2.
                Properties
                10Item
                    3.
                Legal
                    Proceedings.
                11Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders.
                11PART
                    IIItem
                    5.
                Market
                    for Registrant’s Common Equity, Related Stockholder Mattersand
                    Issuer Purchases of Equity Securities.
                12Item
                    6.
                Selected
                    Financial Data.
                12Item
                    7.
                Management’s
                    Discussion and Analysis of Financial Condition and
                    Results of Operations
                14Item
                    7A.
                Quantitative
                    and Qualitative Disclosures About Market Risk
                27Item
                    8.
                Financial
                    Statements and Supplementary Data.
                27Item
                    9.
                Changes
                    in and Disagreements with Accountants on Accounting and Financial
                    Disclosure
                28Item
                    9A.
                Controls
                    and Procedures
                28Item
                    9B.
                Other
                    Information
                28PART
                    IIIItem
                    10.
                Directors,
                    Executive Officers and Corporate Governance
                29Item
                    11.
                Executive
                    Compensation
                31Item
                    12.
                Security
                    Ownership of Certain Beneficial Owners and
                    Management and Related Stockholder Matters
                41Item
                    13.
                Certain
                    Relationships, Related Transactions and Director
                    Independence
                42Item
                    14.
                Principal
                    Accounting Fees and Services
                44Part
                    IVItem
                    15.
                Exhibits
                    and Financial Statement Schedules.
                45
 
 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.”
  *EasyBill* *TM* , *Oncosoft* *TM* and *OncoPro* *TM* ** are
          trademarks of our dsIT Solutions Ltd subsidiary. *Maingate* ® is a
          registered trademark and *PowerCamp* *TM* is a
          trademark of Comverge, Inc.
 
 **PART
          I**
 
 **ITEM
          1. BUSINESS**
  **OVERVIEW**
  Acorn
          Factor is a holding company that currently maintains majority ownership
          or
          primarily controlling equity positions in the three companies described
          below.
          Our principal business strategy is to identify, develop, acquire and operate
          majority-owned subsidiaries and primarily-controlled companies by seeking
          to
          acquire new technologies or existing businesses that (i) are led by proven
          entrepreneurs, (ii) have strong growth potential and (iii) are approaching
          profitability and positive cash flow. We seek to identify and acquire companies
          possessing new business models that can speed adoption of proven technologies,
          with a particular focus on “power systems” that offer solutions for managing
          knowledge, asset protection and intelligent delivery systems for our
          increasingly scarce natural resources. We also seek strategic partner companies
          outside the “power systems” area, which we believe would otherwise substantially
          fulfill the objectives of our business strategy.
  We
          presently hold majority or significant equity interests in the following
          companies:
  (a)
                Comverge,
                    Inc. — a leading demand response company enabling utilities, industry
                    and
                    consumers to better manage peak electricity usage;
  (b)
                Paketeria
                    GmbH — the innovator of Germany's first "Super Service Market"; and
  (c)
                dsIT
                    Solutions Ltd. — a provider of software consulting and development
                    services and software/hardware solutions in the areas of port
                    security,
                    oncology treatment and billing
                    services.
  During
          2006, we had operations in two reportable segments: RT Solutions and IT
          Solutions, both conducted through our dsIT subsidiary.
  ·
                RT
                    Solutions whose activities are focused on two areas - naval solutions
                    and
                    other real-time and embedded hardware & software
                    development.
  ·
                IT
                    Solutions, whose activities are comprised of the Company’s OncosoftTM
                    solution state of the art chemotherapy package for oncology and
                    hematology
                    departments and EasyBillTM, an easy-to-use, end-to-end, modular customer
                    care and billing system designed especially for small and medium-sized
                    enterprises with large and expanding customer
                    bases.
  **SALES
          BY ACTIVITY**
  The
          following table shows, for the years indicated, the dollar amount and the
          percentage of the sales attributable to each of the segments of our
          operations.
 
 2004
                
                2005
                
                2006Amount
                
                %
                
                Amount
                
                %
                
                Amount
                
                %RT
                    Solutions
                
                $
                1,988
                
                
                59
                
                $
                2,844
                
                
                68
                
                $
                2,729
                
                
                66IT
                    Solutions
                
                
                1,312
                
                
                39
                
                
                1,314
                
                
                31
                
                
                1,125
                
                
                27Other
                
                
                64
                
                
                2
                
                
                29
                
                
                1
                
                
                263
                
                
                7Total
                
                $
                3,364
                
                
                100
                %
                $
                4,187
                
                
                100
                %
                $
                4,117
                
                
                100
                %
   1
 **RT
          SOLUTIONS**
  *Products
          and Services*
  dsIT’s
          RT
          Solutions activities are focused on two areas - naval solutions and other
          real-time and embedded hardware & software development. Our naval solutions
          include a full range of sonar and acoustic-related solutions to the commercial,
          defense and homeland security markets. These solutions include:
  ·
                Diver
                    Detection Sonar (DDS) - a system that guards ports and shore
                    installations
                    from underwater threats;
  ·
                Mobile
                    Acoustic Range (MAR); - a mobile system that accurately measures
                    the
                    radiated noise of submarines and surface vessels, thus assisting
                    to reduce
                    their noise level;
  ·
                Generic
                    Sonar Simulator (GSS) - a PC based sonar simulator for the rapid
                    and
                    comprehensive training of ASW, submarine, and mine detection
                    sonar
                    operators;
  ·
                Harbor
                    Surveillance System (HSS) - a system that incorporates DDS sensors
                    with
                    above-water surveillance sensors to create a comprehensive above
                    and below
                    water security system; and
  ·
                Underwater
                    Acoustic Signal Analysis system (UASA) - a system that processes,
                    analyzes
                    and classifies all types of acoustic signals radiated by various
                    sources
                    and received by naval sonar
                    systems.
  Our
          other
          real-time and embedded hardware & software development solutions areas of
          development and production include:
  ·
                Computerized
                    vision for the Semiconductor industry;
  ·
                Modems
                    & data links;
  ·
                Bluetooth
                    solutions;
  ·
                VOIP/ROIP
                    applications;
  ·
                Operation
                    control consoles and HMI applications;
                    and
  ·
                Command
                    & control applications
  During
          2004, 2005 and 2006, sales from our RT solutions activities were $2.0 million,
          $2.8 million and $2.7 million, respectively, accounting for approximately
          59%,
          68% and 66% of company sales for 2004, 2005 and 2006, 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.
  dsIT
          has
          initiated discussions for strategic alliances for marketing its sonar
          technology. We hope that some of these discussions will come to fruition
          before
          the end of 2007.
  *Customers
          and Markets*
  All
          of
          this segment’s operations and most sales took place in Israel in 2004, 2005 and
          2006. We expect to generate significant revenues from naval solutions outside
          of
          Israel in 2007. 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. Two customers accounted for 63% of segment sales in 2006 (32%
          and
          31%, respectively) while in 2005 three customers accounted for 72% (33%,
          22%,
          and 17%, respectively) of segment sales. (See Risks Related to the RT and
          IT
          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.)
  2
 *Competition*
  Our
          RT
          Solutions activity faces competition from numerous competitors, both large
          and
          small, operating in the Israeli and United States markets, some with
          substantially greater financial and marketing resources. We believe that
          our
          wide range of experience and long-term relationships with large corporations
          as
          well as the strategic partnerships we are developing will enable us to
          compete
          successfully and obtain future business.
  **IT
          SOLUTIONS**
  *Products
          and Services*
  Through
          dsIT, we also provide globally oriented solutions in the area of information
          technology (“IT”). dsIT’s IT solutions includes OncoProTM, a state of the art
          chemotherapy package for oncology and hematology departments, based on
          experience gained in the largest cancer center in Israel. OncoProTM integrates
          patient data with medical knowledge bases and enables the simplified management
          of daily ward functions as well as the creation of complex protocols. We
          also
          offer EasyBill TM ,
          an
          easy-to-use, end-to-end, modular customer care and billing system designed
          especially for small and medium-sized enterprises with large and expanding
          customer bases.
  Sales
          from our IT solutions activities were $1.3 million, $1.3 million and $1.1
          million, respectively, accounting for approximately 39%, 31% and 27% of
          company
          sales for 2004, 2005 and 2006, respectively.
  We
          recently received a letter of intent from a major chain of hospitals in
          the
          U.S., which will allow us to install our OncoProTM solutions package as a beta
          site. We expect to finalize this arrangement in the near future. In addition,
          we
          continue to have discussions with respect to potential strategic partners,
          investors and alliances for our OncoProTM solutions package.
  *Customers
          and Markets*
  All
          of
          this segment’s operations and sales took place in Israel in 2004, 2005 and 2006.
          We expect to begin to generate revenues from our OncoProTM solutions outside of
          Israel in 2007. We have created a significant relationship with Israel’s largest
          HMO organization (the Clalit Health Fund or “Clalit”) and are continuing to
          invest considerable effort to penetrate the US and European markets in
          order to
          broaden our geographic sales base. Two customers accounted for 83% (61%
          (Clalit)
          and 22%, respectively) of segment sales in 2006 (three customers accounted
          for
          94% of segment sales in 2005 (54% (Clalit), 25% and 15%, respectively)).
          (See
          Item 1A. Risk Factors - Risks Related to the RT and IT 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.)
  *Proprietary
          Rights*
  The
          customer, for whom the services are performed, generally owns the intellectual
          property rights resulting from our consulting and development services.
          We own
          two proprietary software packages described above - Easybill TM and OncoProTM .
          These
          packages are licensed for use by customers, while we retain ownership of
          the
          intellectual property.
  3
 **DEMAND
          RESPONSE SOLUTIONS - COMVERGE INC.**
  We
          are
          engaged in the business of providing demand response solutions, through
          Comverge
          Inc. Comverge
          is North
          America's leading provider of clean and low-cost peak electric capacity
          reduction, achieved through Demand Response solutions and technologies,
          including its patent pending fully outsourced Virtual Peaking Capacity(TM)
          offering. As North America's leader in Demand Response, Comverge serves
          over 500
          clients in the electric utility industry, implementing both integrated
          and
          outsourced solution-based models for direct and price responsive load
          management, remote meter reading, and distributed generation monitoring.
          We
          currently have an approximate 23% equity interest in Comverge and are Comverge’s
          single largest stockholder. Comverge’s stockholders include Nth Power, EnerTech
          Capital, E.ON Venture Partners GmbH, Ridgewood Capital, Easton Hunt Capital
          Partners, L.P., Norsk Hydro Technology Ventures, Rockport Capital Partners,
          Partners for Growth, the Shell Internet Ventures affiliate of Royal Dutch/Shell
          Group, and Air Products and Chemicals, Inc.
  Comverge designs,
          develops and markets a full spectrum of products, services and turnkey
          solutions
          to electric utilities and transmission and distribution companies that
          provide
          capacity during periods of peak electricity demand and allow their residential
          and commercial customers to conserve energy. These Demand Response solutions
          allow Comverge’s customers to reduce usage or “shed load” during peak usage
          periods, such as the summer air conditioning season, thereby reducing or
          eliminating the need to buy costly additional power on the spot market,
          or
          invest in new peaking generation capacity. Demand Response solutions are
          cost-effective and environmentally superior to building new generation
          capabilities.
  In
          addition to Demand Response solutions, Comverge also offers a combination
          of
          intelligent hardware and a suite of software products, which, together
          or
          separately, help customers address energy usage issues through data
          communications and analysis, real-time pricing and integrated billing and
          reporting. Comverge’s two-way data communications solutions allow utilities to
          gather, transmit, verify and analyze real-time usage information, and can
          be
          used for automated meter reading, support time-of-use metering, theft detection,
          remote connect/disconnect and other value-added services.
  Comverge’s
          principal offices are located in East Hanover, New Jersey and Atlanta,
          Georgia.
          In addition, Comverge operates satellite offices in Newark, California,
          Pensacola, Florida and Tel Aviv, Israel.
  **SUPER
          SERVICES MARKET - PAKETERIA GmbH**
 
 We
          are
          engaged in the “Super Services Market” business through our 33% equity interest
          in Paketeria GmbH. In August 2006, we made our first investment (€600,000 or
          approximately $776.000) in Paketeria GmbH followed by a second investment
          (€320,000 or approximately $419,000) in October 2006. As a result of these
          investments, we currently own approximately 33% of Paketeria with options
          to
          acquire a controlling interest by August 2007.
 
 Paketeria
          GmbH, a company registered in Germany and headquartered in Berlin, is a
          retail
          chain store operating in a unique “Super Services Market” format. The stores
          provide eBay drop shop, post and parcels, office supplies, photo processing,
          photocopy, printer cartridge refilling, 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. Since the beginning of 2006, Paketeria has doubled in size to
          four
          company owned stores and 60 franchised stores.
  4
 Paketeria’s
          principal offices are located in Berlin, Germany. Paketeria’s stores and
          franchises are located throughout Germany with a concentration in the area
          in
          and around Berlin.
  **BACKLOG**
  As
          of
          December 31, 2006, our backlog of work to be completed was $1.9 million,
          $1.4
          million of which related to our RT segment and $0.5 million of which related
          to
          our IT segment. We estimate that we will perform our entire backlog in
          both of
          our reporting segments in 2007.
  **EMPLOYEES**
  At
          December 31, 2006, we employed a total of 70 people, including 53 in engineering
          and technical support, 1 in marketing and sales, and 16 in management,
          administration and finance. A total of 69 of our employees are employed
          by dsIT
          and are based in Israel. Our only employee in the United States is our
          CEO and
          President. 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 19 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.
  **GENERAL
          FACTORS**
  *We
          have a history of operating losses and decreasing 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 2004, 2005 and 2006, we had
          operating losses of $2.5 million, $2.3 million and $3.6 million, respectively.
          Cash used in operations in 2004, 2005 and 2006 was $0.1 million, $1.7 million
          and $1.6 million, respectively.
  5
 Although
          we raised $3.2 million ($2.5 million net of transaction costs) in 2006
          from the
          private placement of our securities, we have invested a significant portion
          of
          those funds in Paketeria. At December 31, 2006, we did not have sufficient
          cash
          available to fund our US operations for the next 12 months. As described
          under
          the caption “Recent Developments” in “Item 7. Management’s Discussion and
          Analysis of Financial Condition and Results of Operations,” we  recently
          raised an additional $6.9 million (approximately $6.0 after transaction
          costs)
          in a private placement of convertible debentures and warrants. While this
          provides us with enough cash to finance our US operations for the next
          12
          months, we may need additional funds to fund our operating activities and
          acquisitions over the longer term. Should we be unsuccessful in completing
          additional timely transactions providing necessary liquidity, we may not
          have
          sufficient funds to finance our future US activities and strategic acquisitions
          over the long-term. In such event, we might need to sell some of our assets
          to
          finance these activities.
  For
          additional discussion of our liquidity position and factors that may affect
          our
          future liquidity, see the discussion under the captions “Recent Developments”
and “Liquidity and Capital Resources” in “Item 7. Management’s Discussion and
          Analysis of Financial Condition and Results of Operations.”
  *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 certain 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.*
  We
          appointed a new chief financial officer and chief accounting officer in
          December
          2005 and appointed a new president and chief executive officer in March
          2006.
          Any failure to effectively integrate our new management and any new management
          controls, systems and procedures they may implement, could materially adversely
          affect our business, results of operations and financial condition.
  *We
          may be exposed to potential risks relating to our internal controls over
          financial reporting and our ability to have those controls attested to
          by our
          independent registered public accounting firm.*
  As
          directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules
          requiring public companies to include a report of management on internal
          control
          over financial reporting in their annual reports.  In addition, the
          independent registered public accounting firm auditing a public company’s
          financial statements must attest to and report on management’s assessment of the
          effectiveness of the company’s internal control over financial reporting as well
          as the operating effectiveness of the company’s internal controls over financial
          reporting.  Our management is currently required to report on our internal
          controls as a required part of our annual report beginning with fiscal
          year 2007
          and to allow our independent registered public accounting firm to attest
          to our
          internal controls as a required part of our annual report beginning with
          fiscal
          year 2008.
  We
          may
          have to expend significant resources during fiscal years 2007 and 2008
          in
          developing the necessary documentation and testing procedures required
          by
          Section 404 of the Sarbanes-Oxley Act, and there is a risk that we will
          not
          comply with all of the requirements.
  If
          we
          identify material weaknesses in our internal controls over financial reporting
          that we cannot remediate in a timely manner or we receive an adverse opinion
          from our independent registered public accounting firm with respect to
          our
          internal controls over financial reporting, investors and others may lose
          confidence in the reliability of our financial statements and our ability
          to
          obtain equity or debt financing could be adversely affected.
  6
 *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.
  **RISKS
          RELATED TO THE RT AND IT SOLUTIONS SEGMENTS**
  *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 this segment of our business. 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.
  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 were 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* .
  The
          sales
          in this segment stem from our Israeli operations and a significant portion
          of
          those sales are in New Israeli Shekels (“NIS”). In addition, many transactions
          that are linked to the dollar are settled in NIS. The dollar value of the
          revenues of our operations in Israel will decrease if the dollar is devalued
          in
          relation to the NIS during the period from the invoicing of a transaction
          to its
          settlement. In addition, significant portions of our expenses in those
          operations are in NIS, so that if the dollar is devalued in relation to
          the NIS,
          the dollar value of these expenses will increase.
  *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
          2006,
          17% of dsIT’s sales (17% and 13% in 2005 and 2004, respectively) and 24% of its
          billed receivables at December 31, 2006 (10% at December 31, 2005) were
          related
          to Clalit. Clalit 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.
  7
 *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
          2006,
          58% of dsIT’s sales (51% and 59% in 2005 and 2004, respectively) were
          concentrated in three customers (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
          have sold our outsourcing business, which in the past provided our Israeli
          operations with a steady cash flow; our Israeli operations may be hindered
          by
          future cash flow problems.*
  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, places 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 RT and IT 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 in 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.
  **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
          will need to raise funds to finance its planned activities.* **
  Paketeria
          does not currently have enough cash to finance its planned activities in
          2007.
          In the event that it is unable raise these funds from new investors, we
          may need
          to make loans or additional equity investments in Paketeria from our limited
          financial resources to help fund its activities. (See “Recent
          Developments”.)
  8
 **RISKS
          RELATED TO OUR SECURITIES**
 
 *There
          is only a limited trading market for our Common Stock.*
 
 There
          is
          currently only a limited market for our Common Stock. Our Common Stock
          trades on
          the OTC Bulletin Board under the symbol “ ACFN“ with, until recently, very
          limited trading volume. We cannot assure you that a substantial trading
          market
          will be sustained for our Common Stock.
 
 *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 substantial amounts 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, 2006 there were 614,039 warrants with a weighted average exercise
          price of $2.79 and 1,626,157 options with a weighted average exercise price
          of
          $2.46 per share, presently exercisable, which if exercised for cash would
          result
          in the issuance of an additional 2,240,196 shares of Common Stock. In addition,
          there were 482,668 options and 190,000 warrants that expire on or before
          December 31, 2007 all of which are in-the-money at December 31,
          2006.
 
 *The
          market price of our Common Stock will likely be affected by fluctuations
          in the
          market price of the common stock of Comverge* .
 
 As
          described below under “Recent Developments,” shares of Comverge common stock
          have commenced trading on the Nasdaq Global Market. 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.
 
 Our
          equity holdings in Comverge currently account for substantially more than
          45% of
          the value of our assets on a fair market value basis. We believe that until
          the
          recent Comverge initial public offering 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 and the termination of our voting agreement
          with the
          other major Comverge shareholders, it is likely that Comverge will no longer
          be
          controlled primarily by us for Investment Company Act purposes. If we were
          no
          longer deemed to primarily control Comverge, we would no longer be excluded
          from
          the definition of an Investment Company effective June 30, 2007 since the
          value
          of our investment securities, which would now include our Comverge shares,
          would
          be in excess of 45% of our assets.
 
 9
 Were
          we
          to be 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 is formulating its plans for compliance
          with
          Rule 3a-2. These plans would 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.
 
 We
          are
          subject to a lock-up period that would prevent us from being able to sell
          Comverge shares for six months following the completion of the Comverge
          initial
          public offering. To the extent that effectuating our plan to remain exempt
          from
          the Investment Company Act requires us to sell significant number of Comverge
          shares, we may have only a six month period in which to make such sales.
          Being
          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.
          We
          may also find that we are not able to identify and acquire during the one
          year
          period a suitable operating business or businesses on terms acceptable
          to us.
          While we could request an order from the SEC to give us additional time
          beyond
          the 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.
 
 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**
  Prior
          to
          the consummation of the sale of our Databit computer hardware subsidiary,
          our
          corporate headquarters and the principal offices for our computer hardware
          sales
          segment were located in Mahwah, New Jersey in approximately 5,000 square
          feet of
          office space, at a rate of $85,000 per year (plus annual CPI adjustments),
          under
          a lease that expired in September 2006.
  As
          part
          of the sale of our Databit computer hardware subsidiary, we assigned all
          of the
          US leases to Databit. 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.
  In
          November 2006, we signed a lease for office space in Wilmington, Delaware.
          The
          annual rent is approximately $32,000 and the lease is to expire in November
          2009.
  10
 Our
          Israeli 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. The annual rent is approximately $288,000. **** These
          facilities are used for the Israeli operations of our RT Solutions and
          IT
          Solutions segments.
  **ITEM
          3. LEGAL PROCEEDINGS**
  None.
  **ITEM
          4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  None.
  11
 **PART
          II**
  **ITEM
          5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
          PURCHASES OF EQUITY SE** **CURITIES**
  Our
          Common Stock is currently traded on the OTC Bulletin
          Board (“OTCBB”) under
          the
          symbol “ ACFN.OB”. Prior to January 26, 2005, our Common Stock traded on The
          Nasdaq SmallCap Market. The following table sets forth, for the periods
          indicated, the high and low reported sales prices per share of our Common
          Stock
          on The Nasdaq SmallCap Market and the OTCBB (as applicable).
  High
                
                Low2005:First
                    Quarter
                
                $
                1.30
                
                $
                0.64Second
                    Quarter
                
                
                1.32
                
                
                0.95Third
                    Quarter
                
                
                1.74
                
                
                1.05Fourth
                    Quarter
                
                
                1.80
                
                
                1.202006:First
                    Quarter
                
                $
                2.80
                
                $
                1.43Second
                    Quarter
                
                
                3.20
                
                
                2.50Third
                    Quarter
                
                
                3.39
                
                
                2.85Fourth
                    Quarter
                
                $
                3.47
                
                $
                3.14
  As
          of
          April 10, 2007, the last reported sales price of our Common Stock on the
          OTCBB
          was $4.80, there were 106 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 2005 or 2006 and do not intend to pay
          any dividends in 2007.
  **PERFORMANCE
          GRAPH**
  The
          following stock price performance graph compares the cumulative total return
          of
          the Company’s Common Stock, during the period December 31, 2001 to December 30,
          2006, to the cumulative total return during such period of (i) the NASDAQ
          Composite Index and (ii) the NASDAQ Computer Index. The graph assumes that
          the
          value of the investment in our Common Stock and each index (including
          reinvestment of dividends) was
          $100.00 on December 31, 2001.
  
  **ITEM
          6. SELECTED FINANCIAL DATA**
  The
          selected consolidated statement of operations data for the years ended
          December
          31, 2004, 2005 and 2006 and consolidated balance sheet data as of December
          31,
          2005 and 2006 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, 2002 and 2003 and the
          selected consolidated balance sheet data as of December 31, 2002, 2003
          and 2004
          has been derived from our unaudited consolidated financial statements not
          included herein.
  12
 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 31,2002**
                  (unaudited)
                
                
                2003**
                  (unaudited)
                
                
                2004*
                
                
                2005*
                
                
                2006(in
                    thousands, except per share data)Sales
                
                $
                24,295
                
                $
                8,874
                
                $
                3,364
                
                $
                4,187
                
                $
                4,117Cost
                    of sales
                
                
                17,910
                
                
                6,833
                
                
                2,491
                
                
                2,945
                
                
                2,763Gross
                    profit
                
                
                6,385
                
                
                2,041
                
                
                873
                
                
                1,242
                
                
                1,354Research
                    and development expenses
                
                
                1,526
                
                
                153
                
                
                30
                
                
                53
                
                
                324Selling,
                    marketing, general and administrative expenses
                
                
                12,591
                
                
                7,422
                
                
                3,374
                
                
                3,464
                
                
                4,658Impairment
                    of investment
                
                
                90
                
                
                --
                
                
                --
                
                
                --
                
                
                --Operating
                    loss
                
                
                (7,822
                )
                
                (5,534
                )
                
                (2,531
                )
                
                (2,275
                )
                
                (3,628
                )Finance
                    expense, net
                
                
                (429
                )
                
                (534
                )
                
                (33
                )
                
                (12
                )
                
                (30
                )Other
                    income, net
                
                
                --
                
                
                --
                
                
                148
                
                
                --
                
                
                330Loss
                    from operations before taxes on income
                
                
                (8,251
                )
                
                (6,068
                )
                
                (2,416
                )
                
                (2,287
                )
                
                (3,328
                )Taxes
                    on income
                
                
                46
                
                
                48
                
                
                (27
                )
                
                37
                
                
                (183
                )Loss
                    from operations of the Company and its consolidated
                    subsidiaries
                
                
                (8,205
                )
                
                (6,020
                )
                
                (2,443
                )
                
                (2,250
                )
                
                (3,511
                )Share
                    of losses in Comverge
                
                
                --
                
                
                (1,752
                )
                
                (1,242
                )
                
                (380
                )
                
                (210
                )Gain
                    on sale of shares in Comverge
                
                
                --
                
                
                --
                
                
                705
                
                
                --
                
                
                --Share
                    of losses in Paketeria
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (424
                )Minority
                    interests, net of tax
                
                
                880
                
                
                264
                
                
                (90
                )
                
                (73
                )
                
                --Loss
                    from continuing operations
                
                
                (7,325
                )
                
                (7,508
                )
                
                (3,070
                )
                
                (2,703
                )
                
                (4,145
                )Gain
                    (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
                
                
                (819
                )
                
                1,226
                
                
                1,898
                
                
                844
                
                
                78Net
                    loss
                
                $
                (8,144
                )
                $
                (6,282
                )
                $
                (1,172
                )
                $
                (1,318
                )
                $
                (6,136
                )Basic
                    and diluted net income (loss) per share:Loss
                    from continuing operations
                
                $
                (1.00
                )
                $
                (0.97
                )
                $
                (0.39
                )
                $
                (0.26
                )
                $
                (0.48
                )Discontinued
                    operations
                
                
                (0.11
                )
                
                0.16
                
                
                0.24
                
                
                0.10
                
                
                (0.23
                )Net
                    loss per share (basic and diluted)
                
                $
                (1.11
                )
                $
                (0.81
                )
                $
                (0.15
                )
                $
                (0.16
                )
                $
                (0.71
                )Weighted
                    average number of shares
                  Outstanding
                    - basic and diluted
                
                
                7,349
                
                
                7,738
                
                
                7,976
                
                
                8,117
                
                
                8,689
 **___________**
 *
          Results
          have been restated for the discontinued operations of our Israel based
          consulting business, which was sold in August 2005. Results have been restated
          for the discontinued operations of our US-based computer VAR business,
          which was
          sold in March 2006.
 
 **
          The
          selected consolidated statements of operations data for the years ended
          December
          31, 2002 and 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.
 
 13
 *Selected
          Consolidated Balance Sheet Data:*
  As
                    of December 31,2002
                  (unaudited)
                
                2003
                  (unaudited)
                
                2004
                  (unaudited)
                
                2005
                
                2006(in
                    thousands)Working
                    capital
                
                
                2,845
                
                $
                729
                
                $
                874
                
                $
                1,458
                
                $
                259Total
                    assets
                
                
                33,347
                
                
                17,784
                
                
                17,025
                
                
                10,173
                
                
                7,258Short-term
                    and long-term debt
                
                
                10,033
                
                
                2,259
                
                
                1,396
                
                
                365
                
                
                488Minority
                    interests
                
                
                1,609
                
                
                1,367
                
                
                1,471
                
                
                --
                
                
                --Total
                    shareholders’ equity (deficit)
                
                
                7,128
                
                
                3,200
                
                
                2,125
                
                
                820
                
                
                (461
                )
  **ITEM
          7.**  **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
  **RECENT
          DEVELOPMENTS**
  ***Private
          Placement of Debentures and Warrants***
 
 On
          April
          11, 2007, we completed a private placement of $6.9 million of principal
          amount
          of 10% Convertible Redeemable Subordinated Debentures (the “Debentures”),
          resulting in gross proceeds of the same amount. The Debentures, subject
          to
          certain restrictions, are convertible into our common stock at a conversion
          price of $3.80 per share and mature on March 30, 2011.
 
 In
          connection with the offering, we entered into subscription agreements with
          certain accredited investors. By the terms of the subscription agreements
          each
          subscriber in addition to the Debentures purchased, received a warrant
          exercisable for the purchase of 25% of the number of shares obtained by
          dividing
          the principal amount of a given Debenture by the conversion price of $3.80
          per
          share, resulting in the issuance of warrants to purchase 453,047 shares.
          The
          warrants are exercisable for shares of Common Stock for a period of five
          years
          at an exercise price of $4.50 per share. Both the Debentures and the warrants
          are redeemable by us in certain circumstances.
  In
          connection with the offering, we retained a registered broker-dealer to
          serve as
          placement agent. In accordance with the terms of our agreement with the
          placement agent, the agent received a 7% selling commission, 3% management
          fee,
          and 2% non-accountable expense allowance out of the gross proceeds of the
          offering.
  Out
          of
          the gross proceeds of the offering, we paid the placement agent commissions
          and
          expenses of approximately $0.9 million. In addition, we issued to the placement
          agent warrants to purchase 181,211 shares of common stock on substantially
          the
          same terms as those issued to the subscribers.
  ***Comverge
          IPO***
  On
          April
          13, 2007, Comverge priced its initial public offering of 5,300,000 shares
          of its
          common shares, at $18.00 a share. The shares sold in the offering (which
          reflect
          a one for two reverse stock split made immediately prior to the offering)
          represent an approximate 28% interest in Comverge. The underwriters of
          the
          offering are Citigroup Global Markets Inc., sole book-running manager of
          the
          offering, and Cowen and Company, LLC, RBC Capital Markets Corporation and
          Pacific Growth Equities, LLC as co-managers. In addition, certain selling
          shareholders granted the underwriters a 30-day option to purchase up to
          795,000
          additional shares of common stock. We did not sell any of our shares of
          Comverge
          common stock in the offering. On April 13, 2007, shares of Comverge common
          stock
          commenced trading on the Nasdaq Global Market under the symbol "COMV".
  14
 As
          a
          result of the offeringall shares of preferred stock of Comverge will be
          converted to common stock of Comverge and as a result we will own 2,786,021
          shares of Comverge common stock, representing 15.9% of the issued and
          outstanding capital stock of Comverge following the offering.
  In
          connection with the offering, we (and all of Comverge’s executive officers,
          directors and certain of other major stockholders of Comverge), entered
          into a
          lock-up agreement under which we agreed, subject to limited exceptions,
          not to
          transfer or otherwise dispose of any of our shares of Comverge common stock
          for
          a period of at least 180 days from the date of effetiveness of the offering
          without the prior written consent of lead manager of the offering.
  ***Paketeria***
  In
          January and March, we provided Paketeria with approximately $200,000 of
          loans in
          order to provide them with additional short-term financing to help it support
          its current expansion and operating activities.
  ***Dilution
          of Our Holdings in dsIT***
  In
          February 2007, certain senior managers and other employees of dsIT exercised
          their options. These exercises reduced our holdings in dsIT from 80% to
          58%.
  **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: RT Solutions and IT Solutions. As we
          sold
          our Databit computer hardware sales in March 2006, the information provided
          below does not include the results from those activities as they have been
          reclassified and consolidated on one line as net income from discontinued
          operations, after tax.
  The
          following analysis should be read together with the segment information
          provided
          in Note 19 to our Consolidated Financial Statements included in this
          report.
  *RT
          Solutions*
  Segment
          revenues decreased by $0.1 million or 4% in 2006 as compared to 2005. The
          decrease in sales was the result of our near completion of a significant
          Naval
          solutions project in 2005, which was nearly offset by increases in sales
          from
          our embedded hardware and software development products. Segment gross
          profit,
          however, increased by $0.1 million or 16% in 2006 as compared to 2005.
          Segment
          gross profit percentage also increased (from 28% in 2005 to 34% in 2006)
          as we
          completed a number of relatively high margin embedded hardware and software
          development projects during the year.
  Our
          projected growth in sales in 2007 is expected to come primarily from our
          Naval
          solutions projects with our embedded hardware and software development
          projects
          expected to remain relatively stable. Due to the sale of our outsourcing
          business in August 2005, our segment overhead currently is a heavier burden
          to
          the segment and we must generate a higher level of sales to reach profitability.
          We anticipate our sales to increase in the second half 2007 with the expected
          receipt of a number of significant Naval solutions contracts, with the
          segment
          reaching profitability towards the end of the year.
  15
 *IT
          Solutions*
  Segment
          revenues decreased by $0.2 million or 14% in 2006 as compared to 2005.
          The
          decrease in sales was primarily the result of the decreased revenues from
          sales
          of our EasyBillTM billing system. OncoProTM sales were not significantly changed
          in 2006 from 2005. Segment gross profit also decreased by $0.1 million
          or 19% in
          2006 as compared to 2005 with segment gross profit percentage also decreasing
          (from 31% in 2005 to 28% in 2006).
  Our
          projected growth in sales in 2007 is expected to come primarily from sales
          of
          our OncoProTM solutions with revenues from our EasyBillTM billing system
          continuing to decline. We expect to successfully complete our beta-site
          work in
          the second half of 2007 and begin sales of OncoProTM in the United States in the
          second half of 2007. As with our RT Solutions segment, due to the sale
          of our
          outsourcing business in August 2005, our segment overhead currently is
          a heavier
          burden to the segment and we must generate a higher level of sales to reach
          profitability. Though we anticipate our sales to increase in the second
          half
          2007, we also anticipate significantly higher development costs associated
          with
          the beta-site work and do not expect this segment to reach profitability
          until
          2008.
  *Comverge*
  We
          account for Comverge on the equity method; however since our losses to
          date
          exceed our investment, Comverge’s losses no longer affect our consolidated
          results.
  As
          described above under “Recent Developments”, on April 13, 2007 Comverge priced
          its initial public offering. Comverge plans to use the net proceeds from
          the
          offering to finance current and future capital requirements of its VPCTM
contracts, to finance research and development, to repay indebtedness,
          to fund
          any cash consideration for future acquisitions and for other general corporate
          purposes.
  *Paketeria*
  We
          account for our Paketeria investment the equity method and, as such, currently
          record approximately 33% of its income or loss in our consolidated
          results.
  Paketeria
          was established to take advantage of the privatization and subsequent
          substantial reduction in retail outlets of the German post office. Since
          the
          beginning of 2006, Paketeria has doubled in size to four company owned
          stores
          and 60 franchised stores. In 2007, Paketeria is planning to continue its
          expansion of stores. In addition, Paketeria is planning to add additional
          services to its unique “Super Services Market” format. Planned additions to its
          services menu include an Internet pharmacy and telecommunication services
          in
          cooperation with The Phone House, Europe’s largest independent mobile phone
          retailer. In addition, Paketeria will be seeking additional capital investment
          to help fund its activities and expansion.
  In
          2007
          to date, we lent Paketeria approximately $200,000 to help it finance its
          ongoing
          activities and expansion.
  *Corporate*
  In
          March
          2006, we appointed John Moore as our President and CEO to succeed George
          Morgenstern, our founder and President and CEO since 1986. Mr. Morgenstern
          continues to serve on the board of directors and as Chairman of the Board
          focusing on efforts to grow our projects and solutions activities in Israel.
          Though our cash corporate expenses have been relatively stable in 2006
          as
          compared to 2005, we have expended 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.
  We
          raised
          approximately $2.5 million, net, in private placements in 2006 and continue
          to
          raise funds in this way in 2007. For disclosure regarding our recently
          announced
          private placement, see “Recent Developments” above.
  16
 **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; revenue
          recognition; foreign currency transactions; income taxes; 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.
  Investments
          in associated companies are accounted for by the equity method.
  Our
          Comverge investment is comprised of both common and preferred stock. As
          of
          December 31, 2006 the balance of our investment was a net liability of
          $1.8
          million comprised of our negative investment in common shares of $1.8 million
          and our investment in preferred shares of $3.8 million which we have written
          down to zero value as a result of accumulated equity losses against our
          preferred investment. We currently no longer record equity losses in Comverge.
          Should we begin to record equity income on our investment in Comverge,
          we would
          record that equity income to our preferred investment up to our original
          $3.8
          million preferred share investment in Comverge, and thereafter to our investment
          in Comverge’s common shares, of which we currently own approximately 66% (we
          currently own a weighted average of approximately 23% of common and preferred
          shares). As at December 31, 2006, we had a provision for unrecognized losses
          in
          Comverge of $381,000. We will record equity income from our preferred investment
          in Comverge, if and when Comverge records net income in excess of approximately
          $5.7 million. As described above under “Recent Developments,” as a result of the
          Comverge IPO all shares of preferred stock will be converted into common
          stock.
          If as a result of Comverge’s public offering, we may be precluded from
          accounting for our investment in Comverge on the equity method and may
          account
          for our investment in Comverge on 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:
  ·
                $69,000
                    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;
  17
  ·
                $446,000
                    to the value of the Paketeria brand name;
                    and
  ·
                $357,000
                    to goodwill.
  Since
          we
          account for our investment in Paketeria under the equity method, we have,
          in
          2006, reduced our investment in Paketeria by $127,000, which represents
          our
          share of Paketeria’s losses during the period since our investment. In addition,
          we have included in our equity loss the amortization of the value of the
          acquired non-compete agreement and the franchise agreements, which in 2006
          totaled $52,000 during the period since our investment. These reductions
          in our
          investment were partially offset by the $20,000 change in value of the
          put
          option we acquired.
  The
          options that we have in Paketeria allow us to increase our holdings in
          Paketeria
          from our current 33% to just over 50% and would allow us to control the
          company.
  *Revenue
          Recognition*
  Revenue
          from time-and-materials service contracts, maintenance agreements and other
          services is recognized as services are provided.
  In
          2006,
          we derived $1.8 million of revenues from fixed-price type contracts, in
          both our
          RT Solutions and IT Solutions segments, representing approximately 43%
          of
          consolidated sales in 2006 ($1.9 million and 46%, and $1.8 million and
          55%, in
          2005 and 2004, 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.
  In
          March
          2006, we sold our Databit subsidiary. As a result, the results from Databit’s
          operations for the years ended December 31, 2004, 2005 and 2006 are reflected
          as
          discontinued operations. Consequently, our dsIT Israeli subsidiary accounts
          for
          all of our net revenues for the years ended December 31, 2004, 2005 and
          2006. In
          addition, dsIT accounts for 64 %
          of our
          assets and 52% of our total liabilities as of December 31, 2006 (45% of
          our
          assets and 42% of our total liabilities as of December 31, 2005). 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.
  *Income
          Taxes*
  We
          have a
          history of unprofitable operations due to losses incurred in a number of
          our
          operations. These losses generated sizeable state, federal and foreign
          tax net
          operating loss (“NOL”) carryforwards, which as of December 31, 2006 were
          approximately $14.7 million, $12.1 million and $0.8 million,
          respectively.
  18
 Generally
          accepted accounting principles require that we record a valuation allowance
          against the deferred income tax asset associated with these NOL carryforwards
          and other deferred tax assets if it is “more likely than not” that we will not
          be able to utilize them to offset future income taxes. Due to our history
          of
          unprofitable operations, we only recognize net deferred tax assets in those
          subsidiaries in which we believe that it is “more likely than not” that we will
          be able to utilize them to offset future income taxes in the future. We
          currently provide for income taxes only to the extent that we expect to
          pay cash
          taxes on current income or disallowed expenses.
  It
          is
          possible, however, that we could be profitable in the future at levels
          which
          cause management to conclude that it is more likely than not that we will
          realize all or a portion of the NOL carryforwards and other deferred tax
          assets.
          Upon reaching such a conclusion, we would immediately record the estimated
          net
          realizable value of the deferred tax assets at that time and would then
          provide
          for income taxes at a rate equal to our combined federal and state effective
          rates or foreign rates. Subsequent revisions to the estimated net realizable
          value of the deferred tax assets could cause our provision for income taxes
          to
          vary significantly from period to period.
  *Stock-based
          Compensation*
  For
          the
          year ending December 31, 2006, we incurred stock compensation expense of
          approximately $1.8 million. We account for all stock-based compensation
          in
          accordance with the fair value recognition provisions of
          SFAS No. 123R, Share-Based Payment. Under these provisions,
          stock-based compensation cost is measured at the grant date based on the
          value
          of the award and is recognized as expense over the vesting period. 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.
  The
          following table sets forth a comparison of the per share effect of our
          adoption
          of SFAS 123R for the years ended December 31, 2004, 2005 and 2006.
  
 **Year
                    ended December 31,****2004**
                
                **2005**
                
                **2006**Basic
                    and diluted net income (loss) per share as reported:Loss
                    per share from continuing operations
                
                $
                (0.39
                )
                $
                (0.26
                )
                $
                (0.48
                )Discontinued
                    operations
                
                
                0.24
                
                
                0.10
                
                
                (0.23
                )Net
                    loss per share - basic and diluted
                
                $
                (0.15
                )
                $
                (0.16
                )
                $
                (0.71
                )Basic
                    and diluted net income (loss) per share had we not adopted SFAS
                    123R:Loss
                    per share from continuing operations
                
                $
                (0.39
                )
                $
                (0.26
                )
                $
                (0.29
                )Discontinued
                    operations
                
                
                0.24
                
                
                0.10
                
                
                (0.19
                )Net
                    loss per share - basic and diluted
                
                $
                (0.15
                )
                $
                (0.16
                )
                $
                (0.48
                )
  See
          Note
          14 to the condensed 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.
  Prior
          to the adoption of SFAS No. 123-R, we accounted for stock-based
          employee compensation plans in accordance with Accounting Principles Board
          Opinion No. 25, Accounting for Stock Issued to Employees and its related
          interpretations (APB No. 25), and followed the pro forma net income, pro
          forma income per share, and stock-based compensation plan disclosure
          requirements set forth in SFAS No. 123, Accounting for Stock-Based
          Compensation.
  19
 The
          fair values of all stock options granted were estimated using the
          Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton 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 2006 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. The weighted average life of the
          options
          was estimated based management’s estimates based on an evaluation of the vesting
          term, contractual life, and expected exercise behavior since our history
          of
          option exercises is too brief to have established historical rates. The
          risk-free interest rate used is based upon U.S. Treasury yields for a period
          consisted with the expected term of the options.
  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. We use
          the Black-Scholes valuation method to estimate the fair value of
          warrants.
  **RESULTS
          OF OPERATIONS**
  The
          following table sets forth selected consolidated statement of operations
          data as
          a percentage of our total sales:
  Year
                    Ended December 31,2002
                  (unaudited)
                
                2003
                  (unaudited)
                
                2004
                
                2005
                
                2006Sales
                
                
                100
                %
                
                100
                %
                
                100
                %
                
                100
                %
                
                100
                %Cost
                    of sales
                
                
                74
                
                
                77
                
                
                74
                
                
                70
                
                
                67Gross
                    profit
                
                
                26
                
                
                23
                
                
                26
                
                
                30
                
                
                33Research
                    and development expenses
                
                
                6
                
                
                2
                
                
                1
                
                
                1
                
                
                8Selling,
                    marketing, general and administrative expenses
                
                
                52
                
                
                84
                
                
                100
                
                
                83
                
                
                113Impairment
                    of investment
                
                
                0
                
                
                --
                
                
                --
                
                
                --
                
                
                --Operating
                    loss
                
                
                (33
                )
                
                (62
                )
                
                (75
                )
                
                (54
                )
                
                (88
                )Finance
                    expense, net
                
                
                (2
                )
                
                (6
                )
                
                (1
                )
                
                0
                
                
                (1
                )Other
                    income, net
                
                
                --
                
                
                --
                
                
                4
                
                
                --
                
                
                8Loss
                    from operations before taxes on income
                
                
                (34
                )
                
                (68
                )
                
                (71
                )
                
                (55
                )
                
                (81
                )Taxes
                    on income
                
                
                0
                
                
                (1
                )
                
                1
                
                
                (1
                )
                
                4Loss
                    from operations of the Company and its consolidated
                    subsidiaries
                
                
                (34
                )
                
                (68
                )
                
                (72
                )
                
                (54
                )
                
                (85
                )Share
                    of losses in Comverge
                
                
                --
                
                
                (20
                )
                
                (37
                )
                
                (9
                )
                
                (5
                )Gain
                    on sale of shares in Comverge
                
                
                --
                
                
                --
                
                
                21
                
                
                --
                
                
                --Share
                    of losses in Paketeria
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (10
                )Minority
                    interests, net of tax
                
                
                4
                
                
                3
                
                
                (3
                )
                
                (2
                )
                
                --Loss
                    from continuing operations
                
                
                (30
                )
                
                (85
                )
                
                (91
                )
                
                (65
                )
                
                (101
                )Gain
                    (loss) on sale of discontinued operations and contract settlement
                    (in
                    2006), net of income taxes
                
                
                --
                
                
                --
                
                
                --
                
                
                13
                
                
                (50
                )Income
                    (loss) from discontinued operations, net of income taxes
                
                
                (3
                )
                
                14
                
                
                56
                
                
                20
                
                
                2Net
                    loss
                
                
                (34
                )%
                
                (71
                )%
                
                (35
                )%
                
                (31
                )%
                
                (149
                )%
  20
  The
          following table sets forth certain information with respect to revenues
          and
          profits of our reportable business segments for the years ended December
          31,
          2004, 2005 and 2006, including the percentages of revenues attributable
          to such
          segments. (See Note 18 to our consolidated financial statements for the
          definitions of our reporting segments.) Segment information excludes the
          discontinued results of our US based consulting activities, which were
          discontinued in 2004, and our Israel based outsourcing activities, which
          were
          discontinued in 2005 as well as the results of our former Databit subsidiary
          which was sold in March 2006 (see Note 3 to our consolidated financial
          statements). The column marked “Other” aggregates information relating to
          miscellaneous operating segments, which may be combined for reporting under
          applicable accounting principles.
  RT
                  Solutions
                
                ITSolutions
                
                Other
                
                Total(in
                    thousands)Year
                    ended December 31, 2006:Revenues
                    from external customers
                
                $
                2,729
                
                $
                1,125
                
                $
                264
                
                $
                4,117Percentage
                    of total revenues from external customers
                
                
                66
                %
                
                27
                %
                
                7
                %
                
                100
                %Gross
                    profit
                
                
                936
                
                
                330
                
                
                88
                
                
                1,354Segment
                    income (loss) before income taxes
                
                
                (159
                )
                
                (281
                )
                
                29
                
                
                (411
                )Year
                    ended December 31, 2005:Revenues
                    from external customers
                
                $
                2,844
                
                $
                1,314
                
                $
                29
                
                $
                4,187Percentage
                    of total revenues from external customers
                
                
                68
                %
                
                31
                %
                
                1
                %
                
                100
                %Gross
                    profit
                
                
                805
                
                
                408
                
                
                29
                
                
                1,242Segment
                    income before income taxes
                
                
                34
                
                
                48
                
                
                19
                
                
                102Year
                    ended December 31, 2004:Revenues
                    from external customers
                
                $
                1,988
                
                $
                1,312
                
                $
                64
                
                $
                3,364Percentage
                    of total revenues from external customers
                
                
                59
                %
                
                39
                %
                
                2
                %
                
                100
                %Gross
                    profit
                
                
                479
                
                
                330
                
                
                64
                
                
                873Segment
                    income (loss) before income taxes
                
                
                (175
                )
                
                (49
                )
                
                38
                
                
                (186
                )
  **2006
          COMPARED TO 2005**
  *Sales.* Sales
          in
          2006 decreased marginally as compared to 2005 with slight decreases in
          both of
          our reporting segments being partially offset by an increase in sales in
          our
“Other” miscellaneous segment.
  *Gross
          profit.* Gross
          profits increased in 2006 by $112,000 or 9%, primarily due to an increase
          in
          gross profits from our RT Solutions segment which more than offset the
          decrease
          in gross profits from our IT Solutions segment. The increase in gross profit
          in
          our RT Solutions segment was primarily attributable to a number of specific
          projects with particularly high profit margins, which offset the decrease
          in
          sales. The decrease in gross profit in our IT Solutions segment was attributable
          to a combination of reduced sales and a reduced gross margin.
  *Research
          and development expenses (“R&D”).* Research
          and development expenses increased by $271,000, which was primarily attributable
          to an increase in development costs associated with our OncoProTM
          solution package in our IT Solutions segment.
 
 21
  *Selling,
          marketing, general and administrative expenses (“SMG&A”).* SMG&A
          increased in 2006 by approximately $1.2 million or 34%. This increase is
          entirely attributable to the $1.2 million of stock-compensation expense
          we
          recorded as a result of our adoption of FAS 123(R) in 2006 that is included
          in
          SMG&A. Excluding the stock-compensation expense, our corporate SMG&A was
          relatively unchanged in 2006 compared to 2005 whereas dsIT’s SMG&A in 2006
          was approximately $90,000 less in 2006 as compared to 2005.
  *Other
          income, net* .
          In the
          first quarter of 2006, we reached a settlement agreement with an Israeli
          bank
          with respect to our claims against the bank and the bank’s counterclaim against
          us. As a result of the settlement agreement, we recorded income of $330,000,
          net
          of legal expenses.
  *Taxes
          on income* .
          The
          increase in taxes on income in 2006 is due to the increase in a tax provision
          previously made with respect to a transaction in a previous year.
  *Share
          of Losses in Comverge* .
          In the
          first quarter of 2006, the carrying value of our investment in Comverge's
          common
          stock and preferred stock was reduced to zero. As such, Comverge has had
          no
          effect on our results since the first quarter of 2006. ** Our
          share
          of Comverge's net losses in 2006 was $210,000. In the future, when Comverge
          begins to show profit, after it has reached the level of equity at which
          we
          ceased recording equity losses, we will record 7% of that income as equity
          income to our preferred investment up to our original $3.9 million preferred
          share investment in Comverge, and thereafter to our investment in Comverge’s
          common shares, of which we currently own approximately 66%.
  *Share
          of losses in Paketeria.* In
          the
          third quarter of 2006, we acquired 23% of Paketeria and increased our investment
          in the fourth quarter of 2006 to approximately 33%. Our share of Paketeria’s net
          losses plus amortization of the purchase price allocated to intangibles
          during
          the period since our acquisition was $159,000.
  *Net
          income from discontinued operations, net of tax.*  Under
          applicable accounting principles, as a result of our sale of Databit in
          the
          first quarter of 2006, the results of Databit have been reclassified in
          the
          current period and for all prior periods as a discontinued operation. The
          condensed results of this business are presented in each of the current
          and
          comparative period as net income from discontinued operations.
  The
          results for 2005 include the condensed results of Databit as well as the
          condensed results of the Company’s outsourcing consulting services business in
          Israel, which was sold in August 2005. The decrease in net income from
          discontinued operations in the 2006 period as compared to the 2005 period
          was
          primarily due to the inclusion in the 2005 period of the results of the
          outsourcing consulting services business.
  *Loss
          on sale of discontinued operations and contract settlement, net of tax.* This
          loss
          resulted from the sale of our Databit computer hardware company and contract
          settlement with our former CEO during the first quarter of 2006.
  **2005
          COMPARED TO 2004**
  *Sales* .
          The
          increase in sales in 2005 as compared to 2004 was almost entirely attributable
          to an increase in sales in our RT Solutions segment. Approximately $535,000
          of
          the $856,000 increase was attributable to an increase in sales in our naval
          solutions activities. Sales in our IT Solutions segment was virtually unchanged
          from 2004 to 2005.
  *Gross
          profit* .
          The
          increase in gross profits in 2005 as compared to 2004 was attributable
          to both
          our RT and IT reporting segments. The increase in RT Solutions gross profits
          was
          attributable to both an increase in sales and gross profit margin whereas
          the
          increase in IT Solutions gross profits was attributable to an increase
          in IT
          Solutions gross margin.
  22
 *Selling,
          marketing, general and administrative expenses (“SMG&A”)* .
          SMG&A in 2005 was increased slightly as compared to 2004 increasing by
          $90,000. Both corporate and dsIT increased their SMG&A costs in 2005 as
          compared to 2004 by immaterial amounts.
  *Other
          income, net.* During
          the second quarter of 2004, we received a decision from the Israeli Supreme
          Court in our dispute with an Israeli bank. In its decision, the Court reversed
          the district court’s award for costs in favor of the bank for which we had
          previously accrued. The courts also remanded to the district court our
          claims
          against the bank for a determination as to the amount of damages. As a
          result of
          the decision we recorded other income of approximately $148,000 in
          2004.
  *Taxes
          on Income* .
          The
          change in income tax expense in 2005 as compared to 2004 was primarily
          due to a
          one-time expense due to the reorganization of business at dsIT, as a result
          of
          which, previously recognized foreign income tax assets were expensed. Those
          expenses were offset by a tax benefit recorded from the sale of our dsIT
          Technologies subsidiary.
  *Share
          of Losses in Comverge.* Our
          share of Comverge's $8.0 million and $9.3 million of net losses in 2005
          and
          2004, respectively, was $380,000 and $1.2 million, respectively. The reduction
          in our share of losses in 2005 is attributable to our no longer recording
          equity
          losses in Comverge, as our preferred stock investment has been reduced
          to
          zero.
  *Gain
          on sale of discontinued operations, net of tax* *.* ** In
          August
          2005, we sold our Israeli outsourcing consulting business for approximately
          $3.7
          million, resulting in a gain of $541,000.
  *Minority
          interests.* Minority
          interests reflect the minority interests in income generated by our former
          dsIT
          Technologies subsidiary.
  *Net
          income from discontinued operations, net of tax.* In
          August
          2005, we sold our Israel based consulting business. As a result, net income
          from
          discontinued operations, net of income taxes for those operations have
          been
          restated for 2004. The decrease in net income from discontinued operations,
          net
          of tax is due to 2005 results reflected results for a seven and a half
          month
          period as compared to 2004 which reflects an entire year’s results.
  **LIQUIDITY
          AND CAPITAL RESOURCES**
  As
          of
          December 31, 2006, we had working capital of $ 0.3 million, including $1.5
          million in cash and cash equivalents. Net cash of $0.6 million was provided
          during 2006. Net cash of $1.6 million was used in operating activities
          during
          2006. The net loss for the year ended December 31, 2006 of $6.1 million,
          was due
          primarily to the $2.1 million loss on our sale of our Databit computer
          hardware
          company, the contract settlement with our former CEO, and corporate expenses
          of
          $3.0 million of which 1.5 million was related to stock option compensation.
          The
          primary use of cash in operating activities during 2006 was net corporate
          general and administrative expenditures of approximately $1.5 million.
          Net cash
          of $1.2 million used in investing activities was primarily for the contract
          settlement with our former CEO and associated sale of our Databit computer
          hardware company totaling $1.0 million, and our investments in Paketeria
          ($1.3
          million) and Comverge ($0.2 million). These cash expenditures were partially
          offset by the release of previously restricted cash balances of $1.6 million.
          Additional cash of $3.4 million was provided by financing activities, which
          included the net cash provided by the private placements of our Common
          Stock and
          employee stock option exercises ($2.9 million) and a loan provided to us
          by our
          CEO of $0.3 million.
  Our
          working capital of $259,000 at December 31, 2006, included working capital
          of
          $679,000 in our dsIT subsidiary. Due to Israeli tax and company law constraints
          and dsIT’s own cash flow requirements, working capital and cash flows from
          dsIT's operations are not readily available to finance US based activities.
          As
          of December 31, 2006, dsIT was utilizing approximately $188,000 (net) of
          its
          approximately $485,000 lines of credit. dsIT's lines of credit are denominated
          in NIS and bear a weighted average interest rate of the Israeli prime rate
          plus
          2.2% per annum. The Israeli prime rate fluctuates and as of December 31,
          2006
          was approximately 6.0%. In February 2007, dsIT and one of its banks agreed
          to
          convert NIS 450,000 (or approximately $107,000) of its lines of credit
          to a term
          loan to be paid over a period of one-year with the terms of the remaining
          balance in the line of credit to be revisited in June 2007. At December
          31,
          2006, dsIT was in technical violation of covenants under its line of credit
          with
          its other bank. This bank is continuing to provide funding to dsIT despite
          the
          technical violation and has not formally notified dsIT of any violation
          or any
          contemplated action. In addition, Acorn has agreed to be supportive of
          dsIT’s
          liquidity requirements over the next 12 months .
  23
 At
          the
          end of March 2007, dsIT was using approximately $160,000 (net) of its
          lines-of-credit. 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,
          there is no assurance the measures taken by will be successful and we may
          need
          to provide supplementary financing, or sell all or part of that business.
  The
          cash
          balance in Acorn at the end of March 2007 was approximately $535,000 not
          including the cash from our recent private placements (see “Recent
          Developments”). 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.
  *Contractual
          Obligations and Commitments*
  The
          table
          below provides information concerning obligations under certain categories
          of
          our contractual obligations as of December 31, 2006.
 
 Ending
                    December 31,(in
                    thousands)Cash
                    Payments due to Contractual Obligations
                
                Total
                
                2007
                
                2008-2009
                
                2010-2011
                
                2012
                    and thereafterLong-term
                    debt
                
                $
                26
                
                $
                26
                
                $
                --
                
                $
                --
                
                $
                --Operating
                    leases
                
                
                1,084
                
                
                523
                
                
                561
                
                
                --
                
                
                --Potential
                    severance obligations to Israeli employees (1)
                
                
                2,545
                
                
                --
                
                
                --
                
                
                --
                
                
                2,545Investor
                    relations
                
                
                81
                
                
                81
                
                
                --
                
                
                --
                
                
                --Buy-out
                    of Paketeria loan (2)
                
                
                92
                
                
                92
                
                
                --
                
                
                --
                
                
                --Total
                    contractual cash obligations
                
                $
                3,828
                
                $
                722
                
                $
                561
                
                $
                --
                
                $
                2,545
  We
          expect
          to finance these contractual commitments in 2007 from cash currently on
          hand and
          cash generated from operations.
  (1)
          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, 2006, we accrued a total of $2.5 million for potential severance
          obligations of which approximately $1.6 million was funded with cash to
          insurance companies.
  (2)
          As a
          part of our initial agreement to purchase 23% of Paketeria, we agreed to
          the
          purchase of a €210,000 principal promissory note issued by Paketeria to its
          founder and managing director. Under the terms of the agreement, we must
          purchase one-third of the note from the founder for a cash payment equal
          to
          one-third of the principal amount, plus accrued interest, upon Paketeria
          having
          achieved each of three franchise licensing milestones—the licensing of its 60th,
          75th, and 115th franchises. In October 2006, we purchased €140,000
          (approximately $184,000) of the note. We expect to purchase the remaining
          €70,000 (approximately $92,000) of the note in 2007, upon the achievement
          of the
          third and final milestone.
  24
 *Certain
          Information Concerning Off-Balance Sheet Arrangements.*
  Our
          Israeli subsidiary provided various performance, advance and tender guarantees
          as required in the normal course of its operations. As of December 31,
          2006,
          such guarantees totaled approximately $21,000 and are due to expire through
          2015.
  *Impact
          of Inflation and Currency Fluctuations*
  A
          majority of our sales are denominated in dollars. The remaining portion
          is
          either in NIS or 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, should it be
          significantly different from the rate of inflation. In 2006 the appreciation
          of
          the NIS against the dollar was 8.2%, whereas in 2005 the depreciation of
          the NIS
          against the dollar was 6.8%. Inflation in Israel was (0.1%) in 2006 and
          2.4%
          during 2005. During the first two months of 2007, the NIS was virtually
          unchanged against the dollar and inflation during this period was -(0.4%).
  As
          of
          December 31, 2006, virtually all of our 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.
  25
 **SUMMARY
          QUARTERLY FINANCIAL DATA (Unaudited)**
  The
          following table sets forth certain of our unaudited quarterly consolidated
          financial information for the years ended December 31, 2005 and 2006. This
          information should be read in conjunction with our Consolidated Financial
          Statements and the notes thereto.
  2005
                
                
                2006FirstQuarter
                
                
                SecondQuarter
                
                
                Third
                    Quarter
                
                
                Fourth
                    Quarter
                
                
                First
                    Quarter
                
                
                SecondQuarter
                
                
                Third
                    Quarter*
                
                
                Fourth
                    Quarter*(in
                    thousands, except per share amounts)Sales
                
                $
                1,159
                
                $
                1,049
                
                $
                782
                
                $
                1,197
                
                $
                973
                
                $
                990
                
                $
                923
                
                $
                1,231Cost
                    of sales
                
                
                790
                
                
                772
                
                
                630
                
                
                753
                
                
                745
                
                
                645
                
                
                597
                
                
                776Gross
                    profit
                
                
                369
                
                
                277
                
                
                152
                
                
                444
                
                
                228
                
                
                345
                
                
                326
                
                
                455Research
                    and development expenses
                
                
                9
                
                
                17
                
                
                16
                
                
                11
                
                
                26
                
                
                71
                
                
                137
                
                
                90Selling,
                    marketing, general and administrative expenses
                
                
                1,040
                
                
                876
                
                
                996
                
                
                510
                
                
                922
                
                
                1,044
                
                
                1,570
                
                
                1,122Operating
                    loss
                
                
                (680
                )
                
                (616
                )
                
                (860
                )
                
                (77
                )
                
                (720
                )
                
                (770
                )
                
                (1,381
                )
                
                (757
                )Finance
                    income (expense), net
                
                
                (10
                )
                
                (21
                )
                
                (25
                )
                
                2
                
                
                14
                
                
                (20
                )
                
                (17
                )
                
                (7
                )Other
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                330
                
                
                --
                
                
                --
                
                
                --Loss
                    before taxes on income
                
                
                (690
                )
                
                (637
                )
                
                (885
                )
                
                (75
                )
                
                (376
                )
                
                (790
                )
                
                (1,398
                )
                
                (764
                )Taxes
                    on income
                
                
                2
                
                
                4
                
                
                43
                
                
                (12
                )
                
                (2
                )
                
                (4
                )
                
                (2
                )
                
                (175
                )Loss
                    from operations of the Company and its consolidated
                    subsidiaries
                
                
                (688
                )
                
                (633
                )
                
                (842
                )
                
                (87
                )
                
                (378
                )
                
                (794
                )
                
                (1,400
                )
                
                (939
                )Minority
                    interests, net of tax
                
                
                (42
                )
                
                (17
                )
                
                (14
                )
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Share
                    of loss in Paketeria
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (251
                )
                
                (173
                )Share
                    of loss in Comverge
                
                
                (201
                )
                
                (178
                )
                
                --
                
                
                --
                
                
                (210
                )
                
                --
                
                
                --
                
                
                --Net
                    loss from continuing operations
                
                
                (931
                )
                
                (828
                )
                
                (856
                )
                
                (87
                )
                
                (588
                )
                
                (794
                )
                
                (1,651
                )
                
                (1,112
                )Gain
                    (loss) on sale of discontinued operations, net of tax
                
                
                --
                
                
                --
                
                
                542
                
                
                (1
                )
                
                (2,298
                )
                
                --
                
                
                --
                
                
                229Net
                    income (loss) from discontinued operations, net of tax
                
                
                492
                
                
                257
                
                
                187
                
                
                (92
                )
                
                78
                
                
                --
                
                
                --
                
                
                --Net
                    loss
                
                $
                (439
                )
                $
                (571
                )
                $
                (127
                )
                $
                (180
                )
                $
                (2,808
                )
                $
                (794
                )
                $
                (1,651
                )
                $
                (883
                )Basic
                    and diluted net income (loss) per share:Net
                    loss per share from continuing operations
                
                $
                (0.11
                )
                $
                (0.10
                )
                $
                (0.11
                )
                $
                (0.01
                )
                $
                (0.07
                )
                $
                (0.10
                )
                $
                (0.18
                )
                $
                (0.11
                )Discontinued
                    operations
                
                
                0.06
                
                
                0.03
                
                
                0.09
                
                
                (0.01
                )
                
                (0.27
                )
                
                --
                
                
                --
                
                
                0.02Net
                    loss per share
                
                $
                (0.05
                )
                $
                (0.07
                )
                $
                (0.02
                )
                $
                (0.02
                )
                $
                (0.34
                )
                $
                (0.10
                )
                $
                (0.18
                )
                $
                (0.09
                )Weighted
                    average number of shares outstanding - basic
                
                
                8,117
                
                
                8,117
                
                
                8,117
                
                
                8,117
                
                
                8,160
                
                
                8,161
                
                
                8,993
                
                
                9,444Weighted
                    average number of shares outstanding - diluted
                
                
                8,117
                
                
                8,117
                
                
                8,117
                
                
                8,117
                
                
                8,160
                
                
                8,161
                
                
                8,993
                
                
                9,444
 *
                  FAS123R
                      expense of $199 and $66 for the third and fourth quarters of
                      2006,
                      respectively, have been reclassed from selling, marketing,
                      general and
                      administrative expenses to Share of loss in
                      Paketeria.
 
 26
 **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 2006 the NIS strengthened in
          relation
          to the U.S. dollar by 8.2%. 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, 2006, a 10% unfavorable change in the exchange rate of the
          U.S.
          dollar against the NIS would have decreased stockholders’ equity by
          approximately $45,000 (arising from a negative CTA adjustment of approximately
          $57,000 net exchange gains of approximately $12,000). These hypothetical
          changes
          are based on increasing the
          December 31, 2006 exchange rates by 10%.
  We
          do not
          employ specific strategies, such as the use of derivative instruments or
          hedging, to manage exchange rate 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 62% of the trade accounts receivable at December
          31,
          2006 was due from three customers that pay their 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.
  **ITEM
          8.**  **FINANCIAL
          STATEMENTS AND SUPPLEMENTARY DATA**
  Furnished
          at the end of this report commencing on page F-1.
  27
 **ITEM
          9.**  **CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE**
  None.
  **ITEM
          9A. CONTROLS AND PROCEDURES**
  **Evaluation
          of Controls and Procedures**
  We
          carried out an evaluation, under the supervision and with the participation
          of
          our management, including the Chief Executive Officer and the Chief Financial
          Officer, of the design and operation of our disclosure controls and procedures.
          Based on this evaluation, our Chief Executive Officer and Chief Financial
          Officer concluded that as of December 31, 2006, our disclosure controls
          and
          procedures were effective to ensure that information required to be disclosed
          by
          us in the reports that we file or submit under the Securities Exchange
          Act of
          1934 is recorded, processed, summarized and reported, within the time periods
          specified in the SEC’s rules and forms and to ensure that information required
          to be disclosed by us in the reports that we file or submit under the Securities
          Exchange Act of 1934 is accumulated and communicated to our management,
          including our principal executive and principal financial officers, or
          persons
          performing similar functions, as required to allow timely decisions regarding
          required disclosure.
  **Changes
          in Controls and Procedures**
  There
          have been no significant changes in our internal controls or in other factors
          that could significantly affect disclosure controls and procedures subsequent
          to
          the date of our most recent evaluation.
  **ITEM
          9B. OTHER INFORMATION**
  None.
  28
 **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
                
                73
                
                Founder,
                    Chairman of the Board; Chairman of the Board of our dsIT Solutions
                    Ltd.
                    subsidiary (“dsIT”)John
                    A. Moore
                
                41
                
                Director,
                    President and Chief Executive Officer; director of our Comverge
                    Inc.
                    equity affiliate (“Comverge”) and director of our Paketeria GmbH equity
                    affiliate (“Paketeria”)Samuel
                    M. Zentman
                
                60
                
                DirectorRichard
                    J. Giacco
                
                54
                
                DirectorRichard
                    Rimer
                
                41
                
                DirectorKevin
                    P. Wren
                
                52
                
                DirectorJacob
                    Neuwirth
                
                60
                
                Chief
                    Executive Officer and President of dsITMichael
                    Barth
                
                46
                
                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 serves as a director of Comverge. 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 Chairman of Optimer, Inc., a research based polymer development
          company, and a member of the Board of Directors of Voltaix, Inc., a leading
          provider of specialty gases to the solar and semiconductor industries.
  **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.
  29
  **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.
  **Kevin
          P. Wren** was
          elected to the Board in September 2006. Mr. Wren was employed by MBNA America
          in
          various senior management capacities from March 1995 until his retirement
          from
          MBNA in April 2005, most recently as Director of MBNA Corporate Strategic
          Planning from January 2004 through April 2005. Prior to that, he served
          as
          Director in charge of U.S. credit card product development and as MBNA’s Chief
          Internet Officer. Mr. Wren is currently a member of the Board of Directors
          of Christiana Care Visiting Nurse Association, a non-profit home health
          care
          organization.
  **Jacob
          Neuwirth** has been
          Chief Executive Officer and President of dsIT since December 2001. From
          1994 to
          2001, he was the founder and President of Endan IT Solutions Ltd., an Israeli
          IT
          solutions provider, specializing in billing and healthcare IT solutions,
          which
          was acquired by dsIT in December 2001.
  **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 18 years of experience in public and
          private
          accounting.
   **Audit
          Committee; Audit Committee Financial Expert**
  Since
          September 2006, we no longer have an Audit Committee. We have opted instead
          to
          have the entire Board serve the function of the audit committee as permitted
          under the Exchange Act. One of our directors, Samuel Zentman, has been
          designated as our lead director for Audit Committee matters for the purpose
          of
          overseeing our accounting and financial reporting processes and audits
          of our
          financial statements by our independent auditors.
  Our
          Board
          has not determined that any current member of our board meets the qualifications
          for an “audit committee financial expert” set forth in Item 407 of Regulation
          S-K. It is our intention to reconstitute the Audit Committee in the near
          future,
          with the appointment of one or more additional directors who would also
          serve on
          the audit committee, at least one of which would be expected to meet the
          qualifications for an audit committee financial expert.
  **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 2006
          our
          executive officers and directors complied with the filing requirements
          of
          Section 16(a), with the exception of the late filing of following reports
          (i)
          the Form 3s filed on October 5, 2006 by our directors Richard Rimer, Richard
          Giacco and Kevin Wren following their initial appointment to the Board
          in
          September 2006, (ii) a Form 4 filed by Mr. Moore on March 31, 2006, (iii)
          a Form
          4 filed by Mr. Barth on July 26, 2006, and (iii) a Form 4 filed by Mr.
          Rimer on
          October 20, 2006. We have implemented measures to assure timely filing
          of
          Section 16(a) reports by our executive officers and directors in the
          future.
  30
 **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 is incorporated
          by reference as an exhibit to this Annual Report.
 
 **ITEM
          11. EXECUTIVE COMPENSATION**
  **Executive
          Compensation**
  *Compensation
          Discussion and Analysis*
  The
          entire Board of Directors establishes the general compensation policies
          of the
          Company, the specific compensation levels for each executive officer, and
          administers the Company’s equity compensation plans and practices. The Company
          does not currently have a compensation committee.
  The
          main
          objectives of the Company’s compensation structure including rewarding
          individuals for their respective contributions to the Company’s performance,
          establishing executive officers with a stake in the long-term success of
          the
          Company and providing compensation policies that will attract and retain
          qualified executive personnel.
  Compensation
          of our executives has three primary components: (1) salary; (2) in certain
          cases
          a yearly cash incentive bonus; and (3) in almost all cases stock option
          awards.
          In addition, we provide our executives with benefits that are generally
          available to our salaried employees.
  The
          Board
          of Directors determines the appropriate level of total compensation and
          of each
          component of compensation based on its determination in part as to the
          amount
          and type of compensation necessary to attract and retain the executive,
          overall
          company performance, individual performance and other considerations we
          deem
          relevant. Except as described below, our board of directors have not adopted
          any
          formal or informal policies, set formulas, or guidelines for setting total
          compensation for each executive or allocating compensation between cash
          and
          other currently paid-out compensation and other long-term forms of compensation.
          This is due to the small size of our executive team and the need to tailor
          each
          executive's award to attract and retain that executive. With respect to
          the
          periods covered by this discussion and analysis, the Board of Directors
          has also
          not utilized the services of compensation consultants and other experts.
  For
          compensation decisions, including decisions regarding the grant of equity
          compensation relating to executive officers (other than our President and
          Chief
          Executive Officer), the Board of Directors typically considers the
          recommendations of our President and Chief Executive Officer.
  The
          current intent of the Board of Directors is to perform a periodic review
          of the
          total compensation and the components thereof of its executive officers
          relative
          to the compensation paid by companies with whom we compete for
          executives.
  We
          account for the equity compensation expense for our employees under the
          rules of
          SFAS No. 123R, which requires us to estimate and record an expense for each
          award of equity compensation over the service period of the award. We also
          record cash compensation as an expense at the time the obligation is accrued.
          Until we achieve sustained profitability, the availability to us of a tax
          deduction for compensation expense is not material to our financial position.
          We
          structure cash incentive bonus compensation so that it is taxable to our
          employees at the time it becomes available to them. It is not anticipated
          that
          any executive officer's annual cash compensation will exceed $1 million,
          and we have accordingly not made any plans to qualify for any compensation
          deductions under Section 162(m) of the Internal Revenue Code.
  31
 *Base
          Compensation*
  We
          fix the base salary of each of our executives at a level we believe enables
          us
          to hire and retain individuals in a competitive environment and rewards
          satisfactory individual performance and a satisfactory level of contribution
          to
          our overall business goals.
  *Cash
          Incentive Bonuses*
  Yearly
          cash incentive bonuses for our executive officers are established as part
          of
          their respective individual employment agreements to focus them on achieving
          key
          operational and financial objectives within a yearly time horizon. y Jacob
          Neuwirth, the President and Chief Executive Officer of our dsIT subsidiary
          has
          an employment agreement which provides for a cash incentive bonuses. Mr.
          Neuwirth is entitled to a performance bonus of 5% of dsIT’s net income (as
          defined) before tax as well as a salary increase if dsIT achieves certain
          performance targets. In 2006, Mr. Neuwirth did not earn any performance
          bonus in
          2006 ($11,000 performance bonus was earned in 2005). Mr. Neuwirth did not
          attain
          the performance targets in 2006 (or 2005) to attain a salary increase.
  *Stock
          Options and Equity Awards*
  We
          utilize stock options to reward long-term performance and to ensure that
          our
          executive officers have a continuing stake in our long-term success. These
          options are intended to produce significant value for each executive if
          our
          performance is outstanding and if the executive has an extended tenure.
          Because,
          going forward, our executive officers are awarded stock options with an
          exercise
          price equal to the fair market value of our Common Stock on the date of
          grant,
          the determination of which is discussed below, these options will have
          value to
          our executive officers only if the market price of our Common Stock increases
          after the date of grant.
  Authority
          to make stock option grants to executive officers rests with our board
          of
          directors. In determining the size of stock option grants to executive
          officers,
          our board of directors considers individual performance against the individual's
          objectives, the extent to which shares subject to previously granted options
          are
          vested and the recommendations of our Chief Executive Officer and other
          members
          of management.
  In
          2006,
          prior to the adoption of the 2006 Stock Stock Option Plan for Non-Employee
          Directors and the 2006 Stock Incentive Plan, we issued a total of 1,035,000
          non-plan options to certain of our directors and executive officers, the
          founder
          and director of our Paketeria affiliate, and our investor relations
          advisor.
  In
          addition, during 2006, we modified the terms of previously awarded stock
          options. The terms of total of 392,500 options were modified as a result
          of the
          agreement to sell our former Databit subsidiary to Shlomie Morgenstern
          (the
          President of Databit). The modifications involved the adjustment of the
          expiration date of options granted to Databit employees and to Shlomie
          Morgenstern to be 18 months from the date of the transaction. Certain options
          granted to Shlomie Morgenstern also had their vesting period accelerated.
          In
          addition, the terms of 260,000 options previously granted to George Morgenstern
          (our former CEO and current Chairman of the Board) were modified in connection
          with the contract settlement agreement. Of those options, 200,000 had their
          expiration date extended to December 31, 2009 and 60,000 received accelerated
          vesting. Furthermore, 515,000 options which had been granted at a below
          market
          price in 2006 to our CEO, CFO and an investor relations advisor were modified
          so
          that the exercise price of those options were equal to the market price
          of our
          stock of the date of the original grant. In addition, the expiration date
          for
          116,000 other options for employees and former employees were extended
          and
          15,000 options for a former director had a price modification and extension
          of
          an expiration date.
  32
  Going
          forward, we expect that all equity awards to our directors, executive officers
          and employees (other than dsIT) will be made under our 2006 Stock Option
          Plan
          for Non-Employee Directors and 2006 Stock Incentive Plan.
  In
          November 2006, we adopted a Key Employee Stock Option Plan for our dsIT
          Solutions Ltd. subsidiary. Under the plan, a committee of board members
          of dsIT,
          to initially be comprised of the entire board of directors of dsIT, was
          to be
          created for its administration.
  On
          December 31, 2006, dsIT granted options to purchase 3,914 of its ordinary
          shares, to senior management and employees of dsIT (including an option
          to
          purchase 569 ordinary shares that was granted to Michael Barth, our CFO
          as well
          as the CFO of dsIT) under the plan. The options were granted with an exercise
          price of NIS 1.00 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 resulted in the reduction of our equity
          interest
          in dsIT from 80% to 58%.
  On
          the same date, dsIT granted options to purchase 2,260 of its ordinary shares
          to
          senior management and employees of dsIT (including an option to purchase
          190
          ordinary shares granted to Michael Barth with an exercise price of $105.26)
          at
          exercise prices ranging from NIS 1.00 to $126.05 per share and exercisable
          for a
          period of seven years. These options vest and become exercisable only upon
          the
          occurrence of either an initial public offering of dsIT or a merger,
          acquisition, reorganization, consolidation or similar transaction involving
          dsIT. If and when these options become exercisable and are exercised, our
          equity interest in dsIT will be reduced from 58% to approximately
          50%.
  The
          purpose of the Key Employee Stock Option Plan for our dsIT Solutions Ltd.
          subsidiary and corresponding grants is to provide incentives to key employees
          of
          dsIT to further the growth, development and financial success of
          dsIT.
  *Severance
          and Change in Control Benefits*
  The
          President and Chief Executive Officer of dsIT and our CFO
          and
          each has a provision in his employment agreement providing for certain
          severance
          benefits in the event of termination without cause. The CEO also has as
          a
          provision providing for the acceleration of his then unvested options in
          the
          event of termination without cause following a change in our control. These
          severance and acceleration provisions are described in the "—Employment
          Agreements" section below, and certain estimates of these change of control
          benefits are provided in "Estimated Payments and Benefits Upon Termination"
          below.
  *Other
          Benefits*
  The
          President and Chief Executive Officer of dsIT and our CFO each receives
          company
          cars as well as payments to pension funds and education funds made on their
          behalves in accordance with their contracts which is substantially on the
          same
          basis as other Israeli executives.
  33
 **COMPENSATION
          COMMITTEE REPORT**
 
 The
          Board
          of Directors of Acorn Factor, Inc., which has no Compensation Committee,
          has
          reviewed and discussed the Compensation Discussion and Analysis required
          by Item
          402(b) of Regulation S-K with management and, based on such review and
          discussions, the Board of Directors has recommended that the Compensation
          Discussion and Analysis be included in this Annual Report on Form
          10-K.
 
 THE
          BOARD
          OF DIRECTORS
 OF
          ACORN
          FACTOR, INC.
 George
          Morgenstern
 John
          A.
          Moore
 Samuel
          M.
          Zentman
 Richard
          J. Giacco
 Richard
          Rimer
 Kevin
          P.
          Wren
 
  The
          following table sets forth for the periods indicated information concerning
          the
          compensation of our Chief Executive Officer, Chief Financial Officer and
          other
          officers who received in excess of $100,000 in salary and bonus during
          2006 (the
“named executive officers”):
  **SUMMARY
                    COMPENSATION TABLE**
 
 **Name
                    and**
                  **Principal
                    Position**
                
                **Year**
                
                **Salary
                    ($)**
                
                **Bonus
                    ($)**
                
                **Stock
                    Awards ($)**
                
                **Options
                    Awards**
                  **($)**
                
                
                
                **All
                    Other**
                  **Compensation
                    ($)**John
                    A. Moore
                  President
                    and Chief Executive Officer
                
                
                2006
                
                
                131,750
                
                
                --
                
                
                --
                
                
                675,744
                (1)
                
                
                
                
                11,669
                (2)George
                    Morgenstern
                  Chairman
                    of the Board and
                  Chairman
                    of the Board of dsIT
                
                
                2006
                
                
                64,837
                
                
                --
                
                
                --
                
                
                10,474
                (3)
                
                
                
                
                699,823
                (4)Jacob
                    Neuwirth
                  Chief
                    Executive Officer of dsIT and
                  President of
                    dsIT
                
                
                2006
                
                
                201,038
                
                
                10,733
                (5)
                
                --
                
                
                --
                
                
                
                
                
                55,972
                (6)Michael
                    Barth
                  Chief
                    Financial Officer and
                  Chief
                    Financial Officer of dsIT
                
                
                2006
                
                
                95,250
                
                
                --
                
                
                --
                
                
                57,912
                (7)
                
                
                
                
                18,463
                (6)
 __________________
 (1)
                Granted
                    400,000 stock options as of March 27, 2006 with an exercise price
                    of $2.60
                    per share.(2)
                Consists
                    of (i) $4,669 in health insurance premiums and (ii) $7,000 in
                    director’s
                    fees.(3)
                Granted
                    7,500 stock options as of October 3, 2006 with an exercise price
                    of $3.28
                    per share.(4)
                Consists
                    of (i) $600,000 received as a lump-sum payment in exchange for
                    a release
                    by Mr. Morgenstern of the Company of any and all liability or
                    obligation
                    due him under his employment agreement (ii) $17,600 in contributions
                    to a
                    non-qualified retirement fund, (iii) $19,223 in life insurance
                    premiums,
                    and (iv) $13,000 in director’s fees.(5)
                Performance
                    bonus of $10,733 paid in 2006 on 2005 results.(6)
                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.(7)
                Granted
                    50,000 stock options as of July 21, 2006 with an exercise price
                    of $3.00
                    per share.
   34
 **OUTSTANDING
          EQUITY AWARDS**
  **AT
          2006 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
                
                300,000
                
                100,000
                (1)
                2.60
                
                March
                    31, 2011Michael
                    Barth
                
                4,000
                  3,333
                  16,666
                
                1,667
                  33,334
                (2)
                  (3)
                4.75
                  0.91
                  3.00
                
                May
                    31, 2007
                  December
                    31, 2009
                  July
                    31, 2011George
                    Morgenstern
                
                150,000
                  50,000
                  180,000
                
                7,500
                (4)
                6.00
                  4.80
                  0.91
                  3.28
                
                December
                    31, 2009
                  December
                    31, 2009
                  December
                    31, 2009
                  October
                    3, 2013
  (1)
                These
                    options vest upon our share price achieving a five-day average
                    closing
                    market price of $5.00.
 (2)
                These
                    options vest on June 30, 2007
 (3)
                16,667
                    of these options vest on each of December 31, 2007 and December
                    31,
                    2008.
 (4)
                These
                    options vest on October 3, 2007.
  **Compensation
          of Directors**
  Through
          the end of September 2006, each of our directors was paid $1,000 for each
          Board
          or committee meeting which he attended (except when a committee meeting
          was held
          on the same day as a Board meeting) and was reimbursed for associated
          out-of-pocket expenses. Mr. Kerbs, Dr. Zentman and Mr. Levine were each
          paid
          based upon a rate of $6,000 per annum plus meeting fees in connection with
          their
          service on the Board (and in the case of Mr. Levine and Dr. Zentman, on
          the
          Audit Committee). Mr. Yurman was paid $24,000 per annum plus meeting fees
          for
          his service on the Board and as Chairman of the Audit Committee.
  Beginning
          in October 2006, it was agreed that non-employee directors (Dr. Zentman,
          Mr.
          Rimer, Mr. Giacco, Mr. Wren and Mr. Morgenstern) should receive a cash
          retainer
          of $20,000 payable quarterly in advance, as well as meeting fees for Board
          and
          Committee meetings of $500 per meeting.
  In
          February 2007, our Board of Directors adopted two a new stock option plans
          for
          directors. The 2006 Stock Option Plan for Non-Employee Directors 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) 7,500 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
          7,500
          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 the OTCBB 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
          the 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.
 
 35
 The
          following table sets forth the compensation paid by the Company to non-employee
          Directors for the fiscal year ended December 31, 2006:
 
 **DIRECTOR
          COMPENSATION FOR 2006**
 
 Name
                
                Fees
                    Earned or Paid in Cash ($)
                
                Option
                    Awards
                  ($)
                    (1)
                
                Total
                    ($)Avi
                    Kerbs (2)
                
                
                1,500
                
                
                --
                
                
                1,500Elihu
                    Levine (3)
                
                
                7,500
                
                
                --
                
                
                7,500Shane
                    Yurman (4)
                
                
                19,000
                
                
                22,077
                
                
                41,077Samuel
                    M. Zentman (5)
                
                
                19,500
                
                
                29,495
                
                
                48,995Richard
                    J. Giacco (6)
                
                
                6,000
                
                
                8,362
                
                
                14,362Richard
                    Rimer (6) (7)
                
                
                6,000
                
                
                68,017
                
                
                72,017Kevin
                    Wren (6)
                
                
                6,000
                
                
                8,362
                
                
                14,362
  (1)
                Reflects
                    the dollar amount recognized for financial statement reporting
                    purposes
                    for the fiscal year ended December 31, 2006 in accordance with
                    FAS 123(R),
                    and thus includes amounts from awards granted in and prior to
                    2006. All
                    options awarded to directors in 2006 remained outstanding at
                    fiscal
                    year-end.
 (2)
                Resigned
                    as director on March 27, 2006.
 (3)
                Term
                    as director ended on September 15, 2006. In December 2006, certain
                    options
                    received in the past were modified. The expiration date of these
                    options
                    was extended and the exercise price was adjusted to reflect the
                    closing
                    share price of our Common Stock on thedate
                    prior to the date of modification.We
                    did not recognize any compensation expense in connection with
                    the
                    modification.
 (4)
                Term
                    as director ended on September 15, 2006. Includes $18,000 fee
                    as chair of
                    the Audit Committee.
 (5)
                Option
                    awards include an award of options for service as the lead director
                    for
                    Audit Committee matters.
 (6)
                Was
                    voted in as a director on September 15,
                    2006.
 (7)
                Option
                    awards includes an award of options for service as the lead director
                    in
                    charge of acquisitions.
  **Compensation
          Committee Interlocks and Insider Participation**
  All
          matters related to the compensation of executive officers, including the
          Chief
          Executive Officer, are acted upon by the full Board of Directors.
  In
          2006,
          George Morgenstern served as the as President and Chief Executive Officer
          until
          March 2006 and was Chairman of our Board for the entire year. In March
          2006,
          John Moore became our President and Chief Executive Officer. No member
          of the
          Board of Directors who was also one of our officers participated in any
          deliberations of the Board of Directors or any committee thereof relating
          to his
          own compensation or to the compensation of any person to whom he is related.
          Except as described in the preceding sentence, each member of the Board
          of
          Directors participated in the deliberations of the Board of Directors concerning
          executive officer compensation in 2006. During 2006, George Morgenstern
          engaged
          in transactions with us in which he was deemed to have an interest. For
          further
          information regarding these transactions please see “Item 13. Certain
          Relationships, Related Transactions and Director Independence”
below.
  36
 **Employment
          Arrangements**
  John
          A.
          Moore became our President and Chief Executive Officer in March 2006. During
          the
          period from March until October 2006, he did not have a formal employment
          contract and was being compensated at the rate of $120,000 per annum as
          approved
          by the Board of Directors. 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
          March
          2006, the Board also approved grants to Mr. Moore of an option to purchase
          200,000 shares of our Common Stock at an exercise price of $2.00 per share,
          vesting on September 30, 2006 and expiring on March 31, 2011, and an option
          to
          purchase 200,000 shares of our Common Stock at an exercise price of $2.25
          per
          share, vesting on March 30, 2009 and expiring on March 31, 2011; both subject
          to
          certain accelerated vesting provisions. The exercise price of both option
          grants
          was subsequently modified to $2.60, that being the market price of our
          shares on
          the date of the grant.
  Through
          March 2006, George Morgenstern served as our Chairman, President and Chief
          Executive Officer pursuant to an employment agreement dated as of January
          1,
          1997, as amended by the First Amendment to Employment Agreement dated as
          of May
          17, 2001, the Second Amendment to Employment Agreement dated as of March
          13,
          2002, the Third Amendment to Employment Agreement dated as of December
          30, 2004
          and a Letter Agreement dated as of March 16, 2005 (collectively, the “GM
          Employment Agreement”).
  On
          March
          10, 2006 Mr. Morgenstern entered into an Amendment and Assignment of Employment
          Agreement with us in connection with the sale of our Databit subsidiary
          pursuant
          to which Databit assumed all remaining obligations under the GM Employment
          Agreement, subject to a lump sum payment by us of $600,000 to Mr. Morgenstern.
          In connection with the Amendment and Assignment, Mr. Morgenstern releases
          us
          from any further obligations under the GM Employment Agreement. Mr. Morgenstern
          has been retained as a consultant, presently engaged as Chairman of our
          Board,
          by way of a Consulting Agreement between himself and the Company dated
          March 10,
          2006. Such agreement provides for the payment of an annual consulting payment
          of
          $1.00, the assumption by Databit of the remainder of the payments due under
          an
          auto loan after the one-time payment of $25,000 by the Company towards
          such
          loan, and a non-accountable expense allowance of $65,000 per year. For
          further
          information, see “Item 13. Certain Relationships and Related Transactions”
below.
  Jacob
          Neuwirth serves as President and Chief Executive Officer of dsIT pursuant
          to an
          employment agreement dated as of December 16, 2001. Mr. Neuwirth’s employment
          agreement provides for a base salary which is denominated in Israeli Consumer
          Price Index linked NIS, currently equivalent to approximately $195,000
          per
          annum. Mr. Neuwirth is entitled to a salary increase if dsIT achieves certain
          performance targets. In addition to his base salary, Mr. Neuwirth is entitled
          to
          receive a bonus payment equal to 5% of dsIT’s net profit before tax.
  Under
          the
          terms of the employment agreement with Mr. Neuwirth, we are obligated to
          make
          certain payments upon termination or change in control. See “Estimated Payments
          and Benefits Upon Termination or Change in Control” below for
          details. **
  Under
          his
          employment agreement, Mr. Neuwirth is entitled to a loan of up to $100,000
          from
          dsIT. As of December 31, 2005 the loan balance plus accrued interest which
          is
          denominated in linked NIS, bears interest at 4% and has no fixed maturity
          date,
          had an outstanding balance of $104,000.
  Michael
          Barth has served as Chief Financial Officer of the Company and Chief Financial
          Officer of dsIT beginning December 1, 2006. In July 2006, the Board approved
          an
          annual salary of $100,000 for Mr. Barth retroactive to March 1, 2006. In
          July
          2006, the Board also approved grants to Mr. Barth of an option to purchase
          50,000 shares of our Common Stock at an exercise price of $2.65 per share,
          vesting one-third each on December 31, 2006, 2007 and 2008 and expiring
          on July
          31, 2011. The exercise price of both option grants was subsequently modified
          to
          $3.00, that being the market price of our shares on the date of the
          grant.
  37
 Under
          the
          terms of the employment agreement with Mr. Barth, we are obligated to make
          certain payments upon termination or change in control. See “Estimated Payments
          and Benefits Upon Termination or Change in Control” below for
          details. **
  **Pension
          Benefits**
  We
          do not sponsor any qualified or non-qualified defined benefit plans.
  Nonqualified
          Deferred Compensation
  We
          do not maintain any non-qualified defined contribution or deferred compensation
          plans. The board of directors may elect to provide our officers and employees
          with non-qualified defined contribution or deferred compensation benefits
          if it
          determines that doing so is in our best interests.
  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.
  *John
          A. Moore*
  The
          following table describes the potential payments and benefits upon termination
          of employment for Mr. Moore, our President and Chief Executive Officer, as
          if his employment terminated as of December 31, 2006, 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)
                
                
                --
                
                
                --
                
                
                --
                
                
                --Benefits
                    and perquisites:Perquisites
                    and other personal benefits
                
                
                --
                
                
                --
                
                
                --
                
                
                --Acceleration
                    of stock awards(2)Market
                    value of stock vesting on termination
                
                
                --
                
                
                --
                
                
                87,000
                (3)
                
                --Total
                
                $
                --
                
                $
                --
                
                $
                87,000
                
                $
                --
  (1)
                  Assumes
                      that there is no earned but unpaid base salary at the time
                      of
                      termination.
 (2)
                  Calculated
                      on the year-end per share price of our stock
                      ($3.47)
 (3)
                  According
                      to the terms of Mr. Moore’s options, upon a change of control, the
                      remaining 100,000 unvested options that he has with an exercise
                      price of
                      $2.60 would accelerate their vesting
   *Jacob
            Neuwirth*
  Under
          the
          terms of the employment agreement with Mr. Neuwirth, we are obligated to
          make
          certain payments to fund in part our severance obligations to him. We are
          required to pay Mr. Neuwirth an amount equal to his last month's salary
          multiplied by the number of years (including partial years) that Mr. Neuwirth
          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. Neuwirth’s employment
          agreement. In addition, the agreement with Mr. Neuwirth 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, 2006,
          the
          unfunded portion of these payments was $214,000.  If there is a change of
          control in dsIT or Acorn, Mr. Neuwirth is entitled to severance obligations
          equal to 150% of his last month's salary multiplied by the number of years
          (including partial years) that Mr. Neuwirth worked for us and an additional
          payment equal to six times his last month’s total compensation (a total of 12
          months total compensation).
  38
 The
          following table describes the potential payments and benefits upon termination
          of employment for Mr. Neuwirth, the President and Chief Executive Officer
          of our dsIT subsidiary, as if his employment terminated as of December 31,
          2006, 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
                
                $
                97,434
                (1)
                $
                97,434
                (1)
                $
                194,869
                (2)
                $
                97,434
                (1)Benefits
                    and perquisites:Perquisites
                    and other personal benefits
                
                $
                216,705
                (3)
                $
                306,226
                (4)
                $
                462,244
                (1)
                $
                306,226
                (4)Total
                
                $
                314,139
                
                $
                403,660
                
                $
                657,113
                
                $
                403,660
 
  (1)
                  Assumes
                      that there is no earned but unpaid base salary at the time
                      of termination.
                      The $97,434 represents a parachute payment of six months salary
                      due to Mr.
                      Neuwirth or by death or disability.
 (2)
                  Assumes
                      that there is no earned but unpaid base salary at the time
                      of termination.
                      The $194,869 represents a parachute payment of 12 months salary
                      due to Mr.
                      Neuwirth upon a change of control.
 (3)
                  Includes
                      $168,758 of severance pay based on the amounts funded in for
                      Mr.
                      Neuwirth’s severance in accordance with Israeli labor law. Also includes
                      accumulated, but unpaid vacation days ($21,069), car benefits
                      ($7,101) and
                      payments for pension and education funds
                      ($19,778).
 (4)
                  Includes
                      $258,279 of severance pay 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.. Neuwirth worked for us.
                      Of the
                      $258,279 due Mr. Neuwirth, we have funded $168,758 in an insurance
                      fund.
                      Also includes accumulated, but unpaid vacation days ($21,069),
                      car
                      benefits ($7,101) and payments for pension and education funds
                      ($19,778).
 (5)
                  Includes
                      $387,418 of severance pay 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.. Neuwirth worked for us
                      multiplied by
                      150% in accordance with his contract, which calls for increased
                      severance
                      under a change of control. Of the $387,418 due Mr. Neuwirth,
                      we have
                      funded $168,758 in an insurance fund. Also includes accumulated,
                      but
                      unpaid vacation days ($21,069), car benefits ($14,201) and
                      payments for
                      pension and education funds
                      ($39,556).
 *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, 2006, the unfunded portion
          of
          these payments was $108,000.
  39
 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, 2006, the last day of our last
          fiscal year.
 Circumstances
                    of Termination
  Payments
                    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
                
                $
                48,001
                (3)
                
                $
                101,153
                (3)
                
                
                --
                
                $
                101,153(4)Total
                
                $
                64,668
                
                
                $
                151,153
                
                
                $
                --
                
                $
                151,153
 
 (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
                    $28,690 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 ($13,978), car benefits ($1,750) and
                    payments for
                    pension and education funds
                    ($3,583).
  (4)
                Includes
                    $71,175 of severance pay 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, which calls for increased severance
                    upon
                    termination without cause. Of the $71,175 due Mr. Barth, we have
                    funded
                    $28,690 in an insurance fund. Also includes accumulated, but
                    unpaid
                    vacation days ($13,978), car benefits ($5,250) and payments for
                    pension
                    and education funds ($10,750).
   40
 **ITEM
          12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT
          AND RELATED STOCKHOLDER MATTERS**
  The
          following table and notes set forth information, as of April 10, 2007,
          concerning beneficial ownership of Common Stock by (i) each director of
          the
          Company, (ii) each of the executive officers of the Company (iii) all executive
          officers and directors of the Company 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
                
                474,554(3)
                
                4.8%Howard
                    Gutzmer
                  5550
                    Oberlin Drive
                  San
                    Diego, CA 92121
                
                647,328(4)
                
                6.8%Richard
                    Giacco
                
                1,000
                
                *Richard
                    Rimer
                
                46,500(6)
                
                *Kevin
                    Wren
                
                5,000
                
                --Samuel
                    M. Zentman
                
                39,121(7)
                
                *Jacob
                    Neuwirth
                
                57,870
                
                *John
                    A. Moore
                
                720,877(8)
                
                7.3%Michael
                    Barth
                
                30,932(9)
                
                *All
                    executive officers and directors of the Company as a group (8
                    people)
                
                1,345,920
                
                13.09%
 **_____________**
 Based
          upon 9,556,659 shares outstanding.
  *
          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, 200 Route 17, Mahwah,
                    NJ
                    07430.
 (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 number
                    of shares
                    outstanding as of April 10, 2007.
 (3)
                Includes
                    (i) 380,000 currently exercisable options, and (ii) 49,439 shares
                    owned by
                    Mr. Morgenstern’s wife.
 (4)
                Based
                    on information in Amendment No. 1 to Schedule 13D filed on January
                    26,
                    2006. Consists of (i) 500,317 shares owned by the Gutzmer Family
                    Trust, of
                    which Mr. Gutzmer is a co-trustee; (ii) 73,450 shares held in
                    an IRA for
                    Mr. Gutzmer’s wife, with Mr. Gutzmer as Custodian; (iii) 13,756 shares
                    owned by a corporation of which Mr. Gutzmer is an executive officer,
                    director and principal shareholder.
 (5)
                Includes
                    25,000 currently exercisable
                    options.
 (7)
                Includes
                    (i) 32,500 currently exercisable options and (ii) 1,324 shares
                    issuable
                    upon exercise of warrants.
 (8)
                Includes
                    340,000 currently exercisable options.
 (9)
                Consists
                    of (i) 25,998 currently exercisable options, (ii) 3,289 shares
                    issuable
                    upon conversion of debenture, and (iii) 1,645 shares issuable
                    upon
                    exercise of warrants.
  41
  **EQUITY
          COMPENSATION PLAN INFORMATION**
  The
          table
          below provides certain information concerning our equity compensation plans
          as
          of December 31, 2006.
  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
                
                1,163,000
                
                $2.89
                
                335,000(1)Equity
                    Compensation Plans Not Approved by Security Holders(2)
                
                412,335
                
                $1.32
                
                0Total
                
                1,575,335
                
                $2.48
                
                335,000
  **__________________________**
 (1)
                This
                    number reflects the number of shares available for issuance under
                    the 1994
                    Stock Option Plan for Outside Directors (the “1994 Plan”). With the
                    exception of the 1994 plan, all Company plans have expired.
  (2)
                All
                    grants were made under our 1995 Stock Option Plan for Non-Management
                    Employees (the “1995 Plan”). The 1995 Plan, which recently expired,
                    provided for grants of options to our employees, officers or
                    consultants,
                    excluding directors and executive officers. The maximum aggregate
                    number
                    of shares that could be issued upon the exercise of options granted
                    under
                    the 1995 Plan was 870,225. For more information about the 1995
                    Plan please
                    see the plan, as amended, filed as an exhibit to the Company’s Annual
                    Report on Form 10-K for the fiscal year ended December 31,
                    2004.
 
  **ITEM
          13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
          INDEPENDENCE**
  **Transactions
          With Related Persons**
  During
          2006, we paid approximately $473,000 for legal services rendered and
          reimbursement of out-of-pocket expenses to Eilenberg & Krause 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 lent us $300,000 on a note payable for
          a
          period of six months. The note bears interest at the rate of 9.5% during
          the
          time it was outstanding. We have the right to repay the note at any time
          prior
          to maturity. The note shall 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.
  In
          August
          2007, 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 who is one of our directors.
          Pursuant to that agreement, we are entitled through August 2007 to purchase
          the
          shares of Paketeria held by the two Paketeria shareholders for an aggregate
          purchase price of the US dollar equivalent on the date of purchase of €598,000
          (approximately $758,000 at the current exchange rate), payable our Common
          Stock
          and warrants on the same terms as our July 2006 private placement.
  On
          March
          10, 2006 we entered into a Stock Purchase Agreement dated as of March 9,
          2006
          (the “Stock Purchase Agreement”), for the sale of all the outstanding capital
          stock of our Databit subsidiary to Shlomie Morgenstern. The transactions
          contemplated under the SPA, and the related transactions to which we, Shlomie
          Morgenstern and George Morgenstern were a party and which are described
          herein
          (collectively, the “Transactions”), were consummated on March 10, 2006 with the
          approval of the Company’s Board of Directors and included the following:
  42
 (a)  Termination
          of the Employment Agreement dated August 19, 2004 among Shlomie Morgenstern,
          Databit and us and our release from any and all liability thereunder (other
          than
          under the related stock option and restricted stock agreements which would
          be
          modified as provided 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 to thereunder.
  (b)  Amendment
          of the option and restricted stock agreements between us 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.
  (c)  The
          assignment to and assumption by Databit of our obligations to George Morgenstern
          under the GM Employment Agreement upon the following terms:
  (i)
          Reduction of the amounts owed to George Morgenstern under the GM Employment
          Agreement by the lump sum payment described below and the modifications
          to
          options and restricted stock agreements described below.
  (ii)
          The
          release of us, by George Morgenstern, from any and all liability and obligations
          to him under the GM Employment Agreement, subject to a lump sum payment
          of
          $600,000.
  (d)  The
          assumption by Databit of our obligations under the our leases for the premises
          in New York City and Mahwah, New Jersey, which provide for aggregate rents
          of
          approximately $450,000 over the next three years.
  (e)  The
          delivery by John A. Moore and the other reporting persons on the Schedule
          13D
          dated June 30, 2005 (filed July 11, 2005), as amended, of consent agreements
          manifesting approval of the Transactions and their fairness, and agreeing
          not to
          institute any claims against the parties to the Transactions arising from
          the
          Transactions, subject to the fulfillment of certain conditions specified
          in such
          consents.
  (f)  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.
  (g)  The
          execution and delivery by George Morgenstern of a new consulting agreement
          for a
          period of two years, pursuant to which George Morgenstern would serve us
          as a
          consultant, primarily to assist in the management of our dsIT subsidiary,
          such
          agreement to provide for compensation of $1.00 per year plus a non-accountable
          expense allowance of $65,000 per year to cover expected costs of travel
          and
          other expenses.
 
 It
          is the
          unwritten 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.
  43
 **Director
          Independence**
 
 Applying
          the definition of independence provided under the Nasdaq Marketplace Rules,
          with
          the exception of Mr. Moore and Mr. Rimer, 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. Rimer
          would
          not be deemed independent because he is director in charge of acquisitions,
          for
          which he receives compensation outside of the ordinary fees paid to board
          members.
 
 **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:
  2005
                
                2006Audit
                    Fees
                
                $
                117,000
                
                $
                94,000Audit-
                    Related Fees
                
                
                24,000
                
                
                29,000Tax
                    Fees
                
                
                --
                
                
                --Other
                    Fees
                
                
                67,000
                
                
                36,000Total
                
                $
                208,000
                
                $
                159,000
  *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.
  *Audit
          Related Fees* were for
          assurance and related services.
  *Other
          Fees* were
          for
          services related to a response letter to the SEC and for reviewing registration
          statements. Other fees in 2005 were for services related to the sale of
          our dsIT
          Technologies Ltd. subsidiary and services related to response letters to
          the
          SEC.
  **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 2006 and 2005.
  44
 
 **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, 2005 and 2006
 Consolidated
          Statements of Operations for the years ended December 31, 2004, 2005 and
          2006
 Consolidated
          Statements of Changes in Shareholders’ Equity (Capital Deficiency) for the years
          ended December 31, 2004, 2005 and 2006
 Consolidated
          Statements of Cash Flows for the years ended December 31, 2004, 2005 and
          2006
 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
                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”)).3.3
                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”)).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).
   45
  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.#4.10
                Form
                    of Warrant.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”)).*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
                Agreement
                    dated January 26, 2002, between the Registrant and Bounty Investors
                    LLC
                    (incorporated herein by reference to Exhibit 10.12 to the 2000
                    10-K).10.8
                Lease
                    Agreement, dated February 5, 2002, between Duke-Weeks Realty
                    Limited
                    Partnership and Comverge, (incorporated herein by reference to
                    Exhibit
                    10.13 to the 2000 10-K).10.9
                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).10.10
                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).10.11
                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.*10.12
                Agreement,
                    dated as of February 25, 2003, between the Registrant and J.P.
                    Turner
                    & Company, L.L.C. (incorporated herein by reference to Exhibit
                    10.25
                    to the Registrant’s Annual Report on Form 10-K for the year ended December
                    31, 2002 (the “2002 10-K”).10.13
                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).*10.14
                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).*
   46
  10.15
                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).10.16
                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).10.17
                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).10.18
                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).10.19
                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).10.20
                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).*10.21
                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).*10.22
                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).*10.23
                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).10.24
                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”).*10.25
                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).10.26
                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).10.27
                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).10.28
                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).*10.29
                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).*10.30
                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).*10.31
                Stock
                    Purchase Agreement dated as of March 9, 2006 by and between Shlomie
                    Morgenstern, Databit Inc., and Data Systems & Software Inc.
                    (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”)).10.32
                Termination
                    and Release Agreement dated as of March 9, 2006 by and between
                    Shlomie
                    Morgenstern and Data Systems and Software Inc. (incorporated
                    herein by
                    reference to Exhibit A to Exhibit 10.1 to the 2006
                    8-K).*
   47
  10.33
                Amendment
                    Agreement to GM Employment Agreement dated as of March 9, 2006
                    by and
                    between George Morgenstern and Data Systems & Software Inc.
                    (incorporated herein by reference to Exhibit B to Exhibit 10.1
                    to the 2006
                    8-K).*10.34
                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).*10.35
                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).*10.36
                Consulting
                    Agreement dated as of March 9, 2006 by and between George Morgenstern
                    and
                    Data Systems & Software Inc. (incorporated by reference to Exhibit E
                    to Exhibit 10.1 to the 2006 8-K).*10.37
                Form
                    of Consent Agreement (incorporated herein by reference to Exhibit
                    F to
                    Exhibit 10.1 to the 2006 8-K.).10.38
                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).10.39
                Placement
                    Agent Agreement between First Montauk Securities Corp. and the
                    Registrant
                    dated June 13, 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).10.40
                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“)).10.41
                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).10.42
                Form
                    of Stock Purchase Agreement (incorporated herein by reference
                    to Exhibit
                    10.3 to the August 2006 8-K).10.43
                Form
                    of Investors’ Rights Agreement (incorporated herein by reference to
                    Exhibit 10.4 to the August 2006 8-K).10.44
                Form
                    of Non-Plan Option Agreement (incorporated herein by reference
                    to Exhibit
                    10.5 to the August 2006 8-K).*10.45
                Acorn
                    Factor, Inc. 2006 Stock Option Plan for Non-Employee Directors
                    (incorporated herein by reference to Exhibit 10.1 to the Registrant’s
                    Current Report on Form 8-K dated February 8, 2007 (the “February 2007
                    8-K”).*10.46
                Acorn
                    Factor, Inc. 2006 Stock Incentive Plan (incorporated herein by
                    reference
                    to Exhibit 10.2 to the February 2007 8-K).*#10.47
                Form
                    of Subscription Agreement.#10.48
                Placement
                    Agent Agreement between First Montauk Securities Corp. and the
                    Registrant
                    dated June 13, 2006.14.1
                Code
                    of Ethics of the Registrant (incorporated herein by reference
                    to Exhibit
                    14.1 to the Registrant’s Annual Report on Form 10-K for the year ended
                    December 31, 2003).21.1
                List
                    of subsidiaries (incorporated herein by reference to Exhibit
                    21.1 to the
                    Registrant’s Annual Report on Form 10-K for the year ended December 31,
                    2005).#23.1
                Consent
                    of Kesselman & Kesselman CPA.#31.1
                Certification
                    pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.#31.2
                Certification
                    pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002.#32.1
                Certification
                    pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002.#32.2
                Certification
                    pursuant to Section 906 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. (These exhibits have not been provided
          with this Report, but can be found as exhibits Company’s originally filed Annual
          Report on Form 10-K and the Amendment thereto on Form10-K/A for the fiscal
          year
          ended December 31, 2005.)
 
 48
 
 **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 Mahwah,
          State of
          New Jersey, on April 16, 2007.
  By:
                Acorn
                    Factor, Inc.
                  
                  /s/John
                    A. Moore
                  John 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
                    16, 2007/s/
                    George MorgensternGeorge
                    Morgenstern
                
                Chairman
                    of the Board and Director
                April
                    16, 2007/s/
                    Michael BarthMichael
                    Barth
                Chief
                    Financial Officer (Principal Financial Officer and Principal
                    Accounting
                    Officer)
                April
                    16, 2007/s/
                    Samuel M. ZentmanSamuel
                    M. Zentman
                
                Director
                April
                    16, 2007/s/Richard
                    J. GiaccoRichard
                    J. Giacco
                
                Director
                April
                    16, 2007Richard
                    Rimer
                
                Director
                April
                    16, 2007/s/
                    Kevin WrenKevin
                      Wren
                
                Director
                April
                      16, 2007


49




**ACORN
      FACTOR, INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




CONSOLIDATED
      FINANCIAL STATEMENTS OF ACORN FACTOR, INC.:


Report
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                        Balance Sheets as of December 31, 2006 and December 31,
                        2005
              F-2Consolidated
                    Statements of Operations for the years ended December 31, 2006,
                    December
                    31, 2005 and December 31, 2004
              F-3Consolidated
                    Statements of Changes in Shareholders’ Equity (Capital Deficiency) for the
                    years ended December 31, 2006, December 31, 2005 and December
                    31,
                    2004
              F-4Consolidated
                  Statements of Cash Flows for the years ended December 31, 2006,
                  December
                  31, 2005 and December 31, 2004
              F-5Notes
                  to Consolidated Financial Statements.
              F-7










**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and Shareholders of


Acorn
      Factor, Inc.




We
      have
      audited the consolidated balance sheets of Acorn Factor, Inc. (the “Company”)
      and its subsidiaries as of December 31, 2006 and 2005, and the related
      consolidated statements of operations, changes in shareholders’ equity and cash
      flows for each of the three years in the period ended December 31, 2006. 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 audit 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, 2006 and 2005 and the results of their
      operations and of their cash flows for each of the three years in the period
      ended December 31, 2006, in conformity with accounting principles generally
      accepted in the United States of America.




As
      discussed in Note 2 to the consolidated financial statements, effective January
      1, 2006, the Company changed its method of accounting for share based payment,
      to conform with FASB Statement of Financial Accounting Standards No. 123
      (revised 2004), “Share-Based Payment”.








April
      16,
      2007





/s/
      Kesselman & Kesselman


Certified
      Public Accountants


A
      member
      of PricewaterhouseCoopers International Limited


Tel-Aviv,
      Israel




F-1


**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


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




**As
                of December 31,****2005**
            
            **2006**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            913
            
            $
            1,521Restricted
                cash
            
            
            247
            
            
            —Restricted
                cash (under agreement with a related party)
            
            
            300
            
            
            —Accounts
                receivable, net
            
            
            4,096
            
            
            1,373Unbilled
                work-in-process
            
            
            348
            
            
            393Inventory
            
            
            25
            
            
            —Other
                current assets
            
            
            709
            
            
            316Total
                current assets
            
            
            6,638
            
            
            3,603Property
                and equipment, net
            
            
            500
            
            
            445Investment
                in Paketeria
            
            
            —
            
            
            1,212Other
                assets
            
            
            334
            
            
            285Funds
                in respect of employee termination benefits
            
            
            1,441
            
            
            1,568Restricted
                cash - non-current (under agreement with a related party)
            
            
            1,050
            
            
            —Goodwill
            
            
            129
            
            
            97Other
                intangible assets, net
            
            
            81
            
            
            48Total
                assets
            
            $
            10,173
            
            $
            7,258LIABILITIES
                AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)Current
                liabilities:Short-term
                bank credit
            
            $
            130
            
            $
            462Current
                maturities of long-term debt
            
            
            160
            
            
            26Note
                payable - related party
            
            
            —
            
            
            300Trade
                accounts payable
            
            
            1,950
            
            
            378Accrued
                payroll, payroll taxes and social benefits
            
            
            740
            
            
            478Other
                current liabilities
            
            
            2,200
            
            
            1,700Total
                current liabilities
            
            
            5,180
            
            
            3,344Long-term
                liabilities:Investment
                in Comverge, net
            
            
            1,824
            
            
            1,824Long-term
                debt
            
            
            75
            
            
            —Liability
                for employee termination benefits
            
            
            2,264
            
            
            2,545Other
                liabilities
            
            
            10
            
            
            6Total
                long-term liabilities
            
            
            4,173
            
            
            4,375Commitments
                and contingencies (Note 13)Shareholders’
                equity:Common
                stock - $0.01 par value per share:Authorized
                - 20,000,000 shares; Issued -8,937,395 and 10,276,030 shares at December
                31, 2005 and 2006
            
            
            88
            
            
            102Additional
                paid-in capital
            
            
            39,975
            
            
            43,987Warrants
            
            
            183
            
            
            888Accumulated
                deficit
            
            
            (35,608
            )
            
            (41,904
            )Treasury
                stock, at cost - 820,704 and 777,371 shares for December 31, 2005
                and
                2006, respectively
            
            
            (3,791
            )
            
            (3,592
            )Accumulated
                other comprehensive income (loss)
            
            
            (27
            )
            
            58Total
                shareholders’ equity (capital deficiency)
            
            
            820
            
            
            (461
            )Total
                liabilities and shareholders’ equity (capital deficiency)
            
            $
            10,173
            
            $
            7,258




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




F-2




**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Sales:Projects
              
              $
              2,815
              
              $
              3,204
              
              $
              3,186Services
              
              
              485
              
              
              954
              
              
              863Other
              
              
              64
              
              
              29
              
              
              68Total
                  sales
              
              
              3,364
              
              
              4,187
              
              
              4,117Cost
                  of sales:Projects
              
              
              2,127
              
              
              2,117
              
              
              2,022Services
              
              
              364
              
              
              828
              
              
              741Other
              
              
              —
              
              
              —
              
              
              —Total
                  cost of sales
              
              
              2,491
              
              
              2,945
              
              
              2,763Gross
                  profit
              
              
              873
              
              
              1,242
              
              
              1,354Operating
                  expenses:Research
                  and development expenses, net
              
              
              30
              
              
              53
              
              
              324Selling,
                  marketing, general and administrative expenses
              
              
              3,374
              
              
              3,464
              
              
              4,658Total
                  operating expenses
              
              
              3,404
              
              
              3,517
              
              
              4,982Operating
                  loss
              
              
              (2,531
              )
              
              (2,275
              )
              
              (3,628
              )Finance
                  expense, net
              
              
              (33
              )
              
              (12
              )
              
              (30
              )Other
                  income, net
              
              
              148
              
              
              —
              
              
              330Loss
                  before taxes on income
              
              
              (2,416
              )
              
              (2,287
              )
              
              (3,328
              )Income
                  tax benefits (expense)
              
              
              (27
              )
              
              37
              
              
              (183
              )Loss
                  from operations of the Company and its consolidated
                  subsidiaries
              
              
              (2,443
              )
              
              (2,250
              )
              
              (3,511
              )Share
                  in losses of Paketeria
              
              
              —
              
              
              —
              
              
              (424
              )Share
                  in losses of Comverge
              
              
              (1,242
              )
              
              (380
              )
              
              (210
              )Gain
                  on sale of shares in Comverge
              
              
              705
              
              
              —
              
              
              —Minority
                  interests
              
              
              (90
              )
              
              (73
              )
              
              —Net
                  loss from continuing operations
              
              
              (3,070
              )
              
              (2,703
              )
              
              (4,145
              )Gain
                  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
              
              
              1,898
              
              
              844
              
              
              78Net
                  loss
              
              $
              (1,172
              )
              $
              (1,318
              )
              $
              (6,136
              )Basic
                  and diluted net income (loss) per share:Loss
                  per share from continuing operations
              
              $
              (0.39
              )
              $
              (0.26
              )
              $
              (0.48
              )Discontinued
                  operations
              
              
              0.24
              
              
              0.10
              
              
              (0.23
              )Net
                  loss per share
              
              $
              (0.15
              )
              $
              (0.16
              )
              $
              (0.71
              )Weighted
                  average number of shares outstanding - basic and diluted
              
              
              7,976
              
              
              8,117
              
              
              8,689




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





F-3


**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, 2003
            
            
            8,741
            
            $
            87
            
            $
            39,595
            
            $
            461
            
            $
            (33,069
            )
            $
            (3,874
            )
            $
            —
            
            $
            3,200Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,172
            )
            
            —
            
            
            —
            
            
            (1,172
            )Differences
                from translation of subsidiaries’ financial statements
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (17
            )
            
            (17
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,189
            )Issuance
                of restricted shares as compensation
            
            
            195
            
            
            1
            
            
            70
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            71Exercise
                of options
            
            
            1
            
            
            *
            
            
            —
            
            
            —
            
            
            (49
            )
            
            83
            
            
            —
            
            
            34Amortization
                of stock-based deferred compensation
            
            
            —
            
            
            —
            
            
            9
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            9Balances
                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
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            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
            )




*
      Less
      than $1




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




F-4


**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**




**2004**
            
            **2005**
            
            **2006**Cash
                flows used in operating activities:Net
                loss
            
            $
            (1,172
            )
            $
            (1,318
            )
            $
            (6,136
            )Adjustments
                to reconcile net loss to net cash used in operating activities (see
                Schedule A)
            
            
            1,081
            
            
            (431
            )
            
            4,548Net
                cash used in operating activities
            
            
            (91
            )
            
            (1,749
            )
            
            (1,588
            )Cash
                flows provided by investing activities:Investment
                in short-term bank deposits
            
            
            (72
            )
            
            —
            
            
            —Maturity
                of short-term bank deposits
            
            
            —
            
            
            72
            
            
            —Amounts
                funded for employee termination benefits
            
            
            (495
            )
            
            (558
            )
            
            (671
            )Utilization
                of employee termination benefits
            
            
            38
            
            
            687
            
            
            544Acquisitions
                of property and equipment
            
            
            (94
            )
            
            (240
            )
            
            (149
            )Acquisitions
                of intangibles
            
            
            —
            
            
            (36
            )
            
            —Proceeds
                from the sale of Comverge shares
            
            
            975
            
            
            —
            
            
            —Proceeds
                from the sale of property and equipment
            
            
            65
            
            
            152
            
            
            —Restricted
                cash (under agreement to a related party)
            
            
            —
            
            
            (1,350
            )
            
            1,350Restricted
                cash
            
            
            (3
            )
            
            (3
            )
            
            247Investment
                in Comverge
            
            
            —
            
            
            —
            
            
            (210
            )Investment
                in Paketeria
            
            
            —
            
            
            —
            
            
            (1,338
            )Sale
                of dsIT Technologies (see Schedule C)
            
            
            —
            
            
            3,431
            
            
            —Sale
                of Databit (see Schedule D)
            
            
            —
            
            
            —
            
            
            (974
            )Net
                cash provided by (used in) investing activities
            
            
            414
            
            
            2,155
            
            
            (1,201
            )Cash
                flows provided by (used in) financing activities:Proceeds
                from employee stock option exercises
            
            
            34
            
            
            —
            
            
            285Proceeds
                from private place of common stock and warrants, net of issuance
                costs
            
            
            —
            
            
            —
            
            
            2,631Proceeds
                from note payable to a related party
            
            
            —
            
            
            425
            
            
            300Repayment
                of note payable to a related party
            
            
            —
            
            
            (425
            )
            
            —Short-term
                bank credit, net
            
            
            (239
            )
            
            182
            
            
            332Proceeds
                from borrowings of long-term debt
            
            
            —
            
            
            90
            
            
            —Repayments
                of long-term debt
            
            
            (646
            )
            
            (450
            )
            
            (151
            )Net
                cash provided by (used in) financing activities
            
            
            (851
            )
            
            (178
            )
            
            3,397Net
                increase (decrease) in cash and cash equivalents
            
            
            (528
            )
            
            228
            
            
            608Cash
                and cash equivalents at beginning of year
            
            
            1,213
            
            
            685
            
            
            913Cash
                and cash equivalents at end of year
            
            $
            685
            
            $
            913
            
            $
            1,521Supplemental
                cash flow information:Cash
                paid during the year for:Interest
            
            $
            151
            
            $
            144
            
            $
            25Income
                taxes
            
            $
            90
            
            $
            102
            
            $
            19




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




F-5




**ACORN
      FACTOR, INC. AND SUBSIDIARIES**


**SCHEDULES
      TO CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**


**2004**
              
              **2005**
              
              **2006**A.
                  Adjustments to reconcile net loss to net cash provided by (used
                  in)
                  operating activities:Depreciation
                  and amortization.
              
              $
              227
              
              $
              254
              
              $
              204Change
                  inminority
                  interests
              
              
              90
              
              
              73
              
              
              —Share
                  in losses of Comverge
              
              
              1,242
              
              
              380
              
              
              210Share
                  in losses of Paketeria
              
              
              —
              
              
              —
              
              
              159Change
                  in deferred taxes
              
              
              24
              
              
              (81
              )
              
              —Impairment
                  of goodwill
              
              
              —
              
              
              —
              
              
              40Increase
                  (decrease) in liability for employee termination benefits
              
              
              558
              
              
              (277
              )
              
              281Gain
                  on sale of Comverge shares
              
              
              (705
              )
              
              —
              
              
              —Gain
                  on sale of dsIT Technologies Ltd.
              
              
              —
              
              
              (541
              )
              
              —Loss
                  on sale of Databit and contract settlement.
              
              
              —
              
              
              —
              
              
              2,298Gain
                  on sale of property and equipment, net
              
              
              (2
              )
              
              (6
              )
              
              —Stock
                  and stock option compensation
              
              
              80
              
              
              23
              
              
              1,522Value
                  of warrants issued for services provided
              
              
              —
              
              
              —
              
              
              121Other
              
              
              21
              
              
              (71
              )
              
              7Changes
                  in operating assets and liabilities:Decrease
                  in accounts receivable, unbilled work-in- process, other current
                  assets
                  and other assets
              
              
              424
              
              
              1,210
              
              
              350Decrease
                  (increase) in inventory
              
              
              27
              
              
              36
              
              
              (18
              )Decrease
                  in accounts payable, other current liabilities and other
                  liabilities
              
              
              (483
              )
              
              (1,431
              )
              
              (626
              )Decrease
                  in the liabilities of US based consulting business
              
              
              (422
              )
              
              —
              
              
              —$
              1,081
              
              $
              (431
              )
              $
              4,548B.
                  Non-cash investing and financing activities:Issuance
                  of subsidiary shares to minority interest in lieu of balance
                  due
              
              $
              22Increase
                  in goodwill from sale of dsIT Technologies
              
              
              
              
              $
              79Accrued
                  expenses in respect of private placement of common stock
              
              
              
              
              
              
              
              $
              104C.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
              )




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




F-6




**NOTE
      1—NATURE OF OPERATIONS**




(a)
      Description of Business




Acorn
      Factor, Inc. (“AFI”) (formerly known as Data Systems and Software, Inc.), a
      Delaware corporation, through its majority-owned operating subsidiary
      (collectively, the “Company”) and its equity investments in Comverge Inc.
      (“Comverge”) and Paketeria GmbH, (i) provides software consulting and
      development services with a focus in areas of port security and oncology
      treatment (ii) provides energy intelligence solutions for utilities and energy
      companies (iii) provides eBay drop shop, post and parcels, office supplies,
      photo processing, photocopy, printer cartridge refilling, and Internet pharmacy
      services through a chain of retail stores operating in Germany under a “Super
      Services Market” format. The Company’s operations are based in the United
      States, Israel and in Germany. Acorn’s shares are traded on the OTC Bulletin
      Board and on the Frankfurt Stock Exchange in Germany. On March 10, 2006, the
      Company sold its Databit Inc. subsidiary, which comprised the entire computer
      hardware segment (see Note 5(a)).




(b)
      Financing of Operations




The
      working capital of $259 at December 31, 2006, included working capital of $679
      in the Company’s Israeli dsIT Solutions Ltd. subsidiary (“dsIT”). Due to Israeli
      tax and company law constraints and its own cash flow requirements, working
      capital and cash flows from dsIT are not readily available to finance US based
      activities.




dsIT
      Solutions was utilizing approximately $188 (net) of its approximately $485
      lines
      of credit as of December 31, 2006. These lines of credit are denominated in
      NIS
      and bear a weighted average interest rate of the Israeli prime rate plus
      2.2% per
      annum. The Israeli prime rate fluctuates, and as of December 31, 2006 was
      6.0 %.
      In
      February 2007, dsIT Solutions agreed to convert NIS 450 (or approximately $107)
      of its line of credit with one of its banks to a term loan to be paid over
      a
      period of one-year with the terms of the remaining balance in the line of credit
      to be revisited in June 2007. At December 31, 2006, dsIT was in technical
      violation of covenants under its line of credit with its other bank. This bank
      is continuing to provide funding to dsIT despite the technical violation and
      has
      not formally notified dsIT of any violation or any contemplated action. In
      addition, AFI has agreed to be supportive of dsIT’s liquidity requirements over
      the next 12 months.




The
      Company intends to fund its US activities with the cash available and the cash
      provided from its recent private placement of Common Stock (see Note 20(c)).




(c)
      Accounting Principles




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




(d)
      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.




**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 AFI
      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.




**Inventory**




Inventories
      were stated at the lower of cost or market. Cost was determined on the first-in,
      first-out method for merchandise inventory and parts and supplies. Inventory
      was
      primarily comprised of merchandise inventory.




**Investment
      in Associated Companies**




An
      associated company is a company over which significant influence is exercised.
      The Company’s investment in Comverge is comprised of investment in common and
      preferred shares. The Company considers Comverge preferred shares to be
      in-substance common stock as defined in Emerging Issues Task Force (“EITF”)
      Issue No. 02-14 “Whether the Equity Method of Accounting Applies When an
      Investor Does Not Have an Investment in Voting Stock of an Investee but
      Exercises Significant Influence Through Other Means”. Accordingly, the entire
      investment in Comverge is accounted for by the equity method.




The
      Company’s investment in Paketeria is only in common shares as Paketeria has only
      one class of stock. The Company’s investment in Paketeria is also accounted for
      by the equity method.




**Property
      and Equipment**




Property
      and equipment are presented at cost at the date of acquisition including
      capitalized labor costs, net of third party participation. 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 and assigned its goodwill and intangible assets
      to both its RT Solutions and IT 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.




F-8




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.




**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**




Revenues
      from 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.




Unbilled
      work-in-process represents revenues, primarily from fixed price projects, that
      have not been invoiced to the customer as of the end of the period. Such amounts
      are generally billed upon the completion of a project milestone.




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.




**Warranty
      Provision**




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




**Concentration
      of Credit Risk - Allowance for Doubtful Accounts**




Financial
      instruments, which potentially subject the Company to concentrations of credit
      risk, consist principally of cash and cash equivalents and trade receivables.
      The counter-party to a majority of the Company’s cash equivalent deposits as
      well as its short-term bank 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. Approximately 62% of the trade accounts
      receivable at December 31, 2006, were due from three customers that pay their
      trade receivables over usual credit periods (as to revenues from significant
      customers - see Note 19(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.




An
      appropriate allowance for doubtful accounts is included in respect of specific
      debts of
      which collection
      is in doubt. The Company performs ongoing credit evaluations of its customers
      and does not require collateral.




F-9


**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 $5,
      $6
      and $3 for the years ended December 31, 2004, 2005 and 2006, 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 provided
      by SFAS 123R and, accordingly, financial statement amounts for the prior periods
      presented in this Form 10-K 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
      14
      to the consolidated financial statements for information on the impact of the Company’s
      adoption of SFAS 123R and the assumptions used to calculate the fair value
      of
      share-based employee compensation. Upon the exercise of options, it is the
      Company’s policy to issue new shares rather than utilizing treasury
      shares.




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





Year
                ended December 31,2004
            
            2005Net
                loss from continuing operations as reported
            
            $
            (3,056
            )
            $
            (2,703
            )Plus:
                Stock-based employee compensation expense included in reported net
                income
            
            
            —
            
            
            —Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (46
            )
            
            (275
            )Pro
                forma net loss from continuing operations
            
            $
            (3,102
            )
            $
            (2,978
            )Net
                income from discontinued operations as reported
            
            $
            1,884
            
            $
            1,385Plus:
                Stock-based employee compensation expense included in reported net
                income
            
            
            79
            
            
            23Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (142
            )
            
            (116
            )Pro
                forma net income from discontinued operations
            
            $
            1,821
            
            $
            1,292Pro
                forma net loss
            
            $
            1,281
            
            $
            1,686Basic
                and diluted net income (loss) per share - as reported:From
                continuing operations
            
            $
            (0.39
            )
            $
            (0.26
            )From
                discontinued operations
            
            
            0.24
            
            
            0.10Basic
                and diluted
            
            $
            (0.15
            )
            $
            (0.16
            )Basic
                and diluted net income (loss) per share -pro forma:From
                continuing operations
            
            $
            (0.39
            )
            $
            (0.37
            )From
                discontinued operations
            
            
            0.23
            
            
            0.16Basic
                and diluted
            
            $
            (0.16
            )
            $
            (0.21
            )




The
      pro
      forma information in the above table also gives effect to the application of
      SFAS No. 123 on the share option plans of the Company’s subsidiaries.




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.




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 they 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.




**Basic
      and Diluted Net Loss Per Share**




Basic
      net
      loss per share is computed by dividing the net loss by the weighted average
      number of shares outstanding during the year, excluding treasury stock. Diluted
      net loss per share is computed by dividing the net 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. However, 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 and warrants
      that were excluded from the computation of diluted net loss per share, as they
      had an antidilutive effect, were
      approximately 2,155,000, 1,765,000 and 1,945,000 for the years ending December
      31, 2004, 2005 and 2006, respectively.




**Comprehensive
      Income (Loss)**




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




**Recently
      Issued Accounting Principles**




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




F-10


In
      June
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
      Uncertainty in Income Taxes, an Interpretation of SFAS No. 109”. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
      for Income Taxes”, by prescribing a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. Under FIN 48, the
      financial statement effects of a tax position should initially be recognized
      when it is more likely than not, based on the technical merits, that the
      position would be sustained upon examination. A tax position that meets the
      more-likely-than-not recognition threshold should initially and subsequently
      be
      measured as the largest amount of tax benefit that has a greater than fifty
      percent likelihood of being realized upon ultimate settlement with a taxing
      authority. FIN 48 is effective for the Company as
      of the
      interim reporting period beginning January 1, 2007 .
      The
      cumulative effect, if any, of applying the provisions of FIN 48 will be reported
      as an adjustment to the opening balance of retained earnings in the period
      adopted. FIN 48
      also requires additional disclosures about unrecognized tax benefits associated
      with uncertain income tax positions and a reconciliation of the change in the
      unrecognized benefit. In addition, FIN 48 requires interest to be recognized
      on
      the full amount of deferred benefits for uncertain tax positions. An income
      tax
      penalty is recognized as expense when the tax position does not meet the minimum
      statutory threshold to avoid the imposition of a penalty. The Company is
      evaluating the impact of FIN 48 on our consolidated financial statements. The
      Company estimates that the charge to retained earnings will be less than $350.




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




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




In
      February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option
      for Financial Assets and Financial Liabilities”, to permit all entities to
      choose, at specified election dates, to measure eligible financial instruments
      at fair value. An entity shall report unrealized gains and losses on items
      for
      which the fair value option has been elected in earnings at each subsequent
      reporting date, and recognize upfront costs and fees related to those items
      in
      earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years
      beginning after November 15, 2007 (January 1, 2008 for the Company), with early
      adoption permitted for an entity that has also elected to apply the provisions
      of SFAS No. 157, Fair Value Measurements. An entity is prohibited from
      retrospectively applying SFAS No. 159, unless it chooses early adoption. SFAS
      No. 159 also applies to eligible items existing at November 15, 2007 (or early
      adoption date). The Company is currently evaluating the impact that the adoption
      of SFAS No. 159 will have on its consolidated financial position and results
      of
      operations.




F-11


**Reclassifications**




Certain
      reclassifications have been made to the Company’s prior years’ consolidated
      financial statements to conform to the current year’s consolidated financial
      statement presentation. All operating information in the current year’s
      consolidated financial statements and footnotes have been reclassified to
      reflect the results of continuing operations of the Company.




**NOTE
      3—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 is convertible into Comverge’s common stock
      initially on a one-for-one basis subject to adjustment for the achievement
      of
      certain performance criteria. Conversion is mandatory (i) in the event that
      the
      holders of at least a majority of the then-outstanding shares of Series A
      Preferred consent to such conversion or (ii) 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. The holders of Preferred Stock have no mandatory redemption
      rights.




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 thus, the Company no longer consolidates
      Comverge's balance sheet and results of operations, accounting for its
      investment in Comverge on the equity method.




The
      Company has entered into various agreements with Comverge and the syndicate
      of
      venture capital investors. These agreements provide for, among other things,
      restrictions and other provisions relating to the transfer, voting and
      registration of the Comverge shares owned by the Company, and the Company's
      right to receive quarterly and annual financial reports from Comverge.




Until
      December 31, 2003, the Company had an option to purchase from Comverge up to
      $1,500 of Series A-2 Convertible Preferred Stock. The Series A-2 Preferred
      Stock
      has the same rights as the Series A, except the Series A-2 Preferred Stock
      is
      junior in priority in liquidation (which includes the sale of Comverge) to
      the
      Series A Preferred Stock. In December 2003, the Company exercised its option
      and
      invested an additional $100 in Series A-2 Convertible Preferred
      Stock.




In
      September 2004, the Company sold 480,769 shares
      of Comverge Series A Preferred Stock for approximately $1,000, resulting in
      a
      gain of $705.




In
      October 2004, Comverge closed on the sale of additional Series B Preferred
      Stock
      in the amount of $13,600. The rights in the Series B Preferred Stock are similar
      to those of Series A Preferred Stock This round of financing diluted the
      Company’s holdings to approximately 7% of Comverge’s preferred equity and
      approximately 25% of its total equity.




In
      the
      first quarter of 2006, the Company made an additional $210 investment in
      Comverge’s Series C Preferred Stock. The rights
      in
      the Series C Preferred Stock are similar to those of Series A Preferred
      Stock. **.** As
      result of the investment, the Company maintained its preferred stock holdings
      at
      approximately 7%. As a result of the investment, the Company immediately
      recognized a loss equal to (i) its provision for unrecognized losses in Comverge
      of $173 as of December 31, 2005 and (ii) an additional $37 representing its
      7%
      equity share of Comverge’s losses for the first quarter of 2006.





During
      2006, the exercise of options in Comverge and the issuance of Series C Preferred
      Stock reduced the Company’s holdings in Comverge’s common stock from
      approximately 76% to approximately 66% and its total equity to approximately
      23%.





F-12


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.




As
      of
      December 31, 2006, the Company’s accumulated share of losses attributable to its
      Comverge preferred stock was equal to its investment in Comverge’s preferred
      stock. As a result, the Company has ceased recording losses against its
      preferred stock investment. In the future, equity income will be recorded to
      the
      Company’s preferred stock investment only once Comverge’s equity reaches the
      level it was when the Company ceased recording equity losses. As at December
      31,
      2006, the Company had a provision for unrecognized losses in Comverge of $381
      with respect to its preferred stock investment and the Company will record
      equity income from its preferred investment in Comverge, if and when Comverge’s
      records net income in excess of approximately $5,660. Equity income from the
      Company’s preferred investment may be recorded up to the Company’s original
      $3,854 preferred share investment in Comverge, and thereafter to its investment
      in Comverge’s common shares, of which the Company currently owns approximately
      66%.




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




Common
                stock
            
            Preferred
                stock
            
            Provision
                for unrecognized losses on Preferred stock
            
            Net
                investment in ComvergeBalances
                as of December 31, 2003
            
            $
            (1,824
            )
            $
            1,892
            
            $
            —
            
            $
            68Preferred
                shares sold
            
            
            —
            
            
            (270
            )
            
            —
            
            
            (270
            )Equity
                loss in Comverge
            
            
            —
            
            
            (1,242
            )
            
            —
            
            
            (1,242
            )Balances
                as of December 31, 2004
            
            $
            (1,824
            )
            $
            380
            
            $
            —
            
            $
            (1,444
            )Equity
                loss in Comverge
            
            
            —
            
            
            (553
            )
            
            173
            
            
            (380
            )Balances
                as of December 31, 2005
            
            $
            (1,824
            )
            $
            (173
            )
            $
            173
            
            $
            (1,824
            )Additional
                investment in Preferred stock
            
            
            —
            
            
            210
            
            
            —
            
            
            210Equity
                loss in Comverge
            
            
            —
            
            
            (418
            )
            
            208
            
            
            (210
            )Balances
                as of December 31, 2006
            
            $
            (1,824
            )
            $
            (381
            )
            $
            381
            
            $
            (1,824
            )




The
      percentage share of Comverge’s loss recognized by the Company as equity loss
      against its preferred stock investment in 2004 through 2006 can be found in
      the
      table below:




Percentage
                of Comverge Loss Recognized Against Preferred StockJanuary
                1, 2004 - March 8, 2004
            
            
            17
            %March
                9, 2004 - September 9, 2004
            
            
            15
            %September
                10, 2004 - October 20, 2004
            
            
            11
            %October
                21, 2004 - December 31, 2006
            
            
            7
            %




**NOTE
      4—INVESTMENT IN PAKETERIA**




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




F-13


In
      addition to the Common Stock Purchase Agreement, the Company also entered into
      a
      Note Purchase Agreement with Paketeria’s founder and managing director. Under
      the Note Purchase Agrement, the Company is obligated to purchase from the
      founder and managing director all or a portion of the €210 ($270) Promissory
      Note (the “Note”) issued by Paketeria and payable to him. The Note is
      convertible into shares of Paketeria at a conversion price of €50.70 per share
      ($65.30 per share), accrues interest at a rate of 8% per annum, matures on
      August 7, 2009 and may be converted by the Company in whole or in part at any
      time prior to its maturity. Under the terms of the Note Purchase Agreement,
      the
      Company would be required to purchase one third of the principal amount of
      the
      Note upon Paketeria’s achieving each of three franchise licensing milestones—the
      licensing of its 60th, 75th, and 115th franchises.





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), representing two-thirds (plus accrued
      interest) of a Promissory Note originally issued to Paketeria’s founder and
      managing director and (ii) an additional investment by the Company of
      approximately €183 ($235) for the purchase of an additional 3,000 Paketeria
      shares 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 and convert the Note in shares of Paketeria.




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 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 the
      milestones noted above. The December 31, 2006 fair value was determined using
      a
      Black-Scholes calculation using a risk-free interest rate of 4.97%, an expected
      life of 9 months, an annual volatility of 22% and no dividends. The reduction
      in
      the fair value of the put option was recorded as part of the Company’s equity
      loss in Paketeria.





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




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.




F-14




·
            $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 a
      component of the Company’s investment in Paketeria. The Company’s share of
      losses in Paketeria for the period from August 7, 2006 to December 31, 2006
      of
      $159 is comprised of $127 reflecting the Company’s equity loss in Paketeria’s
      earnings, $52 of amortization of the non-compete agreement and the franchise
      agreements offset by the reduction in the fair value of the put option of
      $20.





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





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




Summary
      financial information for Paketeria as taken from Paketeria’s financial
      statements as at December 31, 2006 and for the period from August 8, 2006 to
      December 31, 2006, is as follows:


**Financial
                  Position**
              
              As
                  at December 31, 2006Cash
                  and cash equivalents
              
              $
              179Other
                  current assets
              
              
              1,022Property
                  and equipment, net
              
              
              223Other
                  assets
              
              
              51Total
                  assets
              
              $
              1,475Short-term
                  debt (to related parties)
              
              $
              101Current
                  liabilities
              
              
              806Other
                  non-current liabilities
              
              
              130Total
                  liabilities
              
              
              1,037Common
                  stock and paid-in capital
              
              
              2,001Accumulated
                  deficit
              
              
              (1,563
              )Total
                  liabilities and shareholders’ equity
              
              $
              1,475




**Results
                of Operations**
            
            Period
                from August 8, 2006 to December 31, 2006Sales
            
            $
            1,518Gross
                profit
            
            $
            188Operating
                loss
            
            $
            (404
            )Net
                loss
            
            $
            (456
            )




F-15




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
            
            
            20Cumulative
                translation adjustment
            
            
            33Equity
                loss in Paketeria - period from August 7, 2006 to December 31,
                2006
            
            
            (127
            )Investment
                balance as of December 31, 2006
            
            $
            1,212




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 - December 31, 2006
            
            
            33
            %




**NOTE
      5—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 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.




(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.




F-16


(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, 2004
              
              Year
                  ended December 31, 2005
              
              Period
                  ended March 9, 2006Sales-
                  Products
              
              $
              18,468
              
              $
              17,677
              
              $
              2,949Cost
                  of sales - Products
              
              
              14,724
              
              
              14,501
              
              
              2,316Gross
                  profit
              
              
              3,744
              
              
              3,176
              
              
              633Selling,
                  marketing, general and administrative expenses
              
              
              3,725
              
              
              3,126
              
              
              558Income
                  from operations
              
              
              19
              
              
              50
              
              
              75Other
                  income, net
              
              
              —
              
              
              —
              
              
              3Finance
                  income (expense), net
              
              
              —
              
              
              5
              
              
              —Net
                  income before income taxes
              
              
              19
              
              
              45
              
              
              78Income
                  tax benefit (expense)
              
              
              (4
              )
              
              1
              
              
              —Net
                  income from discontinued operations
              
              $
              15
              
              $
              46
              
              $
              78
  F-17




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 years 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.





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




(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:


Year
                  ended December 31,2004
              
              2005*Sales
              
              $
              8,281
              
              $
              5,636Cost
                  of sales
              
              
              6,372
              
              
              4,440Gross
                  profit
              
              
              1,909
              
              
              1,196Operating
                  income
              
              
              1,677
              
              
              1,001Interest
                  expense, net
              
              
              54
              
              
              59Net
                  income from discontinued operations, net of income taxes
              
              $
              1,535
              
              $
              798




*
      Includes the results of operations up to August 18, 2005.


F-18




(c)
      US
      based consulting




Since
      the
      latter part of 2003, the Company has not recorded revenues from its US-based
      consulting business. During the second quarter of 2004, the Company decided
      to
      discontinue its efforts to reestablish this business as it was previously
      conducted. As a result, the Company recorded a gain from discontinued operations
      of $348, net of tax.




As
      at
      December 31, 2006, these discontinued operations had liabilities of
      $217.




Results
      of operations of
      these
      discontinued operations were as follows:




Year
                ended December 31, 2004Sales
            
            $
            —Cost
                of sales
            
            
            —Gross
                profit
            
            
            —Income
                (loss) from operations
            
            
            (2
            )Interest
                expense
            
            
            4Other
                income
            
            
            346Net
                income (loss) from discontinued operations
            
            $
            348




**NOTE
      6—ACCOUNTS RECEIVABLE, NET**




Accounts
        receivable, net, consists of the following:




As
                of December 31,2005
            
            2006Trade
                accounts receivable
            
            $
            4,114
            
            $
            1,387Allowance
                for doubtful accounts
            
            
            (18
            )
            
            (14
            )Accounts
                receivable, net
            
            $
            4,096
            
            $
            1,373




Bad
      debt
      expense related to trade accounts receivable was $0, $2 and $0 for the years
      ended December 31, 2004, 2005 and 2006, respectively.




**NOTE
      7—OTHER CURRENT ASSETS**


Other
        current assets consist of the following:


As
                of December 31,2005
            
            2006Prepaid
                expenses
            
            $
            137
            
            $
            154Employees
            
            
            37
            
            
            43Due
                from Databit
            
            
            —
            
            
            116Income
                tax receivable
            
            
            58
            
            
            —Funds
                in respect of employee termination benefits
            
            
            277
            
            
            —Claim
                receivable
            
            
            123
            
            
            —Deferred
                income taxes
            
            
            28
            
            
            —Other
            
            
            49
            
            
            3$
            709
            
            $
            316




F-19




**NOTE
      8—PROPERTY AND EQUIPMENT, NET**




Property
      and equipment consist of the following:




Estimated
                Useful Life (in years)
            
            As
                of December 31,2005
            
            2006Cost:Computer
                hardware and software
            
            
            1.5
                - 5
            
            $
            992
            
            $
            1,231Office
                furniture and equipment
            
            
            4-10
            
            
            438
            
            
            383Motor
                vehicles
            
            
            4-7
            
            
            110
            
            
            25Leasehold
                improvements
            
            
            Term
                of lease
            
            
            208
            
            
            1761,748
            
            
            1,815Accumulated
                depreciation and amortizationComputer
                hardware and software
            
            
            
            
            
            776
            
            
            956Office
                furniture and equipment
            
            
            
            
            
            299
            
            
            283Motor
                vehicles
            
            
            
            
            
            38
            
            
            15Leasehold
                improvements
            
            
            
            
            
            135
            
            
            1161,248
            
            
            1,370Property
                and equipment, net
            
            
            
            
            $
            500
            
            $
            445




Depreciation
      and amortization in respect of property and equipment amounted to $180, $199
      and
      $161 for 2004, 2005 and 2006, respectively.




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




In
      August
      2005, the Company sold its dsIT Technologies subsidiary (see Note 5(b)). As
      a
      result of the transaction, goodwill of $4,358 (net of associated cumulative
      translation adjustment of $22) associated with dsIT Technologies was allocated
      to the discontinued component based on the fair value of dsIT Technologies
      and
      dsIT Solutions. In addition, the Company recorded an addition to goodwill of
      $79
      resulting from its increased holdings in dsIT Solutions. The $129 of goodwill
      was allocated $40 to the Company’s RT Solutions segment and $89 to its IT
      Solutions segment.




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 each of the year
      ending December 31, 2004 and 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.
      As
      at December 31, 2006, the Company’s entire goodwill balance was related to its
      IT Solutions segment.


TotalBalance
                as of December 31, 2004
            
            $
            4,408Goodwill
                associated with sale of Technologies
            
            
            (4,358
            )Goodwill
                added from increased holdings in dsIT Solutions
            
            
            79Balance
                as of December 31, 2005
            
            
            129Goodwill
                impairment
            
            
            (40
            )Cumulative
                translation adjustment
            
            
            8Balance
                as of December 31, 2006
            
            $
            97




The
      Company’s amortizable intangible assets consists of software licenses, with a
      gross carrying amount of $224 and accumulated amortization of $143 and $176,
      as
      of December 31, 2005 and 2006, respectively. All intangibles assets are being
      amortized over their estimated useful lives, which averaged five
      years.




F-20


Amortization
      in respect of intangible assets amounted to $32, $34 and $39 for 2004, 2005
      and
      2006, respectively.




Amortization
      expense with respect to intangible assets for the years ending December 31,
      2007, 2008, 2009 and 2010, is estimated to be $27, $7, $7 and $7,
      respectively.




**NOTE
      10—SHORT-TERM BANK CREDIT AND OTHER DEBT**




(a)
      Lines
      of credit




At
      December 31, 2006, the Company had approximately $485 in Israeli credit lines
      available to dsIT, of which $462 was then being used and $23 was available
      for
      future draws. 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 2.2% (at December 31, 2005, plus 2.5%). The Israeli prime rate fluctuates
      and as of December 31, 2006 was 6.0% (December 31, 2005, 6.0%). The Company
      has
      a floating lien and provided guarantees with respect to dsIT’s outstanding lines
      of credit.




At
      December 31, 2006, dsIT was in technical violation of covenants under its line
      of credit one of its banks. This bank is continuing to provide funding to dsIT
      despite the technical violation and has not formally notified dsIT of any
      violation or any contemplated action.




In
      February 2007, dsIT and its other bank agreed to convert NIS 450 (or
      approximately $107) of its lines of credit to a term loan to be paid over a
      period of one-year with the terms of the remaining balance in the line of credit
      to be revisited in June 2007.




(b)
      Short
      and Long-Term Debt





Short
      and
      long-term debt includes bank debt representing loans received by the Company’s
      Israeli subsidiaries from Israeli banks denominated in NIS. In 2005, other
      debt
      relates to debt taken to finance the purchase of automobiles. In 2006, other
      debt relates to a note payable to the Company’s CEO (see Note 17(d) for terms).
      Other debt is denominated in U.S. dollars.




As
                of December 31,2005
            
            2006Bank
                debt
            
            $
            170
            
            $
            26Other
                debt
            
            
            65
            
            
            300Total
                debt
            
            
            235
            
            
            326Less:
                current portion
            
            
            (160
            )
            
            (326
            )Long-term
                bank debt
            
            $
            75
            
            $
            —




At
      December 31, 2006, the bank debt bears a weighted average interest rate of
      7.9%
      (December 31, 2005, 7.9%). At December 31, 2005 and 2006, all bank debt was
      denominated in NIS and was unlinked. At December 31, 2005, other debt had a
      weighted average interest rate of 5.3%. 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 $485.




F-21




**NOTE
      11—OTHER CURRENT LIABILITIES**




Other
      current liabilities consists of the following:




As
                of December 31,2005
            
            2006Taxes
                payable
            
            $
            796
            
            $
            906Lien
                allowance
            
            
            410
            
            
            —Advances
                from customers
            
            
            102
            
            
            93Accrued
                expenses
            
            
            461
            
            
            575Liability
                for employee termination benefits
            
            
            277
            
            
            —Value
                added taxes payable
            
            
            65
            
            
            89Other
            
            
            89
            
            
            37$
            2,200
            
            $
            1,700




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




(a)
              Israeli
                  labor law and certain employee contracts generally requires 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.




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,
                  $684, $463 and $412 forthe years ended December 31, 2004, 2005 and 2006,
                  respectively.




(c)
              The
                  Company expects to contribute approximately $171 to the insurance
                  policies
                  in respect of its severance pay obligations in the year ending
                  December
                  31, 2007.




(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 31,2007
              
              $
              —2008
              
              
              —2009
              
              
              —2010
              
              
              —2011
              
              
              —2012
                  - 2016
              
              
              1,421$
              1,421


The
      liability as at December 31, 2006 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.




F-22


**NOTE
      13—COMMITMENTS AND CONTINGENCIES**




(a)
      Leases of Property and Equipment




Office
      rental and automobile
      leasing expenses, for 2004, 2005 and 2006, were $531, $576 and $586,
      respectively. The Company
      and its subsidiaries lease office space and equipment under operating lease
      agreements. Those leases will expire on different dates from
      2007
      to 2009. The lease payments are mainly in dollars or are linked to the exchange
      rate of the dollar. Future
      minimum lease payments on non-cancelable operating leases as of December 31,
      2006 are as follows:


Year
                  ending December 31,2007
              
              $
              5232008
              
              
              3392009
              
              
              222$
              1,084




(b)
      Guarantees




Previously,
      the Company accrued a loss for contingent performance of bank guarantees. The
      Company’s remaining commitment under these guarantees (included in other current
      liabilities) was $410 at December 31, 2005. The Company had collateralized
      a
      portion of these guarantees by means of a deposit (classified as restricted
      cash) of $247 as of December 31, 2005.




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 accrued loss for contingent performance of bank guarantees of $410 was
      reversed and the $247 collateralized portion of these guarantees (shown as
      restricted cash at December 31, 2005) was no longer restricted. The Company
      recorded $330 of other income in the first quarter of 2006 as a result of the
      settlement agreement.




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, 2006, such guarantees totaled approximately $21 and were due to expire
      through 2015.




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




(c)
      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.




**NOTE
      14—SHAREHOLDERS’ EQUITY**




(a)  General





The
      Company is authorized to issue 20,000,000 shares of Common Stock. At December
      31,2006 the Company has 10,276,030 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).





F-23


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.




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 a two to three year period from
      the
      date of the grant. At December 31, 2006 ,
      no
      options or other equity instruments were available for grant under the various
      plans as
      the
      plans have expired, other than the 335,000 shares available for grant under
      the
      1994 Outside Director Stock plan. (See Note 20(a) - Subsequent
      Events)




F-24


A
      summary
      of the Company’s option plans with respect to employees as of December 31, 2004,
      2005 and 2006, as well as changes during each of the years then ended, is
      presented below:




2004
            
            2005
            
            2006Number
                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
            
            
            1,308,051
            
            $
            4.83
            
            
            1,710,435
            
            $
            2.89
            
            
            1,565,335
            
            $
            2.49Granted
                at market price*
            
            
            780,000
            
            $
            0.96
            
            
            30,000
            
            $
            1.80
            
            
            740,000
            
            $
            2.84Granted
                at discount to market price
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            (19,666
            )
            $
            1.74
            
            
            —
            
            
            —
            
            
            (165,833
            )
            $
            1.72Forfeited
                and expired
            
            
            (357,950
            )
            $
            5.83
            
            
            (175,100
            )
            $
            6.33
            
            
            (271,667
            )
            $
            4.82Outstanding
                at end of year
            
            
            1,710,435
            
            $
            2.89
            
            
            1,565,335
            
            $
            2.49
            
            
            1,867,835
            
            $
            2.51Exercisable
                at end of year
            
            
            956,267
            
            $
            4.47
            
            
            1,054,485
            
            $
            3.28
            
            
            1,501,157
            
            $
            2.43




*
      Included in the 2006 options granted at market price are 450,000 to related
      parties whose exercise price was originally granted at a discount and
      subsequently adjusted to market price. No additional compensation was made
      to
      those parties with respect to the modification of the exercise price and no
      incremental expense was recognized.




In
      connection with the stock option exercises during the years ended December
      31,
      2004 and 2006, the Company received proceeds of $34 and $285, respectively.
      Of
      the 19,666 shares issued as a result of stock option exercises in the year
      ending December 31, 2004, 18,000 were issued from treasury stock and 2,000
      were
      newly issued shares. Of the 165,833 shares issued as a result of stock option
      exercises in the year ending December 31, 2006, 43,333 were issued from treasury
      stock and 122,500 were newly issued shares. During the years ended December
      31,
      2004 and 2006, the Company recorded an increase of $49 and $160, respectively,
      to its accumulated deficit with respect to the treasury shares issued from
      option exercises. The intrinsic value of options exercised in 2004 and 2006 were
      $32
      and $195,
      respectively.




The
      Company granted to employees who are related parties 590,000 and 740,000 options
      in the years ending December 31, 2004 and 2006, 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 2004, 2005 or 2006 and as of December 31, 2004, 2005 and 2006,
      the number of outstanding options held by the related parties was 1,149,750,
      797,500 and 1,439,000 options, respectively.




The
      weighted average grant-date fair value of the options granted to employees
      and
      directors during 2004, 2005 and 2006, amounted to $0.73, $0.57 and $2.10 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):




2004
            
            2005
            
            2006Risk-free
                interest rate
            
            
            3.7
            %
            
            4.3
            %
            
            4.8
            %Expected
                term of options, in years
            
            
            6.9
            
            
            1.1
            
            
            3.7Expected
                annual volatility
            
            
            91
            %
            
            120
            %
            
            109
            %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 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, 2006. Estimates of fair value are not intended to predict
      actual future events or the value ultimately realized by persons who receive
      equity awards.




F-25




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





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





As
      at
      December 31, 2006, the Company had a total of approximately $519 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, 2006, the Company modified the terms of numerous
      options with its employees. In connection with the Company’s sale of Databit
      (see Note 5(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).





In
      addition, the exercise price of certain options that had initially been granted
      at below market price, including options granted to the Company’s current CEO
      and CFO were modified to reflect the market price on the date of the initial
      grant. No incremental compensation cost was recorded as a result of the
      modification.




(d)
      Non-employee Stock Options




(1)
            General




In
      2006,
      all options granted to non-employees were non-plan options. Previously, options
      granted to employees were granted from option plans which have since expired.
      In
      February 2007, the Company adopted two new stock option plans, one of which
      provides for options which may be granted to non-employees (see Note
      20(a)).




(2)
            Non-Performance
                Based Options




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 $2.80 and expire after
      five years.




F-26


The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the option to purchase the 40,000 shares immediately vesting and the 25,000
      shares which vested over the period from the date of the agreement through
      December 31, 2006. The Company used a weighted average risk free interest rate
      of 4.9%, an expected life of five years, an annual volatility of 107% and no
      expected dividends to determine the value the options granted. The Company
      estimated the fair value of the options granted to be approximately $152 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, 2006. As each additional tranche of 5,000 options vests,
      the
      Company will record additional selling, marketing, general and administrative
      expense based on an updated Black-Scholes valuation for each tranche.




In
      September 2006, the Company agreed to grant options to purchase 25,000 shares
      of
      the Company’s Common Stock to the Company’s legal counsel who is
      a
      former director and is the son-in-law of the Company’s Chairman of the
      Board .
      The
      options vest one-third each on July 31, 2007, 2008 and 2009, have an exercise
      price of $2.87 and expire in July 2011.




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the options to purchase the 25,000 shares of Common Stock of the Company, using
      a risk free interest rate of 5.0%, an expected term of five years, an annual
      volatility of 109% and no expected dividends. The Company estimated the fair
      value of the option to be approximately $56. During the year ended December
      31,
      2006, the Company recorded the $56 to selling, marketing, general and
      administrative expenses with respect to the options granted to the Company’s
      legal counsel.




(3)
            Performance
                Based Options




In
      August
      2006, as part of the Company’s acquisition of Paketeria (see Note 4), 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
      4.
      The first of the three milestones was met in the fourth quarter of
      2006.




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
      year ended December 31, 2006, the Company recorded $265 to selling, marketing,
      general and administrative expenses with respect to the option granted to the
      founder and managing director of Paketeria based on performance towards the
      milestones described above in Note 4. 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.




(4)
            Summary
                Information




A
      summary
      of the Company’s option plans with respect to non-employees as of December 31,
      2004, 2005 and 2006, as well as changes during each of the years then ended,
      is
      presented below:




2004
            
            2005
            
            2006Number
                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
            
            $
            0.91Granted
                at market price*
            
            
            10,000
            
            $
            0.91
            
            
            —
            
            
            —
            
            
            145,000
            
            $
            2.94Granted
                at discount to market price
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            150,000
            
            $
            2.80Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
                and expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at end of year
            
            
            10,000
            
            $
            0.91
            
            
            10,000
            
            $
            0.91
            
            
            305,000
            
            $
            2.81Exercisable
                at end of year
            
            
            —
            
            
            —
            
            
            6,666
            
            $
            0.91
            
            
            125,000
            
            $
            2.73




*
      Included in the 2006 options granted at market price are 120,000 options whose
      exercise price was originally granted at a discount and subsequently adjusted
      to
      market price. No additional compensation was made to those parties with respect
      to the modification of the exercise price and no incremental expense was
      recognized.




F-27


The
      weighted average grant-date fair value of the options granted to non-employees
      during 2004 and 2006, amounted to $0.68 and $2.47 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):




2004
            
            2006Risk-free
                interest rate
            
            
            3.3
            %
            
            5.0
            %Expected
                term of options, in years
            
            
            5.0
            
            
            4.0Expected
                annual volatility
            
            
            97
            %
            
            105
            %Expected
                dividend yield
            
            
            None
            
            
            None




(5)
            In
                the year ending December 31, 2006, the Company included $208 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, 2004, 2005 and 2006, as well as changes during each of the years
      then ended, is presented below:




2004
            
            2005
            
            2006Number
                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
            
            
            1,308,051
            
            $
            4.83
            
            
            1,720,435
            
            $
            2.88
            
            
            1,575,335
            
            $
            2.48Granted
                at market price*
            
            
            790,000
            
            $
            0.96
            
            
            30,000
            
            $
            1.80
            
            
            885,000
            
            $
            2.86Granted
                at discount to market price
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            150,000
            
            $
            2.80Exercised
            
            
            (19,666
            )
            $
            1.74
            
            
            —
            
            
            —
            
            
            (165,833
            )
            $
            1.30Forfeited
                and expired
            
            
            (357,950
            )
            $
            5.83
            
            
            (175,100
            )
            $
            6.33
            
            
            (271,667
            )
            $
            4.82Outstanding
                at end of year
            
            
            1,720,435
            
            $
            2.88
            
            
            1,575,335
            
            $
            2.48
            
            
            2,172,835
            
            $
            2.55Exercisable
                at end of year
            
            
            956,267
            
            $
            4.47
            
            
            1,061,151
            
            $
            3.27
            
            
            1,626,157
            
            $
            2.46




*
      Included in the 2006 options granted at market price are 570,000 options
      (450,000 to related parties) whose exercise price was originally granted at
      a
      discount and subsequently adjusted to market price. No additional compensation
      was made to those parties with respect to the modification of the exercise
      price
      and no incremental expense was recognized.




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





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




F-28





(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. Upon exercise of these options, the Company’s
      holdings in dsIT will be diluted to 58%. (See subsequent events - Note 20
      (b))




On
      the same date, 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 either 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 just over
      50%.




The
      purpose of the Plan for our 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, as well as changes during the year
      then ended, is presented below:




2006Number
                of Options (in shares)
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of year
            
            
            —
            
            $
            —Granted
                at fair value
            
            
            6,174
            
            
            32.05Exercised
            
            
            —
            
            
            —Forfeited
                and expired
            
            
            —
            
            
            —Outstanding
                at end of year
            
            
            6,174
            
            $
            32
                05Exercisable
                at end of year
            
            
            3,914
            
            $
            0.24




Summary
      information regarding the options under the Plan outstanding and exercisable
      at
      December 31, 2006 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)$0.24
            
            
            4,485
            
            
            7.0
            
            $
            0.24
            
            
            3,914
            
            $
            0.24$105.26
                - $126.05
            
            
            1,689
            
            
            7.0
            
            $
            118.41
            
            
            —
            
            $
            —6,174
            
            
            
            
            
            
            
            
            3,914





F-29




dsIT
      valued the options using a Black Scholes model using the following
      variables:




Options
                granted with immediate vesting (see above)
            
            Options
                granted with restricted vesting
              (see
                above)Stock
                price*
            
            $
            0.00
            
            $
            0.00Weighted
                average exercise price
            
            $
            0.24
            
            $
            118.41Expected
                term of option in years
            
            
            0.25
                years
            
            
            7
                yearsVolatility**
            
            
            30
            %
            
            93
            %Risk-free
                interest rate
            
            
            5.03
            %
            
            4.46
            %Expected
                dividend yield
            
            
            None
            
            
            None




*
            The
                stock price was determined based upon a valuation of dsIT performed
                by an
                independent consultant.




**
            The
                Company’s calculated volatility for the expected term was
                used.




Based
      upon the above, it was determined that the options granted had no value and
      the
      Company, accordingly, recorded no expense associated with their grant.




The
      Company granted an officer 759 options with a weighted average exercise price
      of
      $26.53 in the year ending December 31, 2006 under the Plan . No
      options to purchase shares of dsIT were exercised by the officer during
      2006.




(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
      warrants activity follows:




2004
            
            2005
            
            2006Number
                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
            
            
            435,000
            
            $
            3.06
            
            
            190,000
            
            $
            2.81Granted
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            474,039
            
            $
            2.80Expired
                or forfeited
            
            
            —
            
            $
            —
            
            
            245,000
            
            $
            3.24
            
            
            50,000
            
            $
            3.00Outstanding
                at end of year
            
            
            435,000
            
            $
            3.06
            
            
            190,000
            
            $
            2.81
            
            
            614,039
            
            $
            2.79Exercisable
                end of year
            
            
            435,000
            
            $
            3.06
            
            
            190,000
            
            $
            2.81
            
            
            614,039
            
            $
            2.79




The
      following table summarized information about warrants outstanding and
      exercisable at December 31, 2006:




Exercise
                Price
            
            Number
                Outstanding
            
            Weighted
                Average Remaining Contractual Life(in
                shares)
            
            (in
                years)$2.00
            
            
            30,000
            
            
            0.93$2.34
            
            
            60,000
            
            
            0.93$2.78
            
            
            424,039
            
            
            4.53$3.34
            
            
            100,000
            
            
            0.93614,039




In
      December 2002, the Company’s then consolidated subsidiary, Comverge, Inc.,
      secured a three-year $2,000 revolving line of credit. In connection with this
      line of credit, the Company also issued a five-year warrant to purchase 190,000
      shares of the Company’s common stock, exercisable in three tranches at exercise
      prices ranging from $2.00 to $3.34 per share, all of which were immediately
      exercisable.




F-30


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




The
      Company used the Black-Scholes valuation method to estimate the fair value
      of
      the warrant to purchase the 50,000 shares of Common Stock of the Company, using
      a risk free interest rate of 5.0%, an expected life of four years, an annual
      volatility of 109% and no expected dividends. The Company estimated the fair
      value of the option to be approximately $121. During the year ended December
      31,
      2006, the Company recorded the $121 to selling, marketing, general and
      administrative expenses with respect to the warrants granted to two the
      individuals. In the fourth quarter of 2006, the warrants were cancelled.




(h)
      Stock
      Awards




In
      August
      2004, the CEO of the Company’s previously owned Databit subsidiary received a
      stock grant of 100,000 shares of common stock of the Company. The Company
      recognized an expense of $71, which was charged to selling, general and
      administrative expense in 2004. In addition, the CEO of Databit received a
      restricted stock grant of 95,000 shares of common stock of the Company, which
      vest one third each on the second, third and fourth anniversaries of the grant.
      As part of the Company’s sale of Databit in March 2006, the vesting of the
      restricted stock grant was accelerated and all the previously unvested
      restricted stock vested immediately (see Note 5(a)(ii)).  The
      Company recognized deferred compensation of $68 with respect to the restricted
      stock grant and recognized an expense (amortization) of $9, $23 and $5, which
      has been charged to selling, general and administrative expense in the years
      ending December 31, 2004, 2005 and 2006, respectively. The remaining balance
      of
      $31 was expensed and included in the Company’s loss on the sale of Databit and
      contract settlement (see Note 5(a)).




(i)
      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 2003, the Company purchased 2,000 of its common
      stock (in 2004 and 2006, the Company also issued 18,000 and 43,333,
      respectively, of its treasury shares with respect to options exercised), and
      at
      December 31, 2006 owned in the aggregate 777,371 of its own shares.




**NOTE
      15—FINANCE EXPENSE, NET**




Finance
      expense, net consists of the following:




Year
                Ended December 31,2004
            
            2005
            
            2006Interest
                income
            
            $
            80
            
            $
            28
            
            $
            39Interest
                expense
            
            
            (118
            )
            
            (90
            )
            
            (27
            )Exchange
                gain (loss), net
            
            
            5
            
            
            50
            
            
            (42
            )$
            (33
            )
            $
            (12
            )
            $
            (30
            )





F-31




**NOTE
      16—INCOME TAXES**




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




Year
                Ended December 31,2004
            
            2005
            
            2006Domestic
            
            $
            (1,467
            )
            $
            (1,460
            )
            $
            (2,469
            )Foreign
            
            
            (935
            )
            
            (827
            )
            
            (859
            )$
            (2,402
            )
            $
            (2,287
            )
            $
            (3,328
            )




Income
      tax expense (benefit) consists of the following:




Year
                Ended December 31,2004
            
            2005
            
            2006Current:Federal
            
            $
            —
            
            $
            —
            
            $
            —State
                and local
            
            
            1
            
            
            —
            
            
            —Foreign
            
            
            7
            
            
            100
            
            
            1838
            
            
            100
            
            
            183Deferred:Federal
            
            
            —
            
            
            —
            
            
            —State
                and local
            
            
            —
            
            
            —
            
            
            —Foreign
            
            
            19
            
            
            (137
            )
            
            —19
            
            
            (137
            )
            
            —Total
                income tax expense (benefit)
            
            $
            27
            
            $
            (37
            )
            $
            183




(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 31,2004
            
            2004
            
            2006Statutory
                Federal rates
            
            
            34
            %
            
            34
            %
            
            34
            %Increase
                (decrease) in income tax rate resulting from:Non-deductible
                expenses
            
            
            (29
            )
            
            (1
            )
            
            (1
            )Deferred
                compensation expense
            
            
            —
            
            
            —
            
            
            (19
            )State
                and local income taxes, net
            
            
            6
            
            
            (1
            )
            
            1Other
            
            
            1
            
            
            (1
            )
            
            3Tax
                benefit on sale of dsIT Technologies
            
            
            —
            
            
            16
            
            
            —Valuation
                allowance
            
            
            (13
            )
            
            (45
            )
            
            (23
            )Effective
                income tax rates
            
            
            (1
            )%
            
            2
            %
            
            (5
            )%




F-32




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


Deferred
        tax assets consist of the following:


As
                of December 31,2005
            
            2006Employee
                benefits and deferred compensation
            
            $
            291
            
            $
            916Investments
            
            
            6,814
            
            
            7,045Other
                temporary differences
            
            
            591
            
            
            441Net
                operating and capital loss carryforwards
            
            
            4,516
            
            
            5,51612,212
            
            
            13,918Valuation
                allowance
            
            
            (12,181
            )
            
            (13,912
            )Net
                deferred tax assets
            
            
            31
            
            
            6Deferred
                tax liabilities consist of the following:Intangible
                asset basis differences
            
            
            (16
            )
            
            (6
            )Net
                deferred tax assets (liabilities), net
            
            $
            15
            
            $
            —Deferred
                tax assets - current
            
            $
            28
            
            
            —Deferred
                tax assets - non-current
            
            
            3
            
            
            —Deferred
                tax liabilities - non-current
            
            
            (16
            )
            
            —Net
                deferred tax assets
            
            $
            15
            
            $
            —




Valuation
      allowances relate principally to book-tax basis differences in investments
      and
      net operating loss and capital loss carryforwards. The change in the valuation
      allowance was a decrease of $2,220 and an increase of $1,737 in 2005 and 2006,
      respectively. The decrease in 2005 was primarily attributable to the Company’s
      sale of its outsourcing consulting business (see Note 5(b)) whereas the increase
      in 2006 was primarily attributable to current year losses and FAS 123R
      expenses.




(d)
      Summary of Tax Loss Carryforwards




As
      of
      December 31, 2006, the Company had various net operating loss carryforwards
      expiring as follows:




Expiration:
            
            Federal
            
            State
            
            Foreign2008
            
            $
            —
            
            $
            708
            
            $
            —2009
            
            
            —
            
            
            1,939
            
            
            —2010
            
            
            —
            
            
            2,677
            
            
            —2011
            
            
            —
            
            
            971
            
            
            —2012
            
            
            —
            
            
            2,229
            
            
            —2013
            
            
            —
            
            
            3,540
            
            
            —2019-2027
            
            
            14,725
            
            
            —
            
            
            —Unlimited
            
            
            —
            
            
            —
            
            
            812Total
            
            $
            14,725
            
            $
            12,064
            
            $
            812




(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 July 2004, Amendment No. 140 to the Income Tax
      Ordinance was enacted. One of the provisions of this amendment is that the
      corporate tax rate would be gradually reduced from 36% to 30%. In August 2005,
      a
      further amendment (No. 147) was published, which makes a further revision
      to the corporate tax rates prescribed by Amendment No. 140. As a result of
      the aforementioned amendments, the corporate tax rates for 2004 and thereafter
      are as follows: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%,
      2009
      - 26% and for 2010 and thereafter - 25%.




F-33


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




(a)  The
      Company paid consulting and other fees to directors of $95, $64 and $86 for
      the
      years ended December 31, 2004, 2005 and 2006, 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 $479, $360 and $473 for the
      years ended December 31, 2004, 2005 and 2006, respectively. Approximately $75
      and $86 was owed to this firm as of December 31, 2005 and 2006, respectively,
      and is included in other current liabilities and trade accounts payable.




(c)  The
      chief
      executive officer of the Company’s Israeli subsidiary has a loan from the
      subsidiary that was acquired in 2001. The loan and accrued interest balance
      at
      December 31, 2005 and 2006 were $104. The loan has no defined maturity date,
      is
      denominated in NIS, is linked to the Index and bears interest at 4%. The Company
      recorded interest income of $4 , $4 and $4, for the years ended December 31,
      2004, 2005 and 2006, respectively, with respect to the loan.




(d)  In
      December 2006, the Company’s CEO lent the Company $300 for a period of six
      months on a note payable. The note bears interest at the rate of 9.5%. The
      Company has the right to repay the note at any time prior to maturity. The
      note
      shall become immediately due and payable to the extent net proceeds are raised
      by the Company through any equity or debt financing or sale of shares of stock
      of Comverge, Inc.




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




(f)  During
      2005, the president of the Company’s Databit subsidiary and son of the Chief
      Executive officer lent 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.




(g)  At
      December 31, 2005, the Company had set aside as restricted cash, $1,350 ($300
      current and $1,050 non-current) with respect to the Company’s former CEO’s (and
      current Chairman of the Board) consulting agreement. In 2006, such restricted
      cash became unrestricted as a result of the sale of Databit (see Note 5(a)).




See
      Note
      4 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 who is one of the Company’s current directors.




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




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




F-34


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




(a)
            General
                Information




As
      a
      result of the sale of Databit (see Note 5(a)) and the change in Company
      management in March 2006, the Company has redefined its reported operating
      segments. As of December 31 2006, 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.




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




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




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-35




The
      following tables represent segmented data for the years ended December 31,
      2006,
      2005 and 2004:




**RT
                Solutions**
            
            **IT
                Solutions**
            
            **Other
                (*)**
            
            **Total**Year
                ended December 31, 2006:Revenues
                from external customers
            
            $
            2,729
            
            $
            1,125
            
            $
            263
            
            $
            4,117Depreciation
                and amortization
            
            
            94
            
            
            73
            
            
            —
            
            
            167Segment
                gross profit
            
            
            936
            
            
            330
            
            
            88
            
            
            1,354Goodwill
                impairment
            
            
            (40
            )
            
            —
            
            
            —
            
            
            (40
            )Segment
                income (loss)
            
            
            (199
            )
            
            (281
            )
            
            29
            
            
            (451
            )Segment
                assets
            
            
            345
            
            
            325
            
            
            —
            
            
            670Expenditures
                for segment assets
            
            
            125
            
            
            16
            
            
            —
            
            
            141Year
                ended December 31, 2005:Revenues
                from external customers
            
            $
            2,844
            
            $
            1,314
            
            $
            29
            
            $
            4,187Depreciation
                and amortization
            
            
            101
            
            
            52
            
            
            —
            
            
            153Segment
                gross profit
            
            
            805
            
            
            408
            
            
            29
            
            
            1,242Segment
                income
            
            
            34
            
            
            48
            
            
            19
            
            
            101Segment
                assets
            
            
            358
            
            
            330
            
            
            —
            
            
            688Expenditures
                for segment assets
            
            
            62
            
            
            41
            
            
            —
            
            
            103Year
                ended December 31, 2004:Revenues
                from external customers
            
            $
            1,988
            
            $
            1,312
            
            $
            64
            
            $
            3,364Depreciation
                and amortization
            
            
            51
            
            
            58
            
            
            —
            
            
            109Segment
                gross profit
            
            
            479
            
            
            330
            
            
            64
            
            
            873Segment
                income (loss)
            
            
            (175
            )
            
            (49
            )
            
            38
            
            
            (186
            )Segment
                assets
            
            
            282
            
            
            314
            
            
            —
            
            
            596Expenditures
                for segment assets
            
            
            59
            
            
            10
            
            
            —
            
            
            69




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




F-36




(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, 2004, 2005 and 2006:


Year
                  Ended December 31,2004
              
              2005
              
              2006Revenues:Total
                  consolidated revenues for reportable segments
              
              $
              3,300
              
              $
              4,158
              
              $
              3,854Other
                  operational segment revenues
              
              
              64
              
              
              29
              
              
              263Total
                  consolidated revenues
              
              $
              3,364
              
              $
              4,187
              
              $
              4,117Income
                  (loss)Total
                  income (loss) for reportable segments
              
              $
              (224
              )
              $
              82
              
              $
              (480
              )Other
                  operational segment operating income
              
              
              38
              
              
              19
              
              
              29Total
                  operating income (loss)
              
              
              (186
              )
              
              101
              
              
              (451
              )Unallocated
                  cost of corporate and dsIT headquarters*
              
              
              (2,364
              )
              
              (2,388
              )
              
              (3,207
              )Other
                  income
              
              
              148
              
              
              —
              
              
              330Income
                  taxes
              
              
              (27
              )
              
              37
              
              
              (183
              )Minority
                  interests
              
              
              (90
              )
              
              (73
              )
              
              —Equity
                  loss in Paketeria
              
              
              —
              
              
              —
              
              
              (424
              )Equity
                  loss in Comverge
              
              
              (1,242
              )
              
              (380
              )
              
              (210
              )Gain
                  on sale of shares in Comverge
              
              
              705
              
              
              —
              
              
              —Discontinued
                  operations, net of tax
              
              
              1,884
              
              
              844
              
              
              78Gain
                  on sale of discontinued operations, net of tax
              
              
              —
              
              
              541
              
              
              (2,069
              )Consolidated
                  loss
              
              $
              (1,172
              )
              $
              (1,318
              )
              $
              (6,136
              )




*
      In
      2006, includes $1,229 of FAS 123R stock compensation expense





As
                of December 31,2004
            
            2005
            
            2006Assets:Total
                assets for reportable segments
            
            $
            596
            
            $
            688
            
            $
            670Net
                assets of Databit (see Note 5(a))
            
            
            4,156
            
            
            3,451
            
            
            —Unallocated
                assets of dsIT headquarters
            
            
            11,513
            
            
            4,040
            
            
            4,018Unallocated
                assets of corporate headquarters *
            
            
            760
            
            
            1,994
            
            
            2,570Total
                consolidated assets
            
            $
            17,025
            
            $
            10,173
            
            $
            7,258







*
      In 2005
      includes restricted cash (current and non-current) of $1,597 ($241 in 2004)
      (see
      notes 18(a) and 18(b). In 2006 includes cash of $1,247 and the net value of
      the
      investment in Paketeria of $1,212.




F-37




Other
                Significant Items
            
            Segment
                Totals
            
            Adjustments
            
            Consolidated
                TotalsYear
                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
            
            
            103
            
            
            137
            
            
            240Year
                ended December 31, 2004Depreciation
                and amortization
            
            $
            109
            
            $
            118
            
            $
            227Expenditures
                for assets
            
            
            69
            
            
            25
            
            
            94




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 31,2004
              
              2005
              
              2006Revenues
                  based on location of customer:Israel
              
              $
              3097
              
              $
              3,575
              
              $
              4,034Other
              
              
              267
              
              
              612
              
              
              83$
              3,364
              
              $
              4,187
              
              $
              4,117As
                  at December 31,2004
              
              
              2005
              
              
              2006Long-lived
                  assets located in the following countries:Israel
              
              $
              624
              
              $
              418
              
              $
              445United
                  States
              
              
              25
              
              
              82
              
              
              —$
              649
              
              $
              500
              
              $
              445


(d)
            Revenues
                from Major Customers




Consolidated
                Sales
              Year
                Ended December 31,2004
            
            2005
            
            2006Customer
            
            Segment
            
            Revenues
            
            %
                of Total
              Revenues
            
            Revenues
            
            %
                of
              Total
              Revenues
            
            Revenues
            
            %
                of Total
              RevenuesA
            
            
            RT
                Solutions
            
            $
            896
            
            
            27
            %
            $
            474
            
            
            11
            %
            $
            881
            
            
            21
            %B
            
            
            RT
                Solutions
            
            $
            630
            
            
            19
            %
            $
            963
            
            
            23
            %
            $
            842
            
            
            20
            %C
            
            
            IT
                Solutions
            
            $
            445
            
            
            13
            %
            $
            715
            
            
            17
            %
            $
            687
            
            
            17
            %D
            
            
            RT
                Solutions
            
            $
            145
            
            
            4
            %
            $
            612
            
            
            15
            %
            $
            83
            
            
            2
            %E
            
            
            IT
                Solutions
            
            $
            358
            
            
            11
            %
            $
            191
            
            
            5
            %
            $
            243
            
            
            6
            %




**NOTE
      19—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.




F-38




**NOTE
      20—SUBSEQUENT EVENTS**




(a)
            Stock
                Option Plans




In
      February 2007, the Board of Directors of the Company adopted two new stock
      option plans.




One,
      the
      2006 Stock Option Plan for Non-Employee Directors provides for formula grants
      to
      non-employee directors equal to an option to purchase (i) 25,000 shares of
      the
      Company’s common stock upon a member’s first appointment or election to the
      Board of Directors and (ii) 7,500 shares of the Company’s 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
      the
      Company’s 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 7,500 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 the OTCBB 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 of, or consultant to, the Company. The plan also provides for
      non-formal grants at the discretion of the Company. The maximum number of shares
      of the Company’s common stock to be issued under the plan is 200,000. The
      Company’s Board of Directors is to administer the plan.




The
      second plan, the 2006 Stock Incentive Plan provides for grants to employees
      of
      the Company, its affiliates and subsidiaries, directors of the Company and
      consultants to the Company, of compensation including cash-based awards,
      nonqualified options, incentive options, share appreciation rights, restricted
      shares, restricted share units, performance shares, performance units, and
      other
      equity-based awards. Equity-based compensation shall be granted at a price
      not
      less than the fair-market-value of the Company’s common stock on the date of the
      grant. The terms of the grants are to be determined by the Board of Directors
      as
      administrators of the plan, or such committee as it shall designate. The maximum
      number of shares of common stock to be issued under the plan, including any
      shares underlying any other form of equity-based compensation, is 400,000
      shares.




(b)
            Exercise
                of options in dsIT




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




(c)
            Private
                Placement of Convertible Redeemable Subordinated
                Debenture




On
      March
      30, 2007 the Company conducted an initial closing of its offering of up to
      $6.9
      million of principal amount of 10% Convertible Redeemable Subordinated
      Debentures (the “Debentures”), resulting in the issuance of approximately $4.3
      million of principal amount of Debentures and satisfying the minimum offering
      amount required under the terms of the offering. The Debentures, subject to
      certain restrictions, are convertible into Common Stock at a conversion price
      of
      $3.80 per share and mature on March 30, 2011.





In
      connection with the closing, the Company entered into subscription agreements
      with certain accredited investors, whereby each investor purchased Debentures,
      resulting in gross proceeds to the Company of $4.3 million. By the terms of
      the
      subscription agreements each subscriber in addition to the Debentures purchased,
      received a warrant exercisable for the purchase of 25% of the number of shares
      obtained by dividing the principal amount of a given Debenture by the conversion
      price of $3.80 per share, resulting in the issuance of warrants to purchase
      281,656 shares. The warrants are exercisable for shares of Common Stock for
      a
      period of five years at an exercise price of $4.50 per share. Both the
      Debentures and the warrants are redeemable in certain circumstances.




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 with
      the
      placement agent, they received a 7% selling commission, 3% management fee,
      and
      2% non-accountable expense allowance out of the gross proceeds of the offering.




F-39




On
      April
      11, 2007, the Company conducted a second closing and completed its $6.9 million
      private placement of the Debentures. In connection with the second closing,
      the
      Company entered into subscription agreements with certain accredited investors,
      whereby each investor purchased Debentures, resulting in gross proceeds to
      the
      Company of approximately $2.6 million. By the terms of the subscription
      agreements each subscriber in addition to the Debentures purchased, received
      a
      warrant exercisable for the purchase of 25% of the number of shares obtained
      by
      dividing the principal amount of a given Debenture by the conversion price
      of
      $3.80 per share, resulting in the issuance of warrants to purchase 171,391
      shares.




Out
      of
      the gross proceeds received at the closings, the Company paid the placement
      agent commissions of approximately $853. In addition, the Company issued to
      the
      placement agent warrants to purchase 181,211 shares of Common Stock on the
      same
      terms as those issued to the subscribers except that the warrants issued to
      the
      placement agent may not be redeemed for a period of nine months following the
      date of effectiveness of the registration statement required to be filed in
      connection with the offering.




(d)
            Comverge
                IPO




On
      April
      13, 2007, Comverge announced that the pricing of its initial public offering
      of
      an initial public offering of 5,300,000 shares of its common shares, at a price
      to the public of $18.00 a share, resulting in net proceeeds of approximately
      $95
      million. The shares sold in the offering (which reflect a one for two reverse
      stock split made immediately prior to the offering) represent an approximate
      28%
      interest in Comverge. The underwriters of the offering are Citigroup Global
      Markets Inc., sole book-running manager of the offering, and Cowen and Company,
      LLC, RBC Capital Markets Corporation and Pacific Growth Equities, LLC as
      co-managers. In addition, certain selling shareholders granted the underwriters
      a 30-day option to purchase up to 795,000 additional shares of common stock.
      On
      April 13, 2007, the Comverge common stock commnecd trading on the Nasdaq Global
      Market under the symbol "COMV".




Immediately
      prior to the closing of the Comverge offering (expected to take place on April
      18, 2007) all shares of preferred stock of Comverge will be converted to common
      stock of Comverge and we will own 2,786,021 shares of Comverge common stock,
      representing 15.9% of the issued and outstanding capital stock of Comverge
      following the offering.




In
      connection with the offering, 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
      effetiveness of the offering without the prior written consent of lead manager
      of the offering.





F-40


**Report
      of Independent** **Registered
      Public Accounting Firm**


**on**


**Financial
      Statement Schedule**




To
      the
      Board of Directors of Acorn Factor, Inc.:




Our
      audits of the consolidated financial
      statements referred to in our report dated April 16, 2007 of Acorn
      Factor, Inc. related
      to the consolidated financial statements of Acorn Factor, 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
      16,
      2007





/s/
      Kesselman & Kesselman


Certified
      Public Accountants


A
      member
      of PricewaterhouseCoopers International Limited


Tel
      Aviv,
      Israel




F-41




**ACORN
      FACTOR, INC.**


**SCHEDULE
      II**


**VALUATION
      AND QUALIFYING ACCOUNTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006**


**(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, 2004
            
            
            55
            
            
            (38
            )
            
            15
            
            
            32Year
                ended December 31, 2005
            
            
            32
            
            
            5
            
            
            (19
            )
            
            18Year
                ended December 31, 2006
            
            
            18
            
            
            —
            
            
            (4
            )
            
            14Allowance
                for inventory valuationYear
                ended December 31, 2004
            
            
            13
            
            
            —
            
            
            (12
            )
            
            1Year
                ended December 31, 2005
            
            
            1
            
            
            —
            
            
            (1
            )
            
            —Year
                ended December 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —Valuation
                allowance for deferred tax assetsYear
                ended December 31, 2004
            
            
            13,933
            
            
            —
            
            
            468
            
            
            14,401Year
                ended December 31, 2005
            
            
            14,401
            
            
            298
            
            
            (2,518
            )
            
            12,181Year
                ended December 31, 2006
            
            
            12,181
            
            
            —
            
            
            1,731
            
            
            13,912





F-42