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# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, DC 20549

# FORM 20-F

(Mark One)

|o | Registration
statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------------------

or

|x | Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

# For the fiscal year
ended December 31, 2007

or

|o | Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

# For the transition
period from ________ to ________

or

|o | Shell
company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring
this shell company report_____

# Commission file number
0-30348

ECtel Ltd. (Exact name of
registrant as specified in its charter)

Israel (Jurisdiction of
incorporation or organization)

10 Amal Street, Park
Afek, Rosh Haayin 48902, Israel (Address of principal
executive offices)

Hadar Solomon, Corporate SecretaryTel: +972-3-900-2121
 Facsimile: +972-3-900-2122
 e-mail: hadars@ectel.com
 10 Amal Street, Afek Industrial Park Rosh Ha'ayin 48092 Israel (Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities
registered or to be registered pursuant to Section 12(b) of the Act:

|Title of each class                           | Name of each exchange on which registered
|--------------------------------------------- | -----------------------------------------
|Ordinary Shares, NIS 0.04 par value per share | Nasdaq Global Market                     

Securities
registered or to be registered pursuant to Section 12(g) of the Act:None

Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act:None(Title of Class)

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of December 31,
2007:

16,686,401 Ordinary
Shares, nominal value NIS 0.04 per share

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes     
  x No



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If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes     
  x No

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.

x Yes     
  o No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer  o      Accelerated filer  o      Non-accelerated filer  x

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

U.S.
          GAAP  x

International Financial Reporting Standards as issued by the International Accounting Standards Board  o

Other  o

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.

Item 17  o Item 18  o

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

o Yes     
  x No

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.

o Yes     
  o No

2

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TABLE OF CONTENTS

|          |                                                                              |   
|--------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|PART I    |                                                                              | 4 
|Item 1.   | Identity of Directors, Senior Management and Advisers                        | 4 
|Item 2.   | Offer Statistics and Expected Timetable                                      | 4 
|Item 3.   | Key Information                                                              | 4 
|          | A.        Selected Financial Data                                            | 4 
|          | B.        Capitalization and Indebtedness                                    | 5 
|          | C.        Reasons for the Offer and Use of Proceeds                          | 5 
|          | D.        Risk Factors                                                       | 5 
|Item 4.   | Information on the Company                                                   | 14
|          | A.        History and Development of the Company                             | 14
|          | B.        Business Overview                                                  | 14
|          | C.        Organizational Structure                                           | 21
|          | D.        Property, Plants and Equipment                                     | 21
|Item 4A.  | Unresolved Staff Comments                                                    | 22
|Item 5.   | Operating and Financial Review and Prospects                                 | 22
|          | A.        Operating Results                                                  | 22
|          | B.        Liquidity and Capital Resources                                    | 31
|          | C.        Research and Development, Patents and Licenses                     | 33
|          | D.        Trend Information                                                  | 35
|          | E.        Off-Balance Sheet Arrangements                                     | 35
|          | F.        Tabular Disclosure of Contractual Obligations                      | 35
|Item 6.   | Directors, Senior Management and Employees                                   | 36
|          | A.        Directors and Senior Management                                    | 36
|          | B.        Compensation                                                       | 37
|          | C.        Board Practices                                                    | 38
|          | D.        Employees                                                          | 40
|          | E.        Share Ownership                                                    | 41
|Item 7.   | Major Shareholders and Related Party Transactions                            | 42
|          | A.        Major Shareholders                                                 | 42
|          | B.        Related Party Transactions                                         | 43
|          | C.        Interests of Expert and Counsel                                    | 44
|Item 8.   | Financial Information                                                        | 44
|          | A.        Consolidated Financial Statements and Other Financial Information  | 44
|          | B.        Significant Changes                                                | 44
|Item 9.   | The Offer and Listing                                                        | 45
|          | A.        Offer and Listing Details                                          | 45
|          | B.        Plan of Distribution                                               | 45
|          | C.        Markets                                                            | 45
|          | D.        Selling Shareholders                                               | 45
|          | E.        Dilution                                                           | 45
|          | F.        Expenses of the Issue                                              | 45
|Item 10.  | Additional Information                                                       | 46
|          | A.        Share Capital                                                      | 46
|          | B.        Memorandum and Articles of Association                             | 46
|          | C.        Material Contracts                                                 | 50
|          | D.        Exchange Controls                                                  | 51
|          | E.        Taxation                                                           | 51
|          | F.        Dividends and Paying Agents                                        | 58
|          | G.        Statement by Experts                                               | 58
|          | H.        Documents on Display                                               | 58
|          | I.         Subsidiary Information                                            | 58
|Item 11.  | Quantitative and Qualitative Disclosures About Market Risk                   | 58
|Item 12.  | Description of Securities Other than Equity Securities                       | 60
|         
|PART II   |                                                                              | 61
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies                              | 61
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 61
|Item 15.  | Controls and Procedures                                                      | 61
|Item 16A. | Audit Committee Financial Expert                                             | 61
|Item 16B. | Code of Ethics                                                               | 62
|Item 16C. | Principal Accountant Fees and Services                                       | 62
|Item 16D. | Exemptions from the Listing Standards for Audit Committees                   | 62
|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 62
|         
|PART III  |                                                                              | 63
|Item 17.  | Financial Statements                                                         | 63
|Item 18.  | Financial Statements                                                         | 63
|Item 19.  | Exhibits                                                                     | 63

3

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# PART I

Unless
the context otherwise requires, all references in this Annual Report on Form 20-F (the
Annual Report) to ECtel, us, we,
our and the Company refer to ECtel Ltd. and its subsidiaries.
References to dollars or $ are to United States dollars.
References to NIS are to New Israeli Shekels.

Statements
in this Annual Report concerning our business outlook or future economic performance;
anticipated revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and statements
concerning assumptions made or expectations as to any future events, conditions,
performance or other matters, are forward-looking statements as that term is
defined under the United States Federal Securities Laws. In some cases, you can identify
forward-looking statements by our use of words such as expect,
anticipate, believe, intend, plan,
seek, and estimate and similar expressions. Forward-looking
statements are subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those in such statements. Factors that could cause or
contribute to these differences include, but are not limited to, those set forth under
Item 3DRisk Factors in this Annual Report and elsewhere in this Annual
Report as well as our reports on Form 6-K submitted to the Securities and Exchange
Commission (the SEC).

# Item 1. Identity of
Directors, Senior Management and Advisers

Not
Applicable.

# Item 2. Offer Statistics
and Expected Timetable

Not
Applicable.

# Item 3. Key Information

| | A. | Selected
Financial Data
| | -- | -----------------------

The
selected consolidated balance sheet data as of December 31, 2007 and 2006 and the selected
consolidated statements of operations data for each of the years in the three-year period
ended December 31, 2007, have been derived from our audited consolidated financial
statements included elsewhere in this Annual Report, which have been prepared in
accordance with accounting principles generally accepted in the United States, or U.S.
GAAP, and audited by Somekh Chaikin, Independent Registered Public Accountants, a member
firm of KPMG International. Its report appears elsewhere in this Annual Report. The
selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003 and the
selected consolidated statements of operations data for the years ended December 31, 2004
and 2003 have been derived from our audited consolidated financial statements which are
not included in this Annual Report. The following selected financial data should be read
in conjunction with Item 5Operating and Financial Review and
Prospects and the consolidated financial statements as of December 31, 2007 and 2006
and for each of the years in the three-year period ended December 31, 2007, the related
notes and Somekh Chaikins report, appearing elsewhere in this Annual Report. Somekh
Chaikins report refers to a class action lawsuit that has been filed against the
Company and the adoption of the fair value method of accounting for stock-based
compensation as required by Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, effective January 1, 2006. This data should
not be construed as indicative of our future operating results or financial position.

In March 2004, we sold our government
surveillance business to Verint Systems (Verint) pursuant to an asset purchase
agreement, which is described below under Item 5AOperating
ResultsAcquisitions and Dispositions. The results of operations of this
business for each of the two years ended December 31, 2004 are reflected in our statements
of operations in the line item called income (loss) from discontinued
operations, and the assets and liabilities of this business as of December 31, 2003
are reflected in our balance sheet in separate line items, as well.

In
December, 2005, we acquired all of the outstanding shares of Elron Telesoft Ltd. (the name
of which was later changed to ECtel Telesoft Ltd.) and Elron Telesoft Export Ltd. (the
name of which was later changed to ECtel Telesoft Export (98) Ltd.), two sister companies
held by Elron Electronic Industries Ltd., which we refer to collectively as Telesoft. The
effect of this acquisition is reflected in our consolidated balance sheet as at December
31, 2005.

4

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|                                              | Year ended December 31,
|--------------------------------------------- | -----------------------
|
|
|
|
|Statements of Operations Data:                |                        
|                                              |                        
|Revenues                                      |                        
|Cost of revenues                              |                        
|                                              |                        
|                                              |                        
|Gross profit                                  |                        
|                                              |                        
|Research and development costs, net           |                        
|Selling and marketing expenses                |                        
|General and administrative expenses           |                        
|Amortization of acquisition-related           |                        
|intangible assets                             |                        
|Restructuring and related impairment costs    |                        
|Acquisition-related expenses                  |                        
|Goodwill impairment                           |                        
|                                              |                        
|                                              |                        
|Total operating expenses                      |                        
|                                              |                        
|                                              |                        
|Operating loss                                |                        
|Financial income, net                         |                        
|Impairment of Auction Rate Securities         |                        
|Other (expenses) income, net                  |                        
|                                              |                        
|                                              |                        
|Loss from continuing operations before taxes  |                        
|on income                                     |                        
|Income tax benefit (expense)                  |                        
|                                              |                        
|                                              |                        
|Net loss from continuing operations before    |                        
|cumulative effect of change in accounting     |                        
|principles                                    |                        
|Income (loss) from discontinued operations    |                        
|                                              |                        
|                                              |                        
|Net loss for the year                         |                        
|                                              |                        
|                                              |                        
|Loss per ordinary share                       |                        
|Basic and diluted loss per ordinary share:    |                        
|Continuing operations                         |                        
|Discontinued operations                       |                        
|                                              |                        
|                                              |                        
|                                              |                        
|                                              |                        
|                                              |                        
|Weighted average number of shares outstanding |                        
|                                              |                        
|
|
|
|
|Balance Sheet Data:                           |                        
|                                              |                        
|Cash and cash equivalents                     |                        
|Working capital                               |                        
|Assets, net - held for sale                   |                        
|Total assets                                  |                        
|Due to (from) related parties, net            |                        
|Shareholders' equity                          |                        

| | B. | Capitalization
and Indebtedness
| | -- | -------------------------------

Not
Applicable.

| | C. | Reasons
for the Offer and Use of Proceeds
| | -- | -----------------------------------------

Not
Applicable.

5

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| | D. | Risk
Factors
| | -- | ------------

We
believe that the occurrence of any one or some combination of the following factors could
have a material adverse effect on our business, financial condition and results of
operations.

# Risks Related to Our
Business and Our Industry

We have entered into a
distribution agreement with ECI Telecom Ltd. (ECI) under which we appointed
ECI as our exclusive distributor in significant portions of the Former Soviet Union, which
are important markets for us. Accordingly, we are presently dependent upon ECI for the
achievement of sales in those markets.

In
June 2005, we entered into a distribution agreement with ECI under which we appointed ECI
as our exclusive distributor in the Russian Federation, Ukraine and Kazakhstan,
territories from which we expect, in the aggregate, to derive a significant portion of our
revenues. In 2007, we derived a significant portion of our revenues from sales achieved
through ECI in these territories. The agreement is subject to termination by either party
upon three months notice. In addition, either party may terminate the agreement at
any time upon a material breach by the other party or in the event of liquidation or
similar consequences of the other party. If ECI were to terminate this agreement or if it
does not succeed in obtaining orders for our products and services, for whatever reason,
our business and results of operations may be seriously harmed. For example, our business
deteriorated in the first quarter of 2007, as we experienced a sharp decline in revenues
and did not meet our internal plans. This revenue shortfall was due in part to slower than
anticipated orders intake, mainly from countries within the Former Soviet Union carried
out through ECI, our exclusive reseller in said region.

We depend on several relatively
large customers and the loss of one or more of these customers, or a significant decrease
in revenue from any of these customers, could have a disproportionate impact on our
revenue and income.

A
substantial portion of our revenue has come from relatively large purchases by a small
number of customers. Sales to our top ten customers accounted for 51.54% of our revenues
in 2007, with sales to three customers in the Americas accounting for 19.78% of our
revenues, none of which accounted for more than 10% of our revenues in 2007. Sales to our
top ten customers accounted for 59.24% of our revenues in 2006, with sales to three
customers in Eastern Europe accounting for 28.9% of our revenues, one of which accounted
for 16.0% of our revenues. We expect to continue to depend on sales to a small number of
customers. However, we do not have long-term commitments from any of our top customers to
purchase any specific quantities of products. We expect that our largest customers will
vary from period to period. If we lose one or more large customers and fail to add new
customers, our results of operations could be seriously harmed. For example, our business
deteriorated in the first quarter of 2007, as we experienced a sharp decline in revenues
and did not meet our internal plans. This revenue shortfall was due in part to slower than
anticipated orders intake, mainly from countries within the Former Soviet Union, that were
carried out through our exclusive reseller in said region, and in part to a delay in a
large order from a long-standing European customer.

We maintain significant
cooperation with distribution channels for the sale of our products and services. If our
relationship with these distribution channels is for any reason impaired, our business and
results of operations may suffer.

We
have agreements in place with distributors and system integrators to market and sell our
products and services in addition to our direct sales force. We derive about one half of
our revenues from these distribution and system integrators channels. When a sale is
directed through a distribution channel and not directly by us, if the sales efforts of
these channels are not successful, we may lose sales opportunities, customers and market
share. In addition, there can be no assurance that our channel partners will not develop
or market products or services in competition with us in the future. Furthermore, our
financial results may be affected if our contracts with distribution channels were
terminated, if our relationship with channel partners was to deteriorate or if the
financial condition of our channel partners was to weaken.

Increased expense levels will harm
our business if our revenues do not grow.

A
significant portion of our expenses are comprised of fixed costs such as payrolls, rent of
facilities and vehicles expense, which we cannot decrease in the short term even if our
revenues were to decline. Accordingly, if our revenues do not grow, it will be difficult
for us to decrease costs at a rate that is commensurate with the decrease in revenues.
This will result in an increase in net loss or decrease in net income in the short term.
For example, our revenues for 2007 decreased compared to 2006 from $28.8 million for 2006
to $20.9 million for 2007. This decline was mainly attributed to a slower than anticipated
order intake, mostly from countries within the Former Soviet Union, and a long-standing
European customer as further described below under Item 5AOperating
ResultsOverview. However, our level of fixed expenses remained substantially
the same, resulting in increase of our operating loss for 2007 to $8.5 million, compared
with a operating loss of $3.5 million in 2006. As we maintain the same level of fixed
expenses, if our revenues will not grow or will further decline our business will be
harmed.

Because most of our revenues are
generated in U.S. dollars but a significant portion of our expenses are incurred in New
Israeli Shekels, our results of operations may be seriously harmed by currency
fluctuations and inflation.

Although
we have operations throughout the world, the majority of our revenue and approximately
50% of our operating costs in 2007 were denominated in, or linked to, the U.S. dollar.
Accordingly, we consider the U.S. dollar to be our functional currency. However, a
significant portion of our expenses is in NIS. Therefore, fluctuations in exchange rates
between the NIS and the U.S. dollar may have an adverse effect on our results of
operations and financial condition. For example, during 2007, the NIS appreciated by nine
percent against the U.S. dollar, which resulted in a significant increase in the U.S.
dollar cost of our operations in Israel, and this trend has continued in 2008. We may
also be exposed to this risk to the extent that the rate of inflation in Israel exceeds
the rate of potential devaluation of the NIS in relation to the dollar or if the timing
of such devaluation lags behind inflation in Israel. In either event, the dollar cost of
our operations in Israel will increase and our dollar-measured results of operations will
be adversely affected.

Our
operations could also be adversely affected if we are unable to hedge against currency
fluctuations in the future. Accordingly, we may enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in the exchange rate of the
U.S. dollar against the NIS. These measures, however, may not adequately protect us from
material adverse effects due to the impact of inflation in Israel.

Moreover,
as currently our revenues are denominated primarily in U.S. dollars, devaluation in the
local currencies of our customers relative to the U.S. dollar could cause customers to
default on payment. An increasing portion of our revenues is now denominated in Euros, and
in the future additional revenues may be denominated in currencies other than U.S.
dollars, thereby exposing us to gains and losses on non-U.S. currency transactions.

6

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The market for our products is
highly competitive. Furthermore, because some of our competitors have much greater
resources than we have or may have a lower cost structure than we have, it may be
difficult for us to achieve and maintain profitability. We may also face competition from
our customers.

Competition
in our industry is intense, and we expect it to continue. To compete effectively, we have,
at times, been required to grant substantial discounts on our products, especially as some
of our competitors utilize aggressive pricing strategies. Lower prices and the loss of
sales to our competitors would reduce our ability to generate revenue, which would harm
our business.

Some
of the companies that compete with us have greater name recognition, longer operating
histories, larger customer bases and significantly greater financial, marketing, public
relations, sales, distribution and other resources. Some of our competitors and potential
competitors are among the largest and most capitalized software and hardware companies in
the world. Also, some of our competitors have located their research and development
facilities in countries where labor costs for engineers and other experienced personnel
are far lower than in Israel, where our research and development facilities are located.
This has increased the pressure to reduce pricing on our products. In some situations, we
may not be able to compete successfully because of these factors, and this may adversely
affect our ability to achieve new sales.

We
may also face competition from our customers. Some of our customers are developing their
own solutions internally or through strategic alliances. As a result, solutions developed
by our customers may replace and/or compete with products that we currently sell to them
or that we may seek to sell to them in the future.

We have recently experienced, and
may continue to experience, fluctuations in our annual and quarterly results of
operations, which resulted, and may continue to result in the future, in our failing to
meet expectations about these results and could cause the trading price of our ordinary
shares to decline.

In
recent years we have experienced, and may continue to experience, significant fluctuations
in our quarterly results of operations, and we may likewise experience significant
fluctuations in our annual results of operations. Factors which have contributed and may
in the future contribute to fluctuations in our results of operations include amongst
others:

| |  | changes
in customer capital spending budgets and allocations throughout the year;
| | - | ---------------------------------------------------------------------------------

| |  | trends in customer purchasing;
| | - | ------------------------------

| |  | the
length of our sales process;
| | - | --------------------------------

| |  | the
size and timing of orders;
| | - | ------------------------------

| |  | our
relationships with, and sales through, our channel partners;
| | - | ----------------------------------------------------------------

| |  | competitive
market conditions, including the pricing actions of our customers;
| | - | ------------------------------------------------------------------------------

| |  | timing
and success of new products and new technologies introduced by us or our competitors;
| | - | --------------------------------------------------------------------------------------------

| |  | our
ability to integrate the technology and operations of acquired businesses with our own
business;
| | - | ----------------------------------------------------------------------------------------------------

| |  | regional
or global economic and political conditions;
| | - | -----------------------------------------------------

| |  | changes
in our operating expenses and extraordinary expenses;
| | - | -------------------------------------------------------------

| |  | impairment
of goodwill and intangibles;
| | - | ---------------------------------------

| |  | the
percentage of sales for which we pay sales commissions; and
| | - | ---------------------------------------------------------------

| |  | fluctuations
in foreign currency exchange rates.
| | - | ------------------------------------------------

Unfavorable
changes in the factors listed above, many of which are outside of our control, could
materially adversely affect our business, operating results and financial condition. For
example, our operating results for 2007 were below our internal plans and the expectations
of public market analysts and investors and our business deteriorated, as we experienced a
decline in revenues and increased net loss. The lower than expected results of
operations were mainly due to a slower than anticipated order intake in the first quarters
of 207, mostly from countries within the Former Soviet Union, and a long-standing European
customer. These orders were booked at the end of the second quarter, and not at the
beginning of the first quarter as anticipated due to slower than anticipated purchasing
cycle of these customers. It is likely that in some future periods, our operating results
may again, be below our expectations, or the expectations of public market analysts or
investors, which may cause our share price to drop.

We
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.

We could be subject to warranty
claims, which could be very expensive and harm our financial condition.

We
typically provide one-year warranty programs with respect to our products. Our warranty
generally provides that we will repair or replace products with defects in materials or
workmanship or that fail to meet agreed-upon specifications. Any significant product
returns or warranty claims could adversely affect our results of operations. We offer
sophisticated products that may contain software with undetected errors. In addition, new
products may experience failures when first introduced, and both current and future
products may experience failures as new versions are released. We rely to a large extent
on our reputation among industry leaders in conducting our sales efforts. Such product
returns or warranty claims and the associated negative publicity, could result in the loss
of, or delay in, market acceptance of our products and hurt our business.

7

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Our business could be materially
adversely affected as a result of the risks associated with acquisitions and investments.
In particular, we may not be effective in integrating our acquisitions or succeed in
making additional acquisitions.

As
part of our growth strategy, we may pursue mergers and acquisitions of businesses,
products and technologies, or the establishment of joint venture arrangements, that could
expand our business. For example, in April 2008 we purchased substantially all the assets
of Compwise Ltd., an Israeli based company and a provider of business analytic solutions
for telecommunication operators. In addition, in the fourth quarter of 2005 we acquired
two sister companies engaged in the development and marketing of Revenue Assurance
solutions. Also, during 2006, we carried out a due-diligence process for a potential
acquisition opportunity. Eventually, we decided not to complete the acquisition.

The
negotiation of potential acquisitions or joint ventures as well as the integration of an
acquired or jointly developed business, technology or product may absorb significant
management attention and involves large expenditure of funds that would otherwise be
available for the ongoing development of our business. In addition, the process of
integrating an acquired companys business into our operations and/or of investing in
new technologies may result in unforeseen operating difficulties and large expenditures.
Other risks commonly encountered with acquisitions include the effect of the acquisition
on our financial and strategic position and reputation, the failure of the acquired
business to further our strategies, the inability to successfully integrate or
commercialize acquired technologies or otherwise realize anticipated synergies or
economies of scale on a timely basis and the potential impairment of acquired assets.
Moreover, there can be no assurance that the anticipated benefits of any acquisition or
investment will be realized. Future acquisitions or investments contemplated and/or
consummated could result in potentially dilutive issuances of equity securities as part of
the consideration for such acquisitions or investments, the incurrence of debt and
contingent liabilities, and amortization expenses related to intangible assets, any of
which could have a material adverse effect on our operating results and financial
condition. In addition, we have limited experience with respect to operating acquired
businesses. There can be no assurance that we will be successful in making additional
acquisitions or effective in integrating such acquisitions into our existing business. If
the operation of the business of any future acquisitions disrupts our operations, our
business may suffer.

Consolidation of competitors may
adversely affect our sales and operating results.

In
recent years, our industry has experienced consolidation of solution providers, including
consolidation of some of our direct competitors. This may result in the creation of one or
more competitors possessing more significant market share than we possess. Consolidated
competitors may be able to achieve significant advantages over us in terms of economies of
scale, and therefore, we may be able to compete against us more effectively. Consolidation
can also adversely affect our business and operating results for other reasons, such as
operators preferring to transact with consolidated solution providers for various reasons,
such as their larger customers base and references sites, and larger sales, marketing and
support organizations.

Developments affecting
telecommunication service providers, such as mergers, can adversely affect us.

Developments
in the telecommunications industry, such as the impact of general global economic
conditions, continued industry consolidation, the formation of alliances among network
operators and service providers, and changes in the regulatory environment have had, and
could continue to have, a material adverse effect on our existing or potential customers.
These conditions have reduced the high growth rates that the telecommunications industry
had previously experienced, and have caused the market value, financial results and
prospects, and capital spending levels of many telecommunications companies to decline or
degrade. In recent years, the telecommunications industry has experienced significant
financial pressures that have caused many in the industry to cut expenses and limit
investment in capital-intensive projects and have led to numerous restructurings and
bankruptcies. Recent telecommunications company mergers may have a material adverse effect
on our results of operations, as existing or potential customers may be purchased or two
customers may combine operations in a manner that results in a decline in repeat sales by
us, reduces the number of licenses we can sell to the combined entity or cause us to have
to repeat significant pre-sale efforts in respect of one or more of the merger parties.

Many of our customers require a
lengthy, detailed and comprehensive evaluation process before they order our products. Our
sales process has been subject to delays that have significantly decreased our revenues
and which could result in the eventual cancellations of some sale opportunities.

We
derive substantially all of our revenues from the sale of products and related services
for telecommunications service providers. The purchase of our products represents a
relatively significant capital expenditure for our customers. As a result, our products
generally undergo a lengthy evaluation and purchase process before we can sell them. In
recent years, our customers have been conducting a more stringent and detailed evaluation
of our products, and decisions are subject to additional levels of internal review. As a
result, the evaluation process has significantly lengthened. This evaluation process
generally takes between six and 18 months. The following factors, among others, affect the
length of the approval process:

| |  | the
time involved for our customers to determine and announce their specifications;
| | - | -----------------------------------------------------------------------------------

| |  | the
time required for our customers to process approvals for purchasing decisions;
| | - | ----------------------------------------------------------------------------------

| |  | the
complexity of the products involved;
| | - | ----------------------------------------

| |  | the
technological priorities and budgets of our customers; and
| | - | --------------------------------------------------------------

| |  | the
need for our customers to obtain or comply with any required regulatory approvals.
| | - | --------------------------------------------------------------------------------------

If
customers continue to subject our products to lengthy evaluation processes, continue to
delay project approval, delays lengthen further, or if such continued delays result in the
eventual cancellation of any sale opportunities, it could harm our business and results of
operations.

8

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Volatility experienced by
telecommunications service providers may adversely affect our sales and operating results.
Current weakness in the U.S. and global markets may result in a decline of capital
investment by telecommunications service providers, impact on our sales and may affect the
pricing of our products.

The
telecommunications service provider market to which we sell historically has been
volatile. From time to time this industry has experienced significant downturns. For
instance, beginning in late 2000 and continuing into 2003, the deterioration of the global
economy in general and economic uncertainty in the telecommunications market in particular
resulted in a decline of capital investment by telecommunications service providers. This
decline in capital expenditures significantly reduced our sales and also resulted in
pressure on the prices we charge for our products. Similarly, adverse market conditions in
the future could have a negative impact on our business by reducing the number and the
value of new contracts we are able to sign.

Current
weaknesses in the U.S. and global markets is affecting the global economy and causing
uncertainty in the telecommunications market. This might result in a decline in capital
investment by telecommunications service providers. Any such decline in capital
expenditures may harm our revenues and results of operation.

We depend upon our newly
established Bulgarian subsidiary for the performance of certain of our European
professional services and operations. Failure to manage and expand our Bulgarian
activities may have a material adverse effect on our business, results of operations and
financial condition.

In
recent years, we have outsourced a portion of our professional services and operations in
Europe to a subcontractor in Bulgaria. On April 1, 2008 our contract with this
subcontractor was terminated and the employees of this subcontractor are now directly
employed by ECtel Bulgaria EOOD, our newly established subsidiary. We intend to strengthen
our position in Eastern Europe through the operation of our Bulgarian subsidiary.
Accordingly, our future success will depend in part on our ability to manage and expand
our Bulgarian subsidiarys activities . In addition, as Bulgaria joined the European
Market on January 1, 2007, it is likely that the cost of our Bulgarian operations may
increase over time, as was the case with companies in other countries joining the European
Market.

We depend on single suppliers for
some of our product components, including key product components in our legacy probing
devices, and we cannot control the manufacturing and delivery of these components. Our
business will be interrupted if these suppliers are unable or unwilling to provide these
components.

We
utilize single suppliers for some of our product components, including critical components
needed for some of our products. We cannot control the delivery schedule for these
components. In the event that any of these suppliers are unable to meet our requirements,
or fail to do so in a timely manner, we may experience an interruption in production until
an alternative source of supply can be obtained. Any disruption, or any other interruption
of a suppliers ability to provide components to us, could result in delays in making
product shipments, which could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, as suppliers discontinue their products,
or modify them in manners incompatible with our current use, or use manufacturing
processes and tools that cannot be easily migrated to other vendors, we could have
significant delays in product availability, which would have a significant adverse impact
on our results of operations and financial condition. We cannot assure you that our
inventory and alternative sources of supply would be sufficient to avoid a material
interruption or delay in production and in availability of spare parts.

ECI,
our supplier of critical hardware components for our legacy probing devices and the owner
of certain intellectual property rights related thereto, stopped manufacturing some of
these hardware components in August 2006 and recently ceased all manufacturing activities.
We contracted with an alternative supplier for the performance of manufacturing services
instead of ECI in relation to these components. This contract expires in September 2008
and we are currently negotiating an extension to the contract with such alternative
supplier. If we do not reach agreement to extend or renew our contract or, even if we do
extend or renew that contract but the alternative supplier becomes unable or unwilling to
provide these components at some point in the future, we will have to identify and engage
with a new manufacturer and may experience substantial delays in the manufacturing of
certain of our products. In both cases our business may suffer. In addition, we may be
required, in the future, to pay the alternative supplier higher prices for these
components than the prices which are currently charged. Furthermore, while ECI currently
allows us to sublicense its technology required for production of these components to our
alternative supplier, in order to engage any new alternative manufacturer, we would need
the consent of ECI to sublicense that technology to the new alternative supplier.

In
addition, in connection with our sale to Verint of our government surveillance business,
we agreed to supply some of these components for our legacy probing devices to Verint for
a period of seven years. Any problems with our supplier that cause us to breach our
obligations to Verint, which problems may not be under our control, could expose us to
claims by Verint. Such claims could harm our financial condition.

Implementation of new technologies
by telecom carriers may result in a decline in demand for our products.

Technologies,
such as Voice over Internet Protocol (VoIP), are facilitating the use of
cheaper communications media and new and reduced pricing schemes which are not entirely
based on usage level and records, such as flat rates, by some telecom operators. Such
operators may be less inclined to invest in high-end solutions like ours, which by their
nature monitor the usage records. Moreover, since these technologies enable service
providers to offer relatively low calling rates to subscribers, this may reduce the
incentive to commit telecom fraud. This, in turn, would reduce the need among service
providers to constantly monitor revenue related processes and thereby reduce the demand
for anti-fraud solution like ours. This trend may harm our revenues and results of
operation.

9

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Because the telecommunications
market is characterized by rapid technological and other changes, our success depends on
our ability to continually develop technologically advanced products and product
enhancements that achieve market acceptance.

The
telecommunications market is characterized by rapid technological advances and frequent
product introductions and enhancements. We believe that our future success will largely
depend upon our ability to continue to enhance our existing products and to successfully
develop and market products on a cost-effective and timely basis. The technologies
applicable to our products include applications capable of analyzing and processing data
based on accepted telephony standards and protocols. If other technological standards and
protocols gain broad market acceptance, we will be required to redesign our existing
products or design new products that are able to view and analyze networks based on these
new standards and protocols. For example, the types of fraudulent schemes to which service
providers are subject change with the emergence of new technologies, networks and other
developments. We cannot assure you that we will be successful in developing and marketing
new applications or systems that will respond to technological change.

The payment cycle for our
receivables may reduce the cash we have available to operate and expand our business.

As
is typical in the telecommunications industry, our contracts may provide for payments
under a variety of payment schedules. For example, we may receive a deposit prior to
shipment, a partial payment upon delivery and final payment after 180 or 360 days from
delivery. Also, we may collect payments due to specific project milestones, upon specific
customization and development progress. Such payment cycles may adversely affect the cash
resources available to operate and expand our business.

We do business with companies
located in countries around the world, which subjects us to additional risks. If these
risks materialize, our business will be materially adversely affected.

Because
of the global nature of our business, we are exposed to the risk of economic or political
instability in countries where our customers are located, particularly in developing
countries such as countries in Africa and in Central and South America. In addition, there
are often longer sales and payment cycles in developing countries, as well as greater
difficulties in collecting accounts receivable.

We
face additional risks from our international operations including:

| |  | difficulties
 of  obtaining  licenses,  the  imposition  of tariffs  and the  effects  of other  trade
              barriers;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | difficulties
in staffing and managing foreign operations;
| | - | ---------------------------------------------------------

| |  | potentially
adverse tax consequences;
| | - | -------------------------------------

| |  | laws
and business practices favoring local competitors;
| | - | -------------------------------------------------------

| |  | costs
and difficulties of customizing products for foreign countries;
| | - | ---------------------------------------------------------------------

| |  | compliance
with a wide variety of complex foreign laws and treaties;
| | - | --------------------------------------------------------------------

| |  | political
instability;
| | - | ----------------------

| |  | variance
and unexpected changes in local laws and regulations; and
| | - | ------------------------------------------------------------------

| |  | imposition
 of  exchange  or price  controls  or  other  restrictions  on the  conversion  of
 foreign               currencies.
| | - | --------------------------------------------------------------------------------------------------------------------------------

Our proprietary technology is
difficult to protect and unauthorized use of our proprietary technology by third parties
may impair our ability to compete effectively.

Our
success and ability to compete depend in large part upon our protection of our proprietary
technology, including both software and hardware components of our products. We currently
rely on a combination of patents, trade secret and copyright laws, nondisclosure and other
contractual agreements and technical measures to protect our proprietary rights. We have
several registered patents and trademarks as well as patent and trademark applications
covering some of our technology and are in the process of preparing and filing additional
patent and trademark applications. We cannot assure you that any of these applications
will be granted. These agreements and measures may not be sufficient to protect our
technology from third-party infringement, or to protect us from the claims of others.
Additionally, our products may be sold in foreign countries that provide less protection
to intellectual property than that provided under U.S. or Israeli laws. Moreover,
competitors and potential competitors may attempt to copy or reverse engineer aspects
of our product line or to obtain and use information that we regard as proprietary. If we
are unable to maintain the security of our proprietary technology for these or any other
reasons, our business may suffer.

Because our products may infringe
on the intellectual property rights of third parties, our business will suffer if we are
sued for infringement or cannot obtain licenses to these rights on commercially acceptable
terms.

We
are subject to the risk of adverse claims and litigation alleging infringement by us of
the intellectual property rights of others. Many participants in the telecommunications
industry have an increasing number of patents and patent applications and have frequently
demonstrated a readiness to pursue litigation based on allegations of patent and other
intellectual property infringement. All of our products rely on technology that could be
the subject of existing patents or patent applications of third parties. We have agreed to
indemnify our customers with respect to infringement by our products of the proprietary
rights of third parties. Third parties may assert infringement claims in the future with
respect to our current or future products. These claims may require us to enter into
license arrangements or result in protracted and costly litigation, regardless of the
merits of these claims. Any necessary licenses may not be available or, if available, may
not be obtainable on commercially reasonable terms. If we cannot obtain all necessary
licenses on commercially reasonable terms, we may be forced to stop selling our products
in some or all countries, and our business would be seriously harmed.

10

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Our products contain certain
hardware components. We must maintain sufficient inventory levels of these components to
meet anticipated demand. If we cannot predict orders accurately, our inventory may become
obsolete and our financial performance may be harmed.

Our
solutions consist of both software and hardware components. The timing and volume of our
customers orders are generally difficult to forecast for each quarter, as a
substantial majority of our sales of hardware components are booked and shipped in the same quarter pursuant to
purchase orders. We purchase the hardware components of our solutions from a small number
of manufacturers, some of which may not always timely fill our orders. We must therefore
maintain or have available sufficient inventory levels to satisfy anticipated demand on a
timely basis. Maintaining sufficient inventory levels to assure prompt delivery of our
products increases the risk of inventory obsolescence and associated write-offs. A shift
in demand could also result in inventory write-offs, which could harm our financial
performance.

We are subject to European
regulations that will require us to use components consisting of environmentally friendly
materials. Compliance with these regulations may increase our costs and adversely affect
our results of operations.

We
are subject to European telecommunications industry regulations requiring the use of
environmentally-friendly materials in telecommunications equipment. For example, telecom
equipment suppliers are required to eliminate the lead solders from their products by
2010. Compliance with European Community directives may require us to undertake
significant expenses with respect to the re-design of certain of our hardware products or
find other complying alternatives. In addition, we may be required to pay higher prices
for third-party components that comply with this directive. Our inability or failure to
comply with these regulations could harm our ability to sell our products within the
European Community and in any other countries that may adopt this directive, and may have
an adverse effect on our results of operations.

We depend on a limited number of
key personnel who would be difficult to replace. If we lose the services of these
individuals or cannot hire additional qualified personnel, our business may be harmed.

Our
business and future growth and success largely depend on the managerial and technical
skills of members of our management. If one or more of the members of the senior
management team are unable or unwilling to continue in our employ, our results of
operations could be materially and adversely affected.

Our
success also depends to a substantial degree upon our ability to attract, motivate, and
retain other highly-qualified personnel. There is competition in Israel for the services
of highly-qualified technical and engineering personnel. There is also considerable
competition for the services of experienced sales and marketing personnel. We may not be
able either to retain our current personnel or hire additional qualified personnel if and
when needed.

Holders of our ordinary shares who
are United States residents face income tax risks.

There is a substantial risk that
we are a passive foreign investment company, commonly referred to as PFIC. Our treatment
as a PFIC could result in a reduction in the after-tax return to the holders of our
ordinary shares and would likely cause a reduction in the value of such shares. For
U.S. Federal income tax purposes, we will be classified as a PFIC for any taxable year in
which either (i) 75% or more of our gross income is passive income, or (ii) at least 50%
of the average value of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, cash is considered to be an asset,
which produces passive income. As a result of our substantial cash position and the
decline in the value of our stock, there is a substantial risk that we will be classified
as a PFIC under a literal application of the asset test described above, which looks
solely to the market value. If we are to be a PFIC for U.S. federal income tax
purposes, highly complex rules would apply to U.S. residents who are holding our ordinary
shares. Accordingly, you are urged to consult your tax advisors regarding the
application of such rules. United States residents should carefully read Item
10ETaxationCertain U.S. Federal Income Tax Considerations for a more
complete discussion of the U.S. federal income tax risks related to owning and disposing
of our ordinary shares.

We are dependent upon Verint to
perform our remaining obligations under certain contracts with government customers on
which we remain the named party.

In
connection with the sale to Verint of our government surveillance business, we remain the
named party on a number of contracts which required additional performance, including for
warranty and other remaining services. With respect to these contracts, the customers
consented to the performance by Verint of all the remaining obligations of ECtel under the
contracts. The customers also agreed to communicate directly with Verint in connection
with the performance of the contracts by Verint. However, we still may be liable to the
customer in the event that Verint does not perform as required under these agreements, and
our financial condition and results of operations may suffer if these customers pursue
claims against us. In the event that we suffer damages as a result of Verints
non-performance, we may pursue our indemnification rights against Verint.

# Risks Related to
Operations in Israel

Potential political, economic and
military instability in Israel may adversely affect our results of operations.

Our
principal offices and manufacturing facilities and many of our suppliers are located in
Israel. Accordingly, political, economic and military conditions in and surrounding Israel
may directly affect our business. Since the establishment of the State of Israel in 1948,
a number of armed conflicts have taken place between Israel and its Arab neighbors, as
well as incidents of civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although Israel has
entered into various agreements with Egypt, Jordan and the Palestinian Authority, Israel
has been and is subject to civil unrest and terrorist activity, with varying levels of
severity, since September 2000. Recently, there was an escalation in violence among
Israel, Hamas, the Palestinian Authority and other groups and significant hostilities
along Israels border with the Gaza Strip, as well as extensive hostilities in the
summer of 2006 with Hezbollah along Israels northern border with Lebanon. Any future
armed conflicts or political instability in the region may negatively affect business
conditions and adversely affect our results of operations. In addition, the political and
security situation in Israel may result in parties with whom we have agreements involving
performance in Israel claiming that they are not obligated to perform their commitments
under those agreements pursuant to force majeure provisions in the agreements.

11

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We
can give no assurance that security and political conditions will have no impact on our
business in the future. Hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could adversely affect our
operations and could make it more difficult for us to raise capital.

In
addition, our business insurance does not cover losses that may occur as a result of
events associated with the security situation in the Middle East. Although the Israeli
government currently covers the reinstatement value of direct damages that are caused by
terrorist attacks or acts of war, we cannot assure you that this government coverage will
be maintained. Any losses or damages incurred by us could have a material adverse effect
on our business.

The tax benefits to which we are
currently entitled from the Investment Center of the Israeli Ministry of Industry, Trade
and Labor require us to meet several conditions and may be terminated or reduced in the
future, which would increase our taxes.

We
are entitled to tax benefits under Israeli law for capital investments that are designated
as approved enterprises. To maintain our eligibility for these tax benefits, we must
continue to meet conditions stipulated in applicable law and in our specific approvals,
including making specified investments in fixed assets. If we fail to comply with these
conditions, in whole or in part, with respect to any approved enterprise program we
establish, we may be required to pay additional taxes for the period in which we benefited
from the tax exemption or reduced tax rates and we would likely be denied these benefits
in the future. From time to time, we submit requests for expansion of our approved
enterprise programs or for new programs to be designated as approved enterprises. These
requests might not be approved, particularly in light of difficult economic conditions in
Israel. In addition, in March 2005, the law governing these tax benefits was amended to
revise the criteria for investments that qualify for tax benefits as an approved
enterprise. We cannot assure you that we will, in the future, be eligible to receive
additional tax benefits under this law. In addition, if we fail for any reason to meet the
conditions of an approved investment program, our future tax benefits under the Israeli
law for capital investments will be materially reduced. In light of our carry forward
losses, we are currently not in a taxable position.

We received an approval in principle
from the Investment Center with respect to the sale of our government surveillance
business to Verint in March 2004. If the Investment Center declines, for any reason, to
grant us the final approval, our tax benefits under Israeli law will be materially
reduced, see Item 10ETaxationIsraeli Taxation. The
termination or reduction of these tax benefits could seriously harm our financial
condition and results of operations.

Because we received grants from
the Office of the Chief Scientist, we are subject to ongoing restrictions, and certain of
our large shareholders are required to undertake to observe such restrictions.

We
received royalty-bearing grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry Trade and Labor, or the Office of the Chief Scientist (OCS), for
research and development programs that meet specified criteria. According to Israeli law,
any products developed with grants from the OCS are required to be manufactured in Israel,
unless we obtain prior approval of a governmental committee. As a condition to obtaining
this approval, we may be required to pay the OCS up to 300% of the grants we received and
to repay such grants at a quicker rate. Furthermore, the transfer to a non-Israeli entity
of technology developed with OCS funding, including pursuant to a merger or similar
transaction, and the transfer of rights related to the manufacture of more than 10% of a
product developed with OCS funding are subject to approval by an OCS committee and to
various conditions, including payment by us to the OCS of a percentage of the
consideration paid to us or our shareholders in the transaction in which the technology is
transferred. In connection with a merger or similar transaction, the amount payable would
be a fraction of the consideration equal to the relative amount invested by the OCS in the
development of the relevant technology compared to the total investment in our company,
net of financial assets that we have at the time of the transaction, but in no event less
than the amount of the grant. In addition, in the event that the committee believes that
the consideration to be paid in a transaction requiring payment to the OCS pursuant to the
provisions of the law described above does not reflect the true value of the technology or
the company being acquired, it may determine an alternate value to be used as the basis
for calculating the requisite payments. These restrictions may impair our ability to enter
into agreements for those products or technologies, without OCS approval.

Our results of operations may be
negatively affected by the obligation of key personnel to perform military service.

Some
of our executive officers and employees in Israel are obligated to perform military
reserve duty annually. They may also be further subject to being called to active duty at
any time under emergency circumstances. Our operations could be disrupted by the absence
for a significant period of one or more of our executive officers or key employees due to
military service, and any disruption in our operations would harm our business. The full
impact on our workforce or business if some of our executive officers and employees will
be called upon to perform military service, especially in times of national emergency, is
difficult to predict.

It may be difficult to enforce a U.S. judgment against us, our officers or directors or to assert U.S.
securities law claims in Israel.

Service
of process upon us, since we are incorporated and headquartered in Israel and upon our
directors and officers, substantially all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, because substantially all of
our assets, and substantially all of our directors and officers are located outside the
United States, any judgment obtained in the United States against us or any of them may
not be collectible within the United States.

12

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There
is doubt as to the enforceability of civil liabilities under the Securities Act of 1933,
as amended (the Securities Act) and the Securities Exchange Act of 1934, as
amended (the Exchange Act) in original actions instituted in Israel. However,
subject to specified time limitations, Israeli courts may enforce a U.S. final executory
judgment in a civil matter, provided that:

| |  | adequate
 service of process has been effected and the defendant has had a reasonable  opportunity
 to               be heard;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment and its enforcement  are not contrary to the law, public policy,  security or
sovereignty               of the State of Israel;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment  was obtained  after due process  before a court of competent  jurisdiction
 according to               the rules of private international law prevailing in Israel;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
 judgment  was not  obtained  by  fraudulent  means and does not  conflict  with any
 other  valid               judgment in the same matter between the same parties;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
action  between the same  parties in the same  matter is not  pending in any  Israeli
 court at the               time the lawsuit is instituted in the U.S. court; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. court is not prohibited from enforcing judgments of Israeli courts.
| | - | ----------------------------------------------------------------------------

If
a foreign judgment is enforced by an Israeli court, it generally will be payable in NIS,
which can then be converted into non-Israeli currency and transferred out of Israel. The
usual practice in an action to recover an amount in non-Israeli currency is for the
Israeli court to render judgment for the equivalent amount in NIS at the rate of exchange
on the date of payment, but the judgment debtor also may make payment in non-Israeli
currency. Pending collection, the amount of the judgment of an Israeli court stated in NIS
ordinarily will be linked to the Israel Consumer Price Index plus interest at the annual
rate (set by Israeli law) prevailing at that time. Judgment creditors bear the risk of
unfavorable exchange rates.

Provisions of Israeli law may
delay, prevent or make more difficult a merger or other business combination, and
therefore depress the price of our stock.

The
Israeli Companies Law  1999 includes restrictions on mergers, such as special voting
requirements, the ability of creditors to seek court intervention to delay or prevent a
merger and mandatory waiting periods. In addition, under certain circumstances, the
Companies Law requires that acquisitions be performed via tender offer. For more
information, see Item 10BMemorandum and Articles of
AssociationMergers and Acquisitions Under Israeli Law.

# Risks Related to the
Market for Our Ordinary Shares

Class action litigation due to
stock price volatility or other factors could cause us to incur substantial costs and
divert our managements attention and resources.

Companies
such as ours, which operate in technology industries, are particularly vulnerable to
class action litigation as a result of the volatility of their stock prices. Any
litigation of this sort could result in substantial costs and a diversion of managements
attention and resources

On
October 19, 2004, a class action complaint (the Class Action Complaint), Leumi
Gemel Ltd. v. ECtel Ltd., et al., Case No. 8:04-CV-03380-RWT, was filed in the United
States District Court for the District of Maryland. Named as defendants are ECtel Ltd.,
ECI Telecom Ltd., and certain of ECtels directors and officers. The Class Action
Complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange
Act, and Rule 10b-5 promulgated thereunder, by making false and misleading statements in
the Companys SEC filings and press releases during a period beginning April 24,
2001, and lasting through April 2, 2003. The claims are purportedly brought on behalf of
all persons who purchased our stock during that period. The plaintiffs seek unspecified
compensatory damages against the defendants, as well as attorneys fees and costs.

The
Company filed a motion to dismiss the class action complaint. At a hearing on this motion
held on July 17, 2006, the court granted our motion to dismiss the class action complaint.
Following the dismissal, the plaintiff filed a motion to further amend the class action
complaint. We responded by requesting that the court deny the motion to amend. On March 6,
2007, the court denied the plaintiffs motion to further amend the class action.
Plaintiff filed an appeal of the district courts orders with the United States Court
of Appeals for the Fourth Circuit. After briefing in the Fourth Circuit but before oral
argument or any decision thereon, the parties reached an agreement in principle to resolve
the litigation. The parties have executed a stipulation of settlement documenting their
agreement. The stipulation of settlement must be approved by the district court which has
not yet occurred.

Our stock price has decreased
significantly during 2007 and could continue to fluctuate significantly in the future.

The
market price for our ordinary shares, as well as the prices of shares of other technology
companies, has been volatile. Our share price has decreased significantly since the first
quarter of 2003. Recently, following an announcement that our 2007 first quarter revenues
were lower than our internal work plan, our share price decreased significantly. Numerous
factors, many of which are beyond our control, have caused and may continue to cause the
market price of our ordinary shares to fluctuate significantly, such as:

| |  | shortfalls
in our operating results from levels forecasted by securities analysts and by us;
| | - | --------------------------------------------------------------------------------------------

| |  | fluctuations
in our quarterly revenues and earnings and those of our publicly held competitors;
| | - | -----------------------------------------------------------------------------------------------

| |  | announcements
concerning us, our affiliates, or our competitors;
| | - | ----------------------------------------------------------------

13

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| |  | the
introduction of new telecommunications services;
| | - | ----------------------------------------------------

| |  | changes
in pricing policies by us or our competitors;
| | - | -----------------------------------------------------

| |  | failure
to successfully execute our growth strategy through the acquisition of other businesses;
| | - | ------------------------------------------------------------------------------------------------

| |  | market
conditions in our industry and the global economy in general; and
| | - | ------------------------------------------------------------------------

| |  | the
general state of the securities market (particularly the technology sector).
| | - | --------------------------------------------------------------------------------

In
addition, trading in shares of companies listed on the Nasdaq Global Market in general and
trading in shares of technology companies in particular have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to operating
performance. These broad market and industry factors may depress our share price,
regardless of our actual operating results.

# Item 4. Information on
the Company

| | A. | History
and Development of the Company
| | -- | --------------------------------------

ECtel
Ltd. is our legal and commercial name. Until April 1998, we operated under the name ECI
Telesystems Ltd. We were incorporated as a wholly-owned subsidiary of ECI Telecom Ltd. on
April 4, 1990, under the laws of the State of Israel. Our principal executive offices are
located at 10 Amal Street, Rosh Haayin, Israel and our telephone number is (972-3)
900-2115. Our agent in the United States, ECtel Inc., is located at 8211 W. Broward Blvd.,
Suite 460, Fort Lauderdale, Florida.

On
December, 29, 2005, we acquired all of the outstanding shares of Telesoft. Telesoft is
engaged in the development and marketing of software solutions for the management of large
communications and internet networks, including its Revenue Assurance solution for
telecommunication services providers, which effectively complements our Integrated Revenue
Management solution. We believe that the acquisition of Telesoft has allowed us to provide
telecommunications service providers with a flexible solution that addresses all of their
revenue assurance needs.

On
April 30, 2008, we purchased substantially all the assets of Compwise Ltd.
(Compwise), an Israeli based company and a provider of business analytic
solutions for telecommunication operators. This acquisition is expected to expand and
strengthen our Integrated Revenue Management solution, as well as expand our customer
base.

# Principal Capital
Expenditures

Our
principal capital expenditures in the past three years (aside from the acquisition of
Telesoft and Compwise) have been the purchase of equipment and other fixed assets used in
our business (mainly in Israel). On December 29, 2005 we acquired Telesoft. The aggregate
purchase price was $2.5 million, consisting of $2.1 million in cash paid to Elron
Electronic Industries Ltd., as the seller, at the closing and $0.4 million in direct
transaction costs consisting primarily of professional fees. On April 30, 2008, we
purchased substantially all the assets of Compwise for approximately $1.3 million in cash.

Capital
equipment purchases totaled approximately $0.4 million in 2007, approximately $0.6 million
in 2006 and approximately $0.4 million in 2005. Our capital expenditures in 2007 were
primarily for the procurement of test and production equipment computers. We use internal
working capital to finance these capital expenditures.

| | B. | Business
Overview
| | -- | -----------------

# General

We
develop and market our Integrated Revenue Management, or
IRM, solutions. IRM enables communications service providers to deploy,
execute, and oversee multiple revenue management programs, such as our fraud prevention
and revenue assurance products, on the same platform. As a result, communications service
providers moving towards integrating all existing and future revenue management programs
can, initially, implement any part of the IRM, while gradually migrating to a
comprehensive IRM solution. Our solutions equip telecommunications service providers with
comprehensive data gathering, monitoring, control and analysis capabilities to improve
their operational efficiency and profitability by:

| |  | detecting
and preventing fraud;
| | - | -------------------------------

| |  | monitoring
and controlling revenue related processes;
| | - | -----------------------------------------------------

| |  | detecting
revenue leakage,  (i.e., failure of a  telecommunications  service provider to correctly
and               fully bill and collect revenues for services  provided by it), as part
of a revenue assurance               process, including leakage of billing events; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | monitoring
 customers'  credit  and  risk  (i.e.,  assigning  risk  level to each  customer,  based
on predefined parameters, at each stage of its life cycle).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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# Industry Overview

Changes
in the Telecommunications Industry

The
telecommunications industry is characterized by, among others, the following factors:

Convergence
of Circuit-Switched and Packet-Switched Networks. Telecommunications networks of the
early 1990s were not designed to handle the dramatic increases in data traffic which have
been fueled by the growing use of the Internet. This led to the development of a new
generation of data-oriented communications networks, often based on Internet Protocol,
that use packet-networking technology, as an alternative to traditional, circuit-switched
telephone networks. These packet-based, or next-generation, networks, however, are not
expected to immediately replace circuit-switched networks. As a result, packet-switched
and circuit-switched networks are expected to coexist and interconnect with each other for
the foreseeable future, creating what is known as converged networks.

Development
of Value-Added Services. Greater competition and advances in technology have led
service providers to seek to differentiate themselves by offering advanced, value-added
services. The increased connectivity to the Internet is making Internet-based
communications, such as multimedia content, including video and audio, and e-commerce
services, an integral part of these value-added services. Service providers are also
expanding the range of wireless services to include data services such as e-mail, Short
Message Service (SMS) and limited Internet access. Furthermore, the emerging third
generation wireless (3G) technology enables the wireless provisioning of an even broader
range of services, including full Internet access, downloading music and video, video
conferencing and mobile banking, trading and online games.

Increased
Focus on Operational Improvements and Revenue Assurance. Due to competitive industry
conditions, service providers have often been forced to lower the prices they charge for
value added services. In turn, lower prices have resulted in lower profit margins for the
service providers with respect to these value-added services. Operators seeking greater
profitability per subscriber are looking internally to improve business efficiency to
ensure that they capture as much of the revenues associated with these value added
services as possible. In addition, the recent increase in regulatory scrutiny by U.S.
security laws and other countries regulationserve as an incentive for our
potential customers to implement advanced revenue assurance systems, thereby improving the
quality of their internal controls.

On
the other hand, new technologies, such as VoIP, are facilitating the use of cheaper
communications media and new and reduced pricing schemes which are not entirely based on
usage level and records, such as flat rates, by some telecom operators. Such operators may
be less inclined to invest in high-end solutions like ours, which by their nature monitor
the usage records. Moreover, since these technologies enable service providers to offer
relatively low calling rates to subscribers, this may reduce the incentive to commit
telecom fraud. This, in turn, may reduce the need among service providers to constantly
monitor revenue related processes and thereby reduce the demand for anti-fraud and revenue
assurance solutions like ours.

Service
Provider Challenges

As
service providers increase their focus on fraud prevention and revenue assurance, they
face challenges in the following areas:

Fraud
and Revenue Leakage Prevention. Fraud and revenue leakage typically represent a
significant loss of revenues for service providers. We believe that there are several
significant reasons telecommunications service providers invest in fraud and revenue
leakage prevention:

| |  | The
complexities of telecommunications networks, and the large number of interconnected
billing systems, operations support systems (OSS) and business support systems, present
an environment in which failures and errors of such networks and systems, their
interconnectivity or the lack of such interconnectivity, as well as human errors, are
likely to occur. Such failures might affect the revenues and the profitability of the
service providers. Operators are seeking solutions such as ours to monitor and supervise
their revenue-affecting processes in order to minimize the effect of such failures and
errors;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Product
improvements, increased maturity of the revenue assurance market, and market education by
independent software vendors and consultants, is increasing the willingness of operators
to shift some of their investments in outsourced revenue assurance services towards
internally-deployed revenue assurance software products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
current competitive business environment in the communications markets drives operators
to increase their focus on profitability per customer in addition to number of customers
and average revenue per customer. Operators must therefore look internally to improve
execution and internal operations, such as with respect to fraud and revenue leakage
prevention;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Immature
systems, products, and processes that result from adoption of emerging technologies, such
as Next Generation, VoIP, and 3G, and innovative services, including high value
transactions such as on-line banking, mobile commerce, and content, as well as from the
integration of operators systems after mergers and consolidations among operators
and internal changes in operators organizational structure, increase vulnerability
to errors, faults, leakage and fraud; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
some countries, pirate services providers have begun providing international
voice service on data lines which they lease from the network operator. These leased data
lines are generally not permitted by various laws governing data and voice traffic in
these countries to carry voice traffic. By using these data lines, the pirate providers
bypass the high international toll tariffs that traditional service providers are
required to pay when providing international voice service. As a result, the pirate
providers can charge less to customers than traditional service providers can, which in
turns results in the loss of customers by traditional service providers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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Service
providers require increasingly sophisticated fraud prevention and revenue assurance
solutions in order to overcome these challenges and effectively detect and prevent fraud
in modern telecommunications networks.

Interconnect/Intranetwork
Billing. The number of usage transactions, both among service providers and within the
network is continually increasing, making it more important to verify the accuracy of both
intranetwork and interconnection arrangements. In addition, the current flat rate billing
solutions do not enable service providers to bill their subscribers and other providers
based on usage of new value-added services, such as SMS or cellular roaming, over their
networks. In order to maximize potential revenues, service providers require usage-based
billing solutions.

In
order for service providers to effectively address these challenges and remain
competitive, they require comprehensive revenue assurance solutions to prevent fraud and
accurately bill for their intranetwork and interconnect transmissions. These solutions
must be capable of processing hundreds of millions of sessions per day from objective
and/or comparable sources, operating with hardware and software provided by multiple
vendors and supporting the multiple technologies that exist in converged networks. In
addition, solutions must be flexible in order to adapt easily to rapidly changing
technologies. Finally, service providers seek revenue assurance solutions that meet all of
these objectives and provide a demonstrable and rapid return on investment.

# The ECtel Solution

We
develop and market our Integrated Revenue Management, (or
IRM), framework. IRM enables communications service providers of both
wireline, wireless, Internet Protocol (IP) and converged networks to deploy,
execute, and oversee multiple revenue management products such as our fraud prevention,
credit and risk management, and revenue assurance products, on the same platform. As a
result, communications service providers moving towards integrating all existing and
future revenue management programs can, initially, implement any part of the IRM, while
gradually migrating to comprehensive IRM solutions. Our products consist of proprietary
software and hardware components, as well as off-the-shelf hardware and software
components.

We
believe that our solutions provide our customers with the following benefits:

| |  | Comprehensive
View of the Network. Modern international communications networks function on a
variety of transmission protocols. For example, transmission protocols for
circuit-switched networks are different from those used in packet-switched networks. Our
solutions have the capability to view and analyze many of the transmission protocols used
in converged networks. In addition, our solutions are capable of viewing and analyzing
not only the signaling information, but also the embedded session information. Signaling
information consists of basic information, such as time and place of origin and
destination of the message. Embedded session information includes the classification of
message type (e.g., voice, fax or data) and information regarding the message content,
such as touch tones initiated during a call. Most alternative solutions provided by our
competitors only analyze the signaling information. Moreover, our solutions perform the
crucial mediation function, which is necessary in order to analyze and correlate data
from a wide variety of information sources in a packet-switched network. These
information sources include specialized probes that provide value-added services and
other applications. As a result, our solutions are generally able to provide a more
comprehensive view of modern, interconnected networks than those of our competitors.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Real-Time
Functionality. Our system platform is designed to collect, process and present data
about the network in real-time. This allows our customers to react to network conditions
and events generally as they occur. For example, using our fraud prevention product, a
service provider can detect and interrupt fraudulent activity as it occurs or even before
it begins, thereby reducing losses. This real-time functionality is of increasing
importance with respect to data services that support high value transactions, such as
on-line banking or securities trading, in which both the network provider and the
subscriber bear the risk of substantial losses as a result of acts of fraud. Based on
this information, the provider can reroute traffic and initiate maintenance on its
network within minutes.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Flexible,
Scalable, Multi-Application Platform. Our system platform has been designed to meet
the continually evolving requirements of service providers. Our platform is based on a
modular architecture, which enables our customers to easily and cost-effectively add
capacity and network coverage. In addition, because all of our applications run on the
same platform, our customers can easily add new functionalities to their installed
solution. Our solutions can also be easily upgraded to keep up with the rapid
introduction of new technologies and services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Vendor
Independent Solutions. Our probing solutions analyze raw signaling information and
embedded session information, each captured directly from the network. These solutions do
not rely on information provided in vendor-specific format such as data that is processed
and formatted for billing systems. By analyzing raw information, our fraud prevention
system enables our customers to detect types of fraud that would not be detected by
analyzing only processed data. For example, our solutions capture and analyze information
about unsuccessful call attempts, which is not usually registered with billing systems,
and which is important in detecting some types of fraud and implementing a proactive
approach for fraud prevention.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sophisticated
Algorithms. We have developed sophisticated proprietary algorithms to enable our
products to perform comprehensive session analyses. Using these algorithms and supporting
hardware, our solutions can analyze signaling information and embedded session
information on multiple channels simultaneously. For example, our powerful data-mining
algorithm uses neural networks and decision tree techniques that enable our fraud
prevention solutions to detect types of fraud that the rule-based solutions of many of
our competitors are unable to detect. We have also developed proprietary digital signal
processing algorithms to enable our products to perform comprehensive session signal
analysis.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| |  | Personalized
Dashboards. Our system platform and applications provide service providers with the
flexibility to have their personnel define the scope of the data they require and the
preferred method of viewing this data. For example, a service providers revenue
assurance professional may use our revenue assurance products to view a bar graph showing
revenue leakages for various products offered by the service provider. At the same time,
its marketing professional may use the same product to view usage information. Using a
standard personal computer, each user can generate customized reports and easily select,
organize and analyze the data relevant to the user.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Business Strategy

Our
objective is to be a leading provider of integrated revenue management solutions
worldwide. Currently our IRM suite of integrated revenue management
solutions includes fraud prevention solutions, credit and risk management, and revenue
assurance solutions. The following are key elements of our strategy:

| |  | Offer
Comprehensive Fraud Prevention and Revenue Assurance Solutions within our IRM suite.
We offer our service provider customers comprehensive fraud prevention, credit and risk
management, and revenue assurance solutions to meet their fraud prevention and revenue
assurance needs. We also seek to regularly add new functionality and applications to our
products to enable our customers to meet the full range of fraud prevention, credit and
risk management, and revenue assurance challenges that exist in converged networks. We
continually seek to adapt our existing fraud prevention, credit and risk management, and
revenue assurance solutions to be compatible with emerging technologies and services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Pursue
Organic and Non-Organic Growth.We plan to grow our business by increasing our
installed base of customers and by offering additional solutions to telecom operators in
fields related to our current business mainly in the areas of customersprofitability
and customers retention. By doing so, we will be able to leverage our sales
channels and customers base for the sale of additional solutions. In order to execute
such growth plan we pursue Mergers & Acquisitions with other suppliers. We consider
acquisition of companies that provide us with additional products, with complementary
sales channels and customers, and that will increase the overall shareholder value.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Maintain
and Enhance Our Technological Leadership. We believe that our technology platform
provides us with a competitive advantage in developing revenue assurance solutions to
meet the rapidly changing needs of service providers. We have invested significant
resources over the years in both internal development and selective acquisitions. We
intend to continue to invest in our technology, through internal development and
selective acquisitions, to maintain our position as a technological leader in revenue
assurance solutions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Focus
on Leading Worldwide Service Providers. We focus our marketing efforts on leading
worldwide service providers of wireline, wireless and next-generation communication
services, many of whom have global affiliations. We have sold our solutions to many of
the worlds largest telecommunications service providers, including Hutchison H3G,
TO2, Tele2 group, MTS group, Digicel group, Portugal Telecom, Verizon (MCI), Telenor
(Vodafone Sweden), Kyivstar, Qwest Communications International, Swisscom, the Telefonica
Group, Serbia Telecom and Rostelecom. We believe that sales to market leaders will assist
our marketing efforts to establish our brand name and industry position.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Maintain
Direct and Interactive Relationships With Our Customers. We work closely with our
existing customers, both to support the solutions already sold to them, and to provide
additional products through cross sales and professional services to help them refine and
upgrade their solutions. This enables us to market complementary products to our
customers to meet their changing needs and to stay abreast of the evolving needs of the
marketplace.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Products

Fraud
Prevention Solutions

Our
fraud prevention solutions enable communication service providers (CSPs) to detect,
prevent and manage the treatment of suspected fraudulent activities. The system gathers
information about calls both in real-time and offline and compares it to fraudulent
scenarios established within user-specified filter parameters, subscriber profiles and
thresholds. When defined thresholds are reached, an alert is automatically generated and
appropriate intervention can take place according to the users chosen parameters.
Our FraudView® system provides comprehensive fraud detection and prevention solution
for wireline, wireless and next generation networks.

Our
latest version of FraudView (version 8, introduced during 2006) features an array of fraud
detection and prevention technologies, enabling large amount of anti-fraud checks and
controls for the protection of operators business. In addition, it enables and
facilitates a subscriber-centric fraud management process, in which a fraud analyst can
evaluate the behavior of its subscribers by reviewing information obtained from
various sources, which was consolidated and analyzed by the FraudView® system.

17

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Revenue
Assurance Solutions

Our
revenue assurance solutions enable wireline, wireless, and next-generation CSPs to
implement automated revenue assurance processes which facilitate auditing the accuracy of
billing processes, including revenue leakage detection, help settling of interconnect
disputes between operators, monitor network usage and provide traffic trend reports. Our
solution gathers information such as call and customer details as well as trends and
balances from several sources, and compares the information in order to discover
discrepancies and generate Key Performance Indicators (KPIs), which are metrics that help
the user quantify the level of leakage and level of performance of a certain
revenue-related process. Each user can build, revise and add KPIs according to its
organizational needs. Through its top-down viewing approach, it empowers users to locate
risk points, validate revenue assurance processes, prioritize repair actions and fix
leakages. Our RAP product is an automated revenue assurance product that facilitates
cost-effective assurance of revenues and processes.

Credit
and Risk Management Solution

Our
Credit and Risk Management solution is an innovative tool that enables CSPs to pursue
aggressive sales goals while safeguarding themselves against undue financial risk. It
applies a four-stage screening and evaluation process to evaluate subscribers risk
and avoid bad debtors. Based on our IRM platform, RiskView combines fraud
prevention, subscription risk and credit management over wireline, 2.0/2.5/3G wireless,
VoIP/IP and converged networks, and provides end-to-end financial risk management across
the entire telecom network spectrum.

Integrated
Revenue Management (IRM) Platform for all Solutions

Our
IRM platform can be leveraged for our fraud prevention, credit and risk management,
and revenue assurance solutions. The platform includes the following components:

| |  | Probes;
| | - | -------

| |  | Data
Management Layer or data loaders; and
| | - | ------------------------------------------

| |  | Dashboard.
| | - | ----------

Probes.
          Our application-specific probes are attached to the CSPs network. Our
          probes for circuit-switched networks are a combination of our proprietary
          software and hardware components. Our probes for next generation networks are a
          combination of our proprietary software and off-the-shelf probe hardware. The
          probes capture, filter, aggregate, correlate and merge data collected from
          network links, such as E-1/T-1 links, and Internet, fast Internet and gigabit
          Internet links. Our probes gather information from all layers of the network,
          from the physical layer to the application layer, without disrupting the
          operation of the network service.

Data
Management Layer or data loaders software component. Our software solutions perform
the crucial data loading and data preparation functions. This consists of extracting,
collecting, re-formatting, filtering and enriching raw data from various network elements
and management systems, including switches, soft switches, billing systems, mediation
systems, CRM systems, routers, authentication servers, VoIP gateways and other
information systems. This information can be combined with information obtained from
probes to create complete data records relating to sessions passing through the network.

DashBoard.
          Our solutions include installed software with a central display that provides
an           overview of key information and KPIs. It is fully configurable and provides
          enterprise-wide visibility across all monitored revenue and cost streams. It
          enables users to drill down to the raw data level of each KPI. It also provides
          users and managers with a wide range of analytical and statistical reports,
          including multi-level reports with drill-down capabilities.

Our
platforms flexible, scalable architecture is designed to evolve and grow with
emerging technologies and the changing needs of our customers. It enables our customers
to:

| |  | scale
the capacity and processing power of our products;
| | - | --------------------------------------------------------

| |  | add
new applications to an installed system; and
| | - | ------------------------------------------------

| |  | assimilate
new and emerging network standards, devices and applications.
| | - | ------------------------------------------------------------------------

# Sales and Marketing

As
of March 31, 2008, our direct sales force and marketing staff consisted of 24 employees
worldwide. We market our fraud prevention and revenue assurance solutions to service
providers worldwide, through a direct sales force, as well as indirect. Our sales staff
operates out of our offices in Israel and the United States. In addition, we engage local
sales representatives, distributors and sales consultants worldwide. In some territories,
we engage full time sales consultants for management of sales activities in those
territories.

18

---

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Sales
of our fraud prevention and revenue assurance solutions are made predominantly to large
service providers and involve lengthy evaluation processes before the customers issue
purchase orders. Because the purchase of our products is a relatively significant capital
expenditure, prospective customers generally commit substantial resources to an evaluation
of our solutions and require us to expend significant time, effort and money educating
them about the value of our solutions. This sales cycle for our solutions is an average of
between 6 and 18 months. Our primary marketing activities include raising awareness among
existing and potential customers of the benefits provided by the features of our products.
We utilize the sales and marketing services of local sales representatives for such
activities. We also participate in exhibitions and industry trade shows in an effort to
promote our products.

# Customers

Our
customers are communications service providers, of both fixed and wireless services. We
have recently sold our solutions to leading CSPs worldwide, including the following:

| |                  |                        |                   |                   
| | ---------------- | ---------------------- | ----------------- | ------------------
|
|
|
|
| | Rostelecom       | Kyivstar               | MobilTel Bulgaria | Mobile TeleSystems
|
| | Telefonica Group | Serbia Telecom         | Digitel GSM      
|
| | T02              | T-Com Croatia          | Tele2            
|
| | Cellcom          | Namibia Telecom        | CAT Thailand     
|
| | Embratel         | Portugal Telecom       | Golden Telecom   
|
| | Hutchison H3G    | Partner Communications | Digicel Jamaica  

In
2007, our top ten customers accounted for 51.54% of our revenues, with sales to three
customers in the Americas accounting for 19.78% of our revenues, none of which accounted
for more than 10% of our revenues. In 2006, our top ten customers accounted for 59.24% of
our revenues, with sales to three customers in Eastern Europe accounting for 28.9% of our
revenues, one of which accounted for 16.0% of our revenues.

The
following table shows a breakdown of our revenues by geographical region during 2007, 2006
and 2005 (in thousands of U.S. dollars):

|                        | 2007 | 2006 | 2005
|----------------------- | ---- | ---- | ----
|
|
|
|
|Europe                  |      |      |     
|Americas                |      |      |     
|Middle East and Africa  |      |      |     
|Asia Pacific and others |      |      |     
|                        |      |      |     
|                        |      |      |     
|                        |      |      |     

# PSO (Professional
Services Organization)

Our
professional services organization (PSO) consists of technical personnel possessing an
in-depth understanding of customers business environments. The PSO provides to our
customers comprehensive technical services, including consulting services, project
management, training and on-going support, thereby maximizing the value of our Integrated
Revenue Management solution to our customers.

In
recent years, we outsourced a portion of our technical services and activities in Europe
to a subcontractor in Bulgaria. Due to the low cost of operations in Bulgaria, we
gradually expanded our outsourced activities there and in December 2006, we established a
wholly-owned subsidiary in Bulgaria named ECtel Bulgaria EOOD. As of April 1, 2008, as per
our agreement with our Bulgarian subcontractor, substantially all of the employees of our
former Bulgarian subcontractor were engaged directly by ECtel Bulgaria.

We
have focused on building a strong customer care organization for our systems which
provides services and support to our customers. We maintain at our headquarters in Israel
a staff of highly skilled customer service engineers that offer support to our customers
and sales channels. These service engineers, as well as additional service engineers
located in our offices in the United States and Europe, provide first class field services
and support. We maintain training and expert guidance services for our customers, as well.

Our
products are generally sold with a warranty for repairs of hardware and software defects
and malfunctions, the term of which is usually one year after acceptance of the system.
Post-warranty support and maintenance services are made available to customers on a
contractual basis for an additional charge. The maintenance agreements generally provide
for remote support and maintenance as well as updates to correct minor bugs or errors in
the software. Upgrades and enhancements to the software may be purchased as part of the
support and maintenance services for additional consideration and subject to additional
specific terms.

19

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# Manufacturing

We
purchase some hardware, such as servers and storage devices, from third-party vendors such
as IBM and Hewlett Packard. Our manufacturing operations consist primarily of integration,
final assembly and testing, involving the application of extensive testing and quality
control procedures to materials, modules, subassemblies and systems. ECI, our supplier of
critical hardware components for our legacy probing devices, stopped manufacturing some of
these hardware components in August 2006 and recently ceased all manufacturing activities.
We contracted with an alternative supplier for the performance of manufacturing services
instead of ECI in relation to these components, and we are currently negotiating an
extension to the contract with such alternative supplier. If we do not reach agreement to
extend or renew our contract or, even if we do extend or renew that contract but the
alternative supplier becomes unable or unwilling to provide these components at some point
in the future, we will have to identify and engage with a new manufacturer and may
experience substantial delays in the manufacturing of certain of our products.
Furthermore, while ECI currently allows us to sublicense its technology required for
production of these components to our alternative supplier, in order to engage any new
alternative manufacturer, we would need the consent of ECI to sublicense that technology
to the new alternative supplier.

We
maintain organization-wide quality assurance system, based upon ISO9000:2000, coordinating
the quality control activities of our research and development and manufacturing
departments. Our primary manufacturing and research and development facilities are
certified for Quality Standard ISO 9001:2000. ISO 9001:2000 is an international standard
of quality assurance for companies that perform design, development, manufacturing,
service and installation of products and systems. This standard was established by the
International Organization for Standardization (ISO), an international federation of
national standards bodies. To be certified for ISO 9001:2000, a company must be audited by
an ISO-accredited auditing body, in our case the SII (Standard Israel Institute), and must
meet or surpass the standards requirements. We believe that our customers value the
process, control and traceability, for which we have been awarded ISO 9001:2000
certification.

# Research and Development

In
order to accommodate the rapidly changing needs of our markets, we place considerable
emphasis on research and development projects designed to improve our existing product
lines, develop new product lines and customize our products to meet our customers
needs. As of March 31, 2008, 33 of our employees were engaged primarily in product
development activities. We expect that we will continue to commit substantial resources to
product development in the future.

As
a recipient of grants from the Office of the Chief Scientist (OCS), we are obligated to
perform, in Israel, all development activities related to products under these grants,
unless we receive an exemption. Know-how from the research and development used to produce
these products may not be transferred to third parties without the approval of the OCS.
Approval is not required for the export of any products resulting from the research and
development based on these grants. Also, during the fourth quarter of 2006, we committed
to repay in full all the grants related to programs connected to our FraudView®
solution. These grants were fully paid during 2007. For further information regarding the
OCS of the Israeli Ministry of Industry, Trade and Labor, see Item
5CResearch and Development, Patents and LicensesGrants from the
Office of the Chief Scientist.

# Competition

The
telecommunications industry is characterized by intense competition. Some of the companies
that compete with us may have greater name recognition, longer operating histories, lower
cost structure, extensive presence in a specific territory, larger customer bases or
significantly greater financial, marketing, public relations, sales, distribution and
other resources. Some of our competitors and potential competitors are among the largest
and most well capitalized software and hardware companies in the world.

We
also face competition from our customers, and we expect this trend to continue in the
future. Some of our customers are developing their own solutions internally or through
strategic alliances.

Our
main competitors in the fraud prevention and revenue assurance markets are Subex Limited,
Hewlett-Packard, WeDo Technologies, FairIsaac Corp., Martin Dawes Systems, cVidya Networks
and Neural Technologies Limited.

In
recent years, our industry has experienced consolidation of solution providers, including
consolidation of some of our direct competitors. This may result in the creation of one or
more competitors possessing more significant market share than we possess. We believe that
the principal competitive factors in the markets in which we compete are product
functionality, the ability to provide effective and comprehensive solutions,
recommendations and references of other customers, pricing, timely introduction of new
products, especially products of next generation networks, and responsive customer
support.

# Intellectual Property
and Proprietary Rights

The
telecommunications industry is characterized to a great extent by its reliance on
proprietary technology. We believe that we own or have the license to use the technologies
used in our products. We depend on a combination of technical innovations, trade secrets,
and non-disclosure agreements for the protection of this technology. Also, we are filing
patent applications to protect our technology and trademark applications to register our
trademarks. We have 8 registered patents, of which 1 was allowed in 2007, and 6 pending
patent applications. Various trademarks of ours have already been registered in certain
countries.

Although
we intend to protect our rights in technology vigorously, we cannot be sure that these
measures will be successful. It may be possible for unauthorized third parties to
misappropriate or reverse engineer aspects of our products or technology, independently
develop technology of substantially similar functionality or performance, or obtain
information that we regard as proprietary. Moreover, the laws of some foreign countries in
which we sell or may sell our products may not fully protect, or may not protect at all,
our proprietary rights in products.

20

---

---

Third
parties may, from time to time, claim that our current or future products infringe their
intellectual property rights. Intellectual property litigation is complex and we cannot
assure you of the outcome of any such litigation. Any future intellectual property
litigation, regardless of outcome, could result in substantial expense and significant
diversion of the efforts of our technical and management personnel and disrupt or
otherwise severely impact our relationships with current and potential customers. An
adverse determination in any such proceeding could subject us to significant liabilities
to third parties, require disputed rights to be licensed from those parties, assuming
licenses to the rights could be obtained, or require us to cease using the technology and
expend significant resources to develop non-infringing technology. We may not be able to
obtain a license at an acceptable price.

Our
registered trademarks include among others QUALIVIEW, NGN FRAUDVIEW, I-PROBE, SIGVIEW,
X-ELLENCE, X-PERTVIEW, QUALIVOIP, QUALIMOBILE, PRE-VIEW, VALUEROUTE, BILLGUARD, FLOWGUARD
and SERVGUARD.

# Government Regulations

We
receive grants from the OCS for research and development programs. We are also entitled to
tax benefits under Israeli law for capital investments that are designated as approved
enterprises. Our participation in these programs is subject to our compliance with certain
conditions and imposes certain restrictions upon us.

Demand
for products by service providers is affected by various types of laws and regulations in
the areas of use of communications customer records, network service standards, billing
for use of interconnected networks, certification of and charges paid by VoIP service
providers and opening markets to competition. For more information regarding the OCS and
tax benefits for approved enterprises, see Item 5CResearch and
Development, Patents and LicensesGrants from the Office of the Chief
Scientist and Item 10ETaxationIsraeli TaxationTax
Benefits under the Law for the Encouragement of Capital Investments, 1959,
respectively.

| | C. | Organizational
Structure
| | -- | ------------------------

Prior
to May 10, 2004, ECI held of record 10,490,325, or approximately 57.9%, of our outstanding
ordinary shares. On May 10, 2004 ECI distributed 7,600,000 ordinary shares to its
shareholders and as a result, ECI held 2,890,325, or 15.9%, of our outstanding ordinary
shares. On June 28, 2006 ECI distributed its remaining shares of ECtel as dividend to its
shareholders. As a result, ECI is no longer a shareholder of ECtel.

As
of March 31, 2008, IDB beneficially held approximately 38% of our outstanding shares.

We have
outsourced a portion of our technical services and activities in Europe to a subcontractor
in Bulgaria. Due to the low cost of operations in Bulgaria we have gradually expanded our
outsourced activities In Bulgaria and in December 2006, we established a wholly-owned
subsidiary in Bulgaria named ECtel Bulgaria EOOD. As of April 1, 2008 as per our agreement
with our Bulgarian subcontractor, substantially all of the employees of our Bulgarian
subcontractor have been engaged directly by ECtel Bulgaria.

We
own all the outstanding shares of

| |  | ECtel
Inc., a Maryland corporation;
| | - | -----------------------------------

| |  | ECtel
(2000) U.K. Ltd., a U.K. company;
| | - | ---------------------------------------

| |  | ECtel
Telesoft Ltd, an Israeli company;
| | - | ---------------------------------------

| |  | ECtel
Telesoft Export (98) Ltd, an Israeli company;
| | - | ---------------------------------------------------

| |  | ECtel
Bulgaria EOOD, a Bulgarian company;
| | - | -----------------------------------------

| |  | ECtel
BV, a Dutch company  which,  in turn,  holds all of the shares of ECtel GmbH, a German
 company;               and
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | Telrad
Hawk Net - I Ltd. (in voluntary liquidation), an Israeli company.
| | - | ------------------------------------------------------------------------

| | D. | Property,
Plants and Equipment
| | -- | ------------------------------

We
lease our headquarters and main facilities located in Rosh Haayin, Israel for our
executive offices, sales, marketing, administrative, development, professional services
and support activities. The facilities occupy approximately 37,232 square feet. We lease
these facilities pursuant to an agreement and the lease period commenced on July 10, 2005
and runs through June 30, 2015. We are entitled to shorten the term of the lease at any
time following its fifth or sixth anniversary, subject to certain penalty payments. We are
further entitled to discontinue the lease on the seventh, eight, or ninth anniversaries,
upon providing six months written notice, without any penalty payments.

21

---

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ECtel
Inc., our U.S. subsidiary, leases approximately 1,500 square feet of office space in
Florida which is used mainly for sales and marketing activities. The term of the Florida
lease is through September 24, 2010.

ECtel
Bulgaria EOOD, our Bulgarian subsidiary, leases approximately 4,000 square feet of office
space in Sofia which is used mainly for professional services and support activities. The
term of the Sofia lease is through March 31, 2009.

ECtel
GmbH leased approximately 970 square feet of office space from ECI Telecom GmbH in
Oberrursel, Germany, on an ongoing basis. As we plan to terminate our presence in Germany
and liquidate ECtel GmbH, we terminated this lease on December 31, 2007.

We
believe that our existing facilities are adequate to meet our current and foreseeable
needs.

# Item 4A. Unresolved
Staff Comments

Not
Applicable.

# Item 5. Operating and
Financial Review and Prospects

| | A. | Operating
Results
| | -- | -----------------

We
make forward-looking statements in this Annual Report and in other filings with the SEC.
You can identify these forward-looking statements by use of words such as
strategy, expects, continues, plans,
anticipates, believes, may, estimates,
intends, projects, goals, targets, and
other words of similar meaning. You can also identify them by the fact that they do not
relate strictly to historical or current facts.

We
cannot assure you that any forward-looking statement will be realized, although we believe
we have been prudent in our plans and assumptions. Achievement of future results is
subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks
or uncertainties materialize, or should underlying assumptions prove inaccurate, actual
results could vary materially from those anticipated, estimated or projected. Investors
should bear this in mind as they consider forward-looking statements and whether to invest
or remain invested in ECtel securities. The forward-looking statements relate to, among
other things: revenues, operating results; anticipated cash flows; gross margins; and the
markets acceptance of our technologies, products and solutions.

In
connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we are identifying important factors that, individually or
in the aggregate, could cause actual results and outcomes to differ materially from those
contained in any forward-looking statements made by us; any such statement is qualified by
reference to the following cautionary statements. Please read the section above entitled
Risk Factors to review conditions that we believe could cause actual results
to differ materially from those contemplated by the forward-looking statements. You should
understand that it is not possible to predict or identify all risk-factors. Consequently,
you should not consider the factors discussed in Risk Factors to be a complete
discussion of all potential risks or uncertainties. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our view only as of the
date of this Annual Report. Except as required by law, we undertake no obligation to
update these forward-looking statements to reflect future events or circumstances or the
occurrence of unanticipated events.

You
should read this discussion in conjunction with the consolidated financial statements and
the other financial information appearing elsewhere in this Annual Report.

# Overview

We
develop and market Integrated Revenue Management (IRM)
solutions for wireline, wireless, converged and next-generation operators. Our solutions
equip telecommunications service providers with comprehensive data gathering, monitoring,
control and analysis capabilities to improve their operational efficiency and
profitability by:

| |  | detecting
and preventing fraud;
| | - | -------------------------------

| |  | monitoring
and controlling revenue related processes;
| | - | -----------------------------------------------------

| |  | detecting
revenue leakage,  (i.e., failure of a  telecommunications  service provider to correctly
and               fully bill and collect revenues for services  provided by it), as part
of a revenue assurance               process, including leakage of billing events; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | monitoring
 customers'  credit  and  risk  (i.e.,  assigning  risk  level to each  customer,  based
on               redefined parameters, at each stage of its life cycle).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In April 2008, we purchased
substantially all the assets of Compwise Ltd. an Israeli based company, a provider of
business analytic solutions for telecommunication operators, for $1.3 million dollars,
pursuant to an asset purchase agreement, which is described below under Item
10CMaterial Contracts. This acquisition is expected to expand and strengthen
our Integrated Revenue Management solution, as well as expand our customer base. The
results of operations described in this annual report were not affected by this
acquisition of Compwises assets.

22

---

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In
December 2005, we acquired Telesoft, comprised of two sister companies engaged in the
development and marketing of software solutions for the management of large communications
and internet networks, for $2.5 million. We believe that this acquisition enables us to
provide communications services providers with a comprehensive Integrated Revenue
Management solution.

Our
business deteriorated in 2007, as we experienced a decline in revenues and increased net
loss. The lower than expected results of operations were mainly due to a slower than
anticipated order intake, mostly from countries within the Former Soviet Union, and a
long-standing European customer. These orders were booked at the end of the second
quarter, and not at the beginning of the first quarter as anticipated, due to slower than
anticipated purchasing cycle of these customers. Therefore, in addition to causing our
revenues for the first quarter of 2007 to be below expected levels, as a result of the
fact that this order continued to occupy some of our sales personnel during the second
quarter, it extracted an opportunity cost and caused lower than expected revenues during
the balance of 2007. In addition, we experienced a delay in obtaining acceptance by
certain customers of certain projects which were part of our backlog at the end of 2006.
This caused delayed recognition of the revenues from those projects and extracted an
opportunity cost by occupying our operational resources involved in those projects for
longer than anticipated periods, thus delaying generation of revenues from other customer
projects.

Despite
the decline in 2007 revenues, our level of fixed expenses in 2007 did not change
significantly compared to 2006. Because a significant portion of our expenses, such as
payrolls, rent of facilities and vehicles expense, are fixed, we are less able to respond
to declines in revenues by reducing costs. This leads to larger decreases in net income or
increases in net losses when revenues decline. Our management believes that our level of
fixed expenses is appropriate to facilitate growth of our business. In addition, an
appreciation of nine percent in the NIS compared to the U.S. dollar in 2007 resulted in an
increase in the U.S. dollar cost of our operations in Israel compared to our cost of
operations in 2006, measured based upon the 2006 average exchange rate between the
NIS and the U.S. dollar.

At
the beginning of the second quarter of 2007, our President and Chief Executive Officer,
Mr. Eitan Naor, and our Chief Financial Officer, Mr. Ron Fainaro, both resigned from their
positions. On May 1, 2007 Itzik Weinstein assumed the position of president and Chief
Executive Officer of ECtel. Mr. Weinstein had served as ECtels Executive Vice
President for Professional Services and Operations since July 2004. Mr. Weinstein has
built up the management team, bringing in new members and promoting from within to several
key positions, and assembled a comprehensive business plan which includes measures to
increase our sales force and partnership network, focusing on increasing our proximity to
our customers, and improving our telecom business and cost structure, including by
shifting additional activities to our East European Bulgarian subsidiary and its lower
cost staff.

Subsequent to the first quarter of
2007, our revenues increased over the first quarter and net loss declined in the
second and third quarter. In the fourth quarter net loss increased due to the impact of
the Other than Temporary impairment charge related to certain Auction Rate
Securities (ARS), as described below under Item 5AOperating
ResultsComparison of 2007, 2006 and 2005Impairment of ARS

On
July 1, 2007, Mr. Michael Neumann was appointed as our Senior Vice President and Chief
Financial Officer.

# Acquisitions and
Dispositions

Our
business and financial position during the three years ended December 31, 2007 were
influenced by acquisitions and a disposition. The acquisitions were accounted for as
purchase, and, accordingly, the purchase price for the acquisitions were allocated to the
assets acquired and liabilities assumed based on their respective fair values. The results
of operations related to acquisitions are included in our consolidated statements of
operations from the date of acquisitions. The following are details for each of these
acquisitions and disposition:

| |  | On
December 29, 2005, we acquired Telesoft, from Elron Electronic Industries Ltd. The
aggregate purchase price was $2.5 million consisting of $2.1 million in cash paid to
Elron Electronic Industries Ltd., as the seller at the closing and $0.4 million in direct
transaction costs consisting primarily of professional fees. In addition to the purchase
price, we were obligated to pay to Elron Electronic Industries an amount of up to $0.4
million in connection with an earn outif certain milestones were met, in
accordance with purchase agreement. The earn-outwas over the period of 12 months
following the closing date. No such earn-out was paid, as the milestones were not met.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
March 31, 2004, we sold our government surveillance business to Verint. Accordingly, our
statements of operations, including those of prior periods, reflect the results of
operations of this business in the line item called income (loss) from discontinued
operations. All data in this annual report derived from our statements of
operations, unless otherwise specified, exclude our government surveillance business.
Pursuant to the asset purchase agreement, Verint purchased certain assets and assumed
certain liabilities relating to the government surveillance business for $35 million in
cash. The transferred assets included certain intellectual property rights, fixed assets,
backlog contracts, agreements with subcontractors and suppliers, third-party software
licenses and outstanding customer proposals. The assumed liabilities included
employment-related liabilities in respect of our employees who were hired by Verint
including retention bonuses, severance and compensation liabilities with respect to the
termination of certain of our officers, and an accrual for certain research and
development and customization expenses, see Item 10CMaterial Contracts.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Share Repurchase Plan

In
April 2006 we announced a plan to repurchase our ordinary shares on the open market in an
amount in cash of up to $15 million. Since we adopted the plan, we repurchased an amount
of 2,304,794 of our ordinary shares for total consideration of $11.5 million. The plan
expired in April 2007. As of December 31, 2007, our total cash and investments were
approximately $29.1 million. See also Liquidity and Capital Resources in
connection with our cash position.

23

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# Results of Operations

The
following table sets forth the percentage relationships of certain items from our
consolidated statements of operations, as a percentage of revenues for the periods
indicated:

|                                                      | Year ended December 31,
|----------------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                              |                        
|Cost of revenues                                      |                        
|                                                      |                        
|                                                      |                        
|Gross profit                                          |                        
|                                                      |                        
|Research and development costs, net                   |                        
|Selling and marketing expenses                        |                        
|General and administrative expenses                   |                        
|Restructuring and related impairment costs            |                        
|Amortization of acquisition-related intangible assets |                        
|Acquisition-related expenses                          |                        
|                                                      |                        
|                                                      |                        
|Total operating expenses                              |                        
|                                                      |                        
|                                                      |                        
|Operating loss                                        |                        
|Financial income, net                                 |                        
|Other expenses, net                                   |                        
|                                                      |                        
|                                                      |                        
|Loss before taxes on income                           |                        
|Income tax benefit (expense)                          |                        
|                                                      |                        
|                                                      |                        
|Net loss                                              |                        

|(*) | Represent
a percentage less than 0.1%
|--- | -------------------------------------

# Comparison of 2007, 2006
and 2005

Revenues

Our
revenues consist of fees from the sale of our solutions, which include license of software
and hardware, as well as licenses of software and hardware of third parties, to
telecommunications services providers, and from fees for maintenance and other related
services.

2007
vs. 2006

Total
revenues decreased by 27% from $28.8 million in 2006 to $20.9 million in 2007, for the
reasons discussed above in the Overview of this section.

2006
vs. 2005

Total
revenues increased by 24% from $23.2 million in 2005 to $28.8 million in 2006. We
increased our revenues, both by winning new accounts, including orders for our FraudView
and RAP solutions from major telecommunication carriers in various geographic regions, and
by making sales to existing customers including sales of a new version of our FraudView
product. We kept increasing our maintenance and support revenues largely through renewals
and extensions from our installed customer base.

Cost of Revenues

Cost
of revenues consists primarily of the direct cost of materials, employee compensation
expenses, payments to subcontractors and outsourcers, payments to consultants,
depreciation related to manufacturing facilities, allocated overhead, maintenance and
support of our products, changes in inventory and royalties to the OCS.

2007
vs. 2006

Cost
of revenues decreased from $13.6 million in 2006 to $10.2 million in 2007 primarily due to
the non-recurrence of a provision of $2.3 million in royalties to the OCS, recorded in the
fourth quarter of 2006, which represented substantially full repayment of prior funding to
the OCS arising from its participation plan. Our gross profit margin was 51%, compared to
a gross profit margin of 53% in 2006.Our gross profit decreased primarily because
our revenues decreased, however, our level of fixed expenses, such as payrolls,rent of facilities and vehicles expense remained the same. In addition, the
appreciation of the NIS compared to the U.S. dollar resulted in an increase of the U.S.
dollar cost of our operations in Israel compared to our cost of operations in 2006,
measured based upon the 2006 average exchange rate between the NIS and the U.S. dollar.

24

---

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2006
vs. 2005

Cost of revenues increased from $11.0
million in 2005 to $13.6 million in 2006, primarily due to a provision of $2.3 million in
royalties to the OCS, as discussed in Item 5CResearch and Development, Patents and
LicensesGrants from the Office of the Chief Scientist , which was
recorded in the fourth quarter of 2006, and as a result of increase in revenues. Our gross
profit margin was 53%, which was similar to our gross profit margin in 2005. Gross profit
margins remained essentially unchanged despite the increase in our gross profit from $12.2
million in 2005 to $15.2 million in 2006 which increase was due primarily to our higher
sales in 2006 compared with 2005, as partially offset by the $2.3 million OCS
royalties charge which we provided for in December 2006, as discussed in
Overview..

Operating Expenses

|(in millions of U.S. dollars, except for percentages) | Year ended December 31, | % Change 2007
vs. 2006 | % Change 2006
vs. 2005
|----------------------------------------------------- | ----------------------- | ---------------------- | ----------------------
|
|
|
|
|Research and development costs, net                   |                         |                        |                       
|Selling and marketing expenses                        |                         |                        |                       
|General and administrative expenses                   |                         |                        |                       
|Restructuring and related impairment costs            |                         |                        |                       
|Amortization of acquisition-related intangible assets |                         |                        |                       
|Acquisition-related expenses                          |                         |                        |                       
|Total operating expenses                              |                         |                        |                       

|(*) | Represents
a percentage less than 0.1 million
|--- | ---------------------------------------------

Research and Development
Costs, Net

Research
and development costs consist primarily of employee compensation expenses, payments to
subcontractors and consultants and allocated overhead, costs of materials and software and
amortization of purchased technologies associated with our research and development
activities. Grants received in previous years from the OCS are deducted from gross
research and development expenses to determine net research and development expenses.

2007
vs. 2006

Research
and development costs, net increased by 12.0% from $4.3 million in 2006 to $4.8 million in
2007. This increase was due to the following factors: (i) grants from the OCS that we
recorded in our books decreased by 100.0% from approximately $0.2 million in 2006 to $0 in
2007, as we did not request OCS grants or participation in any new programs; and (ii) the
appreciation of the NIS compared to the U.S. dollar resulted in an increase of the U.S.
dollar cost of our operations in Israel compared to our cost of operations in 2006.

2006
vs. 2005

Research
and development costs, net increased by 18.1% from $3.6 million in 2005 to $4.3 million in
2006. This increase reflected an increase in gross research and development costs from
$4.1 million in 2005 to $4.5 million in 2006, which was primarily due to increase in the
number of research and deelopment personnel in 2006 as a result of our acquisition of
Telesoft and decrease in OCS grants participation. Grants from the OCS that we recorded in
our books decreased by 49.6% from approximately $0.5 million in 2005 to $0.2 million in
2006, as we were granted the remaining of the OCS participation approved in previous years
and did not request any grants or participation in any new programs.

Selling and Marketing
Expenses

Selling
and marketing expenses consist primarily of employee compensation expenses, payments to
consultants, agents commissions and costs associated with advertising, exhibitions,
market research, participation in industry trade shows, travel and allocated overheads.

2007
vs. 2006

Selling
and marketing expenses decreased by 10.1% from $9.5 million in 2006 to $8.5 million in
2007. The decrease was mainly due to lower expense for agents commissions resulting
both from the decrease in our revenues and from increased cooperation with distributors
and system integrators in an effort to broaden our penetration in various markets. Sales
through distributors and system integrators generally do not involve payment by us of
agent commissions. The decrease in selling and marketing expenses was partially offset by
theappreciation of the NIS compared to the U.S. dollar which resulted in an
increase of the U.S. dollar cost of our operations in Israel compared to our cost of
operations in 2006.

2006
vs. 2005

Selling
and marketing expenses increased by 37.4% from $6.9 million in 2005 to $9.5 million in
2006. The increase in selling and marketing expenses in 2006 was due to higher expense for
agents commissions than we incurred in the previous year, resulting from increased
sales in 2006, and due to adoption of SFAS 123 (R) Share-based payment, under
which we recorded an expense in the amount for approximately $0.5 million share-based
compensation we granted to sales and marketing personnel.

25

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General and
Administrative Expenses

General
and administrative expenses consist primarily of employee compensation expenses,
professional fees, including legal and accounting fees, recruiting costs, allocated
overheads and changes in the balance of provision for doubtful accounts.

2007
vs.2006

General
and administrative expenses increased by 51.0% from $3.8 million in 2006 to $5.8 million
in 2007. The increase was primarily due to expenses related to changes in our senior
management resulting from: (i) payment of extended separation compensation to one of our
executives which has resigned from his position with the Company, (ii) increases in senior
management headcount and compensation levels in transition periods, (iii) the appreciation
of the NIS compared to the U.S. dollar which resulted in an increase of our U.S. dollar
cost of our operations in Israel compared to our cost of operations in 2006, and (iv) a
decrease in our doubtful debts recovery as compared to 2006.

2006
vs.2005

General
and administrative expenses decreased by 7.0% from $4.1 million in 2005 to $3.8 million in
2006. The decrease was primarily due to a reduction in certain overhead allocation costs.
In addition, we succeeded in collecting $0.6 million in debt which we had recorded as
doubtful debt in previous years, primarily due to improved creditworthiness in the
telecommunication industry and our improved collection efforts.

Amortization of
Acquisition-Related Intangible Assets

2007
vs.2006

In 2007
and 2006 due to our acquisition of Telesoft, we recorded amortization of
acquisition-related intangible assets in theamount of $0.1 million and $0.5
million, respectively, which amounts consist of amortization expense related to intangible
assets recorded in connection with acquisition accounted for by the purchase method of
accounting. These intangible assets, consisting primarily of core technology, third-party
relations, customer contracts and relationships, are being amortized using the
straight-line method and based on forecasted cash flows associated with the assets over
periods ranging from one to five years.

2006
vs.2005

On October 1, 2001, we acquired all of the outstanding shares of Telrad Hawk Net-I Ltd., or
Net-I. As a result of the purchase of Net-I, goodwill in amount of $16.3 million was
created (as at the date of purchase). On December 29, 2004, we resolved to voluntarily
liquidate it and appointed an attorney to serve as its liquidator. This liquidation
process has not had a significant effect on our consolidated financial statements.

In
2005, the amortization of acquired-related intangible assets are related to the
amortization of intangible assets acquired in NetI acquisition.

Restructuring and Related
Impairment Costs

2007
vs.2006

We
recorded no restructuring expenses during the year 2007.

2006
vs.2005

We recorded
no restructuring expenses during the year 2006.

As
part of our acquisition of Telesoft in December 2005, we included in our results of
operations for 2005 costs of approximately $0.5 million, which related primarily to
involuntary termination of some employees. In addition, during the third quarter of the
year, we reversed a reserve made in 2004 for our restructuring plan in theamount
of $0.2 million, as our management decided that the recovery plan had concluded by that
time.

26

---

---

Acquisition-Related
Expenses

2007
vs.2006

No
material expenses were recorded in our results of operations in 2007 in respect of
acquisition related expenses.

2006
vs.2005

During
2006, we incurred expenses in the amount of $0.6 million in connection with a
due-diligence process and legal work for a potential acquisition. During the third quarter
of 2006 we decided, after evaluating all the relevant parameters, not to conclude the
negotiations, and therefore, we released all incurred expenses to our statements of
operations. These expenses consist principally of third-party legal, accounting and other
professional fees.

We
recorded no acquisition-related expenses during the year 2005.

Operating Loss

2007
vs. 2006

Operating
loss increased from $3.5 million in 2006 to $8.5 million in 2007. The increase in our
operating loss in 2007 was mostly due to (i) a reduction in our revenues during 2007
whilst our level of fixed expenses, such as payrolls, rent of facilities and vehicles
expense remained the same; (ii) payment of extended separation compensation to one of our
executives which has resigned from his position with the Company, (iii) increases in
senior management headcount and compensation levels in transition periods, (iv) the
appreciation of the NIS compared to the U.S. dollar which resulted in an increase of our
U.S. dollar cost of our operations in Israel compared to our cost of operations in 2006,
and (v) a decrease in our doubtful debts recovery as compared to 2006. This increase in
the operation loss in 2007 was partially offset, compared to 2006, by the following
factors: (i) lower expense for agents commissions, resulting both from the decrease
in our revenues and from increased cooperation with distributors and system integrators;
and (ii) the following two non-recurring expenses which were recorded in 2006: (a)
repayment of royalties to the OCS, and (b) expenses for a due-diligence process in
connection with potential acquisition.

2006
vs. 2005

Operating
loss increased from $2.9 million in 2005 to $3.5 million in 2006. This increase was
largely due to several factors, which we do not anticipate to recur in the foreseeable
future. These factors include a provision for the repayment of prior funding to the OCS in
the amount of approximately $2.3 million, as substantially full repayment of our
obligations to the OCS arising from its participation plan with respect to our FraudView
solution and acquisition-related expenses in connection with the negotiation of a
potential acquisition in the amount of $0.6 million. Also, our operating results for 2006
were affected by the adoption of SFAS 123 (R), under which we recorded an expense in the
amount of approximately $1 million.

Financial Income, Net

2007
vs. 2006

Financial
income, net decreased by 6.0% from $1.23 million in 2006 to $1.16 million in 2007. This
decrease was primarily due to the following two factors: (i) decrease in the average cash
available for investment during 2007 compared to 2006, due to shares repurchase plan and
repayment of grant to the OCS; and (ii) appreciation of the NIS compared to the U.S.
dollar.

2006
vs. 2005

Financial
income, net decreased by 17.5% from $1.5 million in 2005 to $1.2 million in 2006. This
decrease was solely due to the decision to repay prior funding to OCS which bore interest
in the amount of $0.6 million.

Impairment of Auction
Rate Securities (ARS)

Other
expenses includes the other than temporary decline in value of certain
securities. As of December 31, 2007, we had $7.4 million of principal invested in ARS. The
Company has a long history of investing excess cash under a conservative corporate policy
that only allows investments in highly rated investment-grade securities, with
preservation of capital and liquidity as primary objectives. The Companys ARS were
ranked as AAA and AA at the time of purchase, and there had been no change in their rating
until the end of the first quarter of 2008 in which they experienced a rating downgrade.
All securities continue to pay interest in accordance with their stated terms. However,
since these ARS have experienced multiple failed auctions due to a lack of liquidity in
the market for these securities, based on initial third-party indications, the Company has
impaired its ARS portfolio. As a result, the Company recorded, an impairment charge of
$1.6 million in the consolidated statement of operations, which is considered other
than temporary, and an unrealized loss of $0.2 million in other comprehensive
income as a reduction of shareholders equity, which is considered as a
temporary impairment. All of these ARS are classified as of December 31,
2007 as long-term investments.

Net Loss

2007
vs. 2006

Net
loss increased from $2.3 million in 2006 to $8.8 million in 2007. The increase in our net
loss in 2007 was mostly due to (i) a reduction in our revenues during 2007 whilst our
level of fixed expenses, such as payrolls, rent of facilities and vehicles expense
remained the same; (ii) payment of extended separation compensation to one of our
executives which has resigned from his position with the Company, (iii) increases in
senior management headcount and compensation levels in transition periods, (iv) the
appreciation of the NIS compared to the U.S. dollar which resulted in an increase of our
U.S. dollar cost of our operations in Israel compared to our cost of operations in 2006,
(v) a decrease in our doubtful debts recovery as compared to 2006, and (vi) an other than
temporary impairment charge related to certain ARS. This increase in the net loss in 2007
was partially offset, compared with 2006 by the following factors: (i) lower expense for
agents commissions resulting both from the decrease in our revenues and from
increased cooperation with distributors and system integrators; and (ii) the following two
non-recurring expenses which were recorded in 2006: (a) repayment of royalties to the OCS,
and (b) expenses for a due-diligence process of a potential acquisition.

27

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2006
vs. 2005

Net
loss was $2.3 million in 2006 compared with net loss of $1.4 million in 2005. This
increase was primarily due to the several non-recurring expense items as mentioned in
Operating Loss above.

# Critical Accounting
Policies

The
preparation of our financial statements in conformity with generally accepted accounting
principles in the United States requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period, which could potentially result in
materially different results under different assumptions and conditions. These are our
managements best estimates based on experience and historical data; however, actual
results could differ materially from these estimates. Our significant accounting
principles are presented within Note 2 to our consolidated financial statements appearing
elsewhere in this Annual Report. While all the accounting policies impact the financial
statements, certain policies may be viewed to be critical. Management believes that the
following policies are those that are most important to the portrayal of our financial
condition and results of operations and are the most critical to aid in fully
understanding and evaluating our reported results:

| |  | revenue
recognition;
| | - | --------------------

| |  | allowance
for doubtful accounts;
| | - | --------------------------------

| |  | goodwill
and other intangible assets;
| | - | -------------------------------------

| |  | deferred
taxes;
| | - | ---------------

| |  | impairment
of long-lived assets;
| | - | --------------------------------

| |  | accounting
for income taxes;
| | - | ----------------------------

| |  | contingencies;
| | - | --------------

| |  | share-based
compensation; and
| | - | -----------------------------

| |  | classification
of investments.
| | - | ------------------------------

Revenue Recognition

Our
revenue recognition policy is significant because our revenue is a key component of our
results of operations. We follow very specific and detailed guidelines in measuring
revenues, as discussed below. However, such guidelines may require the exercise of certain
judgments, estimates and assumptions.

We
have adopted the requirements of American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition. Therefore we recognize revenue from product sales (which include
software) when the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable and (4)
collectibility is probable.

We
include post-contract customer support (PCS), within the price of the product
sale. This PCS is for a one-year period and includes a standard product warranty and
updates and enhancements to correct minor bugs or errors in the software. The cost of
providing the PCS is insignificant, and the warranty and bug fixes have been infrequent.
Therefore, the PCS revenue is recognized upon delivery of the product, in accordance with
SOP 97-2.

We
use the residual method to recognize revenue when an arrangement includes one or more
elements to be delivered at a future date and vendor-specific objective evidence of the
fair value (VSOE) of all undelivered elements exists. Such VSOE is based on
the normal pricing practices for those products and services when sold separately. Under
the residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair
value of one or more undelivered elements does not exist, the revenue is deferred and
recognized when delivery of those elements occurs or when fair value can be established.

When
a software product is sold together with implementation or consulting services, product
fees are recognized upon delivery, provided that the above criteria are met, payment of
the license fees is not dependent upon the performance of the services, and the services
do not provide significant customization or modification of the software products and are
not essential to the functionality of the software that was delivered.

If,
at the outset of an arrangement, the arrangement fee is determined as not fixed or
determinable, revenue is deferred until the arrangement fee becomes due. If, at the outset
of the arrangement, collectibility is determined to be not probable, revenue is deferred
until the earlier of when collecitibility becomes probable or the receipt of payment. If
an arrangement provides for customer acceptance, revenue is not recognized until the
earlier of receipt of customer acceptance or expiration of the acceptance period.

28

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Revenues
from product maintenance and support contracts are recognized on a straight-line basis
over the term of the support period. The majority of our maintenance agreements provide
technical support as well as unspecified software product upgrades and releases when and
if made available by us during the term of the support period.

Revenues
from contracts that require significant design, development, modification and
customization are recognized using the percentage of completion method, which is in
accordance with SOP 81-1, Accounting for performance of construction type and
certain production type contracts. The percentage of completion is determined as a
ratio of the extent of the progress toward completion of the contract, using an input
measure method of labor hours performed. In the event that management anticipates a loss
on a particular contract, such anticipated loss is provided for in full in the period when
the loss is first anticipated. If collectibility is determined as not being probable, we
recognize revenues from contracts with significant design, development, modification and
customization, using the completed-contract method.

Allowance for Doubtful
Accounts

Our
financial statements include an allowance, which we believe reflects adequately the loss
inherent in our accounts receivables portfolio. In establishing the required allowance,
our management bases its determination, among other factors, on information available
about the debtors financial situation, the volume of their operations and evaluation
of the security received from them. We use our best estimate to assess the recoverability
of open accounts. If there is a major deterioration in a major customers credit
worthiness or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due to us could be adversely affected. This would result in
an increase in our general and administrative expenses by increasing the allowance for bad
and doubtful debts and would decrease the amount of our trade receivables.

Business Acquisitions;
Goodwill and Other Intangible Assets

Our
business acquisitions may result in the recognition of goodwill and other intangible
assets, and in certain cases non-recurring charges associated with the write-off of
in-process research and development (IPR&D), which may affect the amount
of current and future period charges and amortization expense. Goodwill represents the
excess of the purchase price over the fair value of net assets acquired, including
identified intangible assets, in connection with our business combinations accounted for
by the purchase method of accounting. We amortize our acquisition-related intangible
assets using the straight-line method and based on forecasted cash flows associated with
the assets over the estimated useful lives. We adopted SFAS 142 requirements regarding
goodwill and other intangible assets with indefinite useful lives. Such goodwill is not
amortized, but rather is periodically assessed for impairment.

The
determination of the value of these components of a business combination, as well as
associated asset useful lives, requires management to make various estimates and
assumptions. Critical estimates in valuing certain of the intangible assets include but
are not limited to: future expected cash flows from product sales, maintenance agreements,
customer contracts, and acquired developed technologies; expected costs to develop the
IPR&D into commercially viable products and estimating cash flows from the projects
when completed; assumptions about the period of time the acquired products and will
continue to be used in our product portfolio; and discount rates. Managements
estimates of fair value and useful lives are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and
circumstances may occur and assumptions may change. Estimates using different assumptions
could also produce significantly different results.

We
continually review the events and circumstances related to our financial performance and
economic environment for factors that would provide evidence of the impairment of our
intangible assets. When impairment indicators are identified with respect to our
previously recorded intangible assets, then we test for impairment using undiscounted cash
flows. If such tests indicate impairment, then we measure the impairment as the difference
between the carrying value of the asset and the fair value of the asset, which is measured
using discounted cash flows. Significant management judgment is required in forecasting of
future operating results, which are used in the preparation of the projected discounted
cash flows and should different conditions prevail, material write downs of net intangible
assets and other long-lived assets could occur. We periodically review the estimated
remaining useful lives of our acquired intangible assets. A reduction in our estimate of
remaining useful lives, if any, could result in increased amortization expense in future
periods.

In
June 2003 and 2004, due to significant reduction in our revenues, we determined that
goodwill had been impaired. We obtained an independent appraisal to assess whether
goodwill carried on our books needed to be written down. The independent appraisal was
conducted in accordance with paragraphs 19-22 of SFAS 142, which requires a two-step
analysis. The first step used the discounted cash flow approach to measure the fair value
of our reporting unit, the result of which indicated that the carrying amount of such
reporting unit, including goodwill, exceeded its fair value. The second step was then
conducted in order to measure the amount of impairment loss, by means of a comparison
between the implied fair value of the goodwill and the carrying amount of the goodwill. In
the second step, the appraisal assigned the fair value of our reporting unit, as
determined in the first step, to the reporting units individual assets and
liabilities. The excess of the fair value of the reporting unit over the amounts assigned
to its assets and liabilities represented the implied fair value of the goodwill.

We
conduct our annual goodwill impairment test as of June 30 every year. We performed annual
impairment tests during 2007, 2006 and 2005 and did not identify any impairment.

We
will continue to perform an impairment test at least annually and on an interim basis
should circumstances indicate that an impairment loss may exist. The outcome of such
testing may lead to the recognition of an impairment loss.

The
estimated useful life of other purchased technology was changed as of April 2004 from 5
years to 2.5 years. The change was based on our managements estimation with regard
to the useful life of this technology and the development of a replacement solution for
the year 2006 and beyond. Therefore, the amortization period has been adjusted for this
change.

29

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Deferred Taxes

We
account for income taxes under SFAS 109, Accounting for Income Taxes. Under
SFAS 109, deferred tax assets or liabilities are recognized in respect of temporary
differences between the tax bases of assets and liabilities and their financial reporting
amounts as well as in respect of tax losses and other deductions which may be deductible
for tax purposes in future years, based on tax rates applicable to the periods in which
such deferred taxes will be realized. Deferred tax assets for future tax benefits from
realization, are included in the balance sheets, when, in our estimation, their
realization is more likely than not.

Valuation
allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. A valuation allowance has been made for almost all of our
deferred tax assets and those of our subsidiary companies, since we believe that it is
more likely than not that the deferred tax assets will not be realized, as we are
uncertain as to whether loss carry forwards will be utilizable in the foreseeable future.

Impairment of Long-Lived
Assets

We
have investments in tangible and intangible long-lived assets. Changes in technology or
changes in our intended useof these assets may cause the value of these assets to
change.

We
account for long-lived assets under the provisions of SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS 144 requires that
long-lived assets 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 future net cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future 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.
SFAS 144 requires companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.

Accounting for Income
Taxes

In
June 2006, the Financial Accounting Standards Board (the FASB) issued FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (the
Interpretation). The Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprises financial statements in accordance with
SFAS 109. The Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Interpretation is effective for fiscal years beginning
after December 15, 2006. The Company applied the provisions of the Interpretation
effective January 1, 2007; however, the adoption of the Interpretation did not have
an effect on the Companys financial condition, results of operations or cash flows.

Contingencies

From time to time, we are defendant
or plaintiff in various legal actions, which arise in the normal course of business. We
are required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. When we believe that it is
probable that we will not prevail in a particular matter, we then estimate the amount of
the liability based in part on advice of legal counsel. See Note 10I to our consolidated
financial statements appearing elsewhere in this Annual Report and Item
8AConsolidated Financial Statements and Other Financial
InformationLegal Proceedings in relation to the class action filed
against us in October 2004.

Share-Based Compensation

Prior
to January 1, 2006, we applied the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for our fixed
plan stock options. As such, compensation expense was determined on the date of grant only
if the current market price of the underlying stock exceeded the exercise price and was
amortized over the vesting period.

We
also adopted the disclosure provisions of SFAS 123 Accounting for Stock-Based
Compensation that were in force until December 31, 2005, but opted to remain under
the expense recognition provisions of APB 25.

In
December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which requires entities to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value
of the award and recognize the cost over the period during which an employee is required
to provide service in exchange for the award. SFAS 123R does not change the accounting
guidance for share-based payment transactions with parties other than employees provided
in SFAS 123 as originally issued. In March 2005, the SEC issued Staff Accounting Bulletin
(SAB) No. 107, which expressed views of the SEC staff regarding the
application of SFAS 123R. Among other things, SAB 107 provides interpretive guidance
related to the interaction between SFAS 123R and certain SEC rules and regulations, as
well as providing the SEC staffs views regarding the valuation of share-based
payment arrangements for public companies.

30

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We
implemented SFAS 123R using the modified prospective method starting January 1, 2006. We
have selected the Black-Scholes option-pricing model to determine the fair value of our
awards on the date of grant and recognizing compensation cost on a straight-line basis
over our awards vesting period for all unvested and new granted awards as of January
1, 2006, based on the grant date fair value of these awards.

The
implementation of SFAS 123R resulted in an increase in our operating expenses during 2007
and 2006 in the amount of approximately $1.1 million and $1 million, respectively. We
expect to grant additional stock-based awards in future years which will result in
additional share-based compensation expense.

Classification of
Investments

Long-term
marketable securities consist of corporate bonds, ARS and U.S. government agencies
debt securities. We classify our corporate bonds and U.S. government agencies debt
securities as held-to-maturity. Held-to-maturity securities are those securities in which
the we have the ability, and intent, to hold the security until maturity. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts. We classify our ARS as available-for-sale. Marketable securities
available-for-sale are carried at fair value, held for an indefinite period of time and
intended for use in meeting the ours ongoing liquidity needs. Unrealized gains and losses
on available-for-sale securities, which are deemed to be temporary, are reported as a
separate component of shareholders equity, net of tax.

Any
decline in the market value of any held-to-maturity or available-for-sale security below
cost, that is deemed to be other than temporary, results in a reduction in the carrying
amount to fair value. The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or accreted over the life of
the related held-to-maturity security as an adjustment to yield using the straight-line
method. Interest income is recognized when earned.

Short-term
deposits and marketable securities with maturity dates between 91 to 365 days are
considered to be short-term investments.

| | B. | Liquidity
and Capital Resources
| | -- | -------------------------------

As
of December 31, 2007, we had $5.7 million in cash and cash equivalents, compared to $6.1
million in cash and cash equivalents as of December 31, 2006. As of December 31, 2007, we
had $5.7 million in short-term investments and $17.8 million in long-term marketable
securities, compared to $19.8 million in short-term investments and $11.3 million in
long-term marketable securities, as of December 31, 2006.

Generally,
we invest our excess cash in instruments that are liquid and generate yields, with
conservative and low risk. As of December 31, 2007, the Company had $7.4 million of
principal invested in ARS. The Company has a long history of investing excess cash under a
conservative corporate policy that only allows investments in highly rated
investment-grade securities, with preservation of capital and liquidity as primary
objectives. The Companys were ranked as AAA and AA at the time of purchase, and
there has been no change in their rating since that time, until the end of the first
quarter of 2008 in which they experienced a rating downgrade. All securities continue to
pay interest in accordance with their stated terms. However, since these ARS have
experienced multiple failed auctions due to a lack of liquidity in the market for these
securities, based on third-party indications, the Company has impaired its ARS portfolio.
As a result, we have recorded, on a GAAP basis, an impairment charge of $1.6 million in
the consolidated statement of operations, which is considered other than
temporary, and an unrealized loss of $0.2 million in other comprehensive income
as a reduction of shareholders equity, which is considered as a
temporary impairment. All of these ARS are classified as at December 31,
2007 as long-term investments.

We
believe that our current cash and cash equivalents, together with our short-term
investments and long-term marketable securities, including interest to be earned thereon,
will be sufficient to fund our working and other capital requirements over the course of
the next twelve months. In the normal course of business, we evaluate the merits of
acquiring technology or businesses. We may elect to use available cash and cash
equivalents and marketable security investments to fund such activities in the future. In
the event additional needs for cash arise, we may raise additional funds from a
combination of sources, including the potential issuance of debt or equity securities.
Additional financing might not be available on terms favorable to us, or at all. If
adequate funds were not available or were not available on acceptable terms, our ability
to take advantage of unanticipated opportunities or respond to competitive pressures could
be limited.

Net Cash Provided by/Used in
Operating Activities. Net cash used in our operating activities was approximately $6.7
million in 2007. Cash used in operations for 2007 was primarily due to (a) the repayments
made during 2007 in respect to the OCS prior years funding in the amount of approximately
$3 million; and (b) an increase in our net loss as described above under  Item
5AOperating ResultsComparison of 2007, 2006 and 2005Net loss. Net
cash used in our operating activities was approximately $2.1 million in 2006. Cash used in
operations for 2006 was primarily due to a longer collection cycle in the fourth quarter
of 2006 which was reflected by a decrease in operating cash flow during fourth quarter and
which resulted in cash flow used in operating activities for 2006. Net cash provided by
operating activities of $4.4 million in 2005 was primarily attributable to higher revenues
and cost-cutting measures we adopted as part of our restructuring plan

From
time to time, we enter into accounts receivables factoring agreements with unaffiliated
financial institutions. During 2007 and 2006, we sold no trade account receivables,
compared to 2005, in which we had $0.4 million in trade account receivables. Our ability
to sell such receivables, if any, to these financial institutions on current terms and
conditions is uncertain and is dependent on the creditworthiness of the customers
involved, the credit risks in the specific countries concerned and the applicable
institutions policies from time to time.

Capital
Expenditures. Our capital expenditures were $0.4 million in 2007, $0.6 million in 2006
and $0.4 million in 2005. Our capital expenditures in each of these periods related
primarily to the purchase of testing and computer equipment, and investment in back-office
equipment. In addition, in 2005 we invested $1.8 million in the acquisition of newly
consolidated subsidiaries (net of cash acquired), as a result of the Telesoft transaction.
Following the acquisition, we had additional expenses in amount of $1.2 million, which
were incurred mostly in connection with termination plan of the employees of the acquired
company and repayment of certain liabilities. We expect our capital expenditures to
increase in 2008 due to our anticipated implementation of new enterprise resource software
platform.

31

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In
addition, we invest in capital expenditures pursuant to the requirements applicable to us
under our approved enterprise programs. As of December 31, 2007, no amounts remain to be
invested in order to comply with our current approved program. This program was concluded
and filed with the Investment Center during 2007. This program will provide us with tax
benefits in the future; however, if we do not comply with applicable requirements of our
approved programs, all current and future benefits from this program may be cancelled.

Net
Cash Used in/Provided by Financing Activities. Net cash provided by our financing
activities in 2007 was approximately $1 million. This was due to the issuance of our
ordinary shares to employees upon the exercise of share options. Net cash used in our
financing activities in 2006 was approximately $10.1 mostly due to the repurchase of our
shares during the second half of 2006 in an amount of $11.5 million. Net cash provided by
our financing activities in 2005 was approximately $0.05 million. This was due to the
issuance of our ordinary shares to employees upon the exercise of share options.

Bank
Credit. In September 2002, we entered into an arrangement with an Israeli bank which
supplies us with various credit facilities and/or banking services, such as bank
guarantees to our customers to guarantee our contractual obligations to such customers. As
of December 31, 2007, outstanding bank guarantees totaled approximately $1.4 million. In
connection with this arrangement, we executed a negative pledge in favor of the bank, in
which we undertook not to perform the following without the banks prior written
consent:

| |  | mortgage,
or undertake to mortgage, in any manner or form, any of our assets; or
| | - | --------------------------------------------------------------------------------

| |  | sell
assets (other than in the ordinary course of business) the value of which exceed $1
million in the aggregate.
| | - | ------------------------------------------------------------------------------------------------------------------

In
addition, from time to time other banks make credit available to us in the form of bonds
to secure our obligations to our customers or in connection with hedging transactions.

# Impact of Related Party
Transactions

Prior
to June 28, 2006, we accounted for transactions with ECI as related party
transactions based on ECIs holdings in our shares. On June 28, 2006, ECI
distributed its remaining shares of ECtel as dividend to its shareholders. As a result,
ECI is no longer a shareholder of ECtel; however, ECI and ECtel may have been deemed
related parties between December 31, 2006 and September 30, 2007, during which period IDB
beneficially held between 31% and 38% of our outstanding shares, as well as approximately
40% of ECIs outstanding shares. On September 30, 2007 all the shares of ECI were
acquired by a group of investors and ECI became a private company. Therefore ECI and ECtel
may no longer be deemed related parties. In our ordinary course of business, we have
entered into a few agreements with ECI which are material to our operations:

Supply
Agreement. In February 2004, we executed a supply agreement with ECI, which replaced
an earlier supply agreement entered into in October 1999. Under the terms of the supply
agreement, ECI supplies us with the components (so-called modules) for use in
our products. We agreed on the prices for these modules after negotiations with ECI. In
accordance with its right under the Supply Agreement, ECI stopped manufacturing some of
these components as of August 2006. Accordingly, we contracted with an alternate supplier
for the manufacture of these components.

Distribution
Agreement. In June 2005, we entered into a distribution agreement with ECI under which
we appointed ECI as our exclusive distributor in the Russian Federation, Ukraine and
Kazakhstan, territories. Under this agreement, ECI, among other things, maintains a
business and sales organization in these territories to promote and/or affect the sale of
those of our products and services covered by the agreement. The agreement is subject to
termination by either party upon three months notice. In addition, either party may
terminate the agreement at any time upon a material breach by the other party or in the
event of liquidation or similar consequences of the other party.

# Corporate Tax Rate

Generally,
Israeli companies are subject to corporate tax on taxable income. The corporate tax rate
was reduced in July 2005, from 34% to 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. However, the effective tax rate payable by a company that derives income
from an approved enterprise (as defined and discussed below) may be considerably less.
Israeli companies are also subject to capital gains tax at a rate of 25% on capital gains
(other than gains derived from the sale of listed securities that are taxed at the
prevailing corporate tax rates) derived after January 1, 2003. Also, regarding assets
acquired prior to January 1, 2003, the reduced tax rate will apply to a proportionate part
of the gain, in accordance with the holding periods of the asset, before or after January
1, 2003, on a linear basis.

Our
manufacturing facilities in Rosh Haayin have been granted approved enterprise status
under the Law for the Encouragement of Capital Investments, 1959. Consequently, these
facilities are eligible for tax benefits. We have derived, and expect to continue to
derive, a substantial portion of our income from our approved enterprise facilities.
Subject to compliance with applicable requirements, the income derived from our approved
enterprise facilities will be subject through 2018 to a reduced tax rate of a maximum of
25%. The actual tax rate will depend upon the percentage of non-Israeli holders of our
share capital. Based on our information as to share ownership as at December 31, 2007, our
effective tax rate for 2007 applicable to our taxable income derived from approved
enterprises would be between 0% to 25%. In light of our carry forward losses, we are
currently not in a taxable position. However, according to the Law for the Encouragement
of Capital Investments, prior to its amendment in 2005 (see Item
10ETaxationIsraeli TaxationTax Benefits Under the Law for the
Encouragement of Capital Investments, 1959), the tax benefits of the law require us
to invest in qualifying assets. To the extent that we invest in non-qualifying assets, we
would not be entitled to the tax benefits under the law for a portion of our taxable
income reflecting the ratio of our qualifying to non-qualifying assets, for those programs
which are subject to the old provisions of the law.

32

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The
above benefits are conditioned upon our fulfillment of conditions stipulated by the Law
for the Encouragement of Capital Investments, the regulations promulgated thereunder and
the instruments of approval for the specific investments in approved enterprises. If we
fail to comply with these conditions, our benefits may be canceled and we may be subject
to higher corporate tax rate.

# Impact of Inflation,
Devaluation, Appreciation and Fluctuation of Currencies on Results of Operations, Liabilities
and Assets

The
dollar cost of our operations is influenced by the extent to which any increase in the
rate of inflation in Israel is offset by the devaluation of the NIS in relation to the
U.S. dollar. Inflation in Israel will cause contracts under which we are to receive
payment in dollars or dollar-linked NIS, while incurring expenses in NIS linked to the
Israeli consumer price index, to be less profitable, unless such inflation is offset by a
devaluation of the NIS.

Most
of our sales are denominated in dollars or are dollar linked. However, a significant
portion of our expenses, primarily expenses associated with employee compensation, is
denominated in NIS unlinked to the dollar. A devaluation of the NIS in relation to the
dollar has the effect of decreasing the dollar value of any asset of ours which consists
of NIS or receivables payable in NIS, unless such receivables are linked to the dollar.
Such devaluation also has the effect of reducing the dollar amount of any of our expenses
or liabilities which are payable in NIS, unless such expenses or payables are linked to
the dollar. Conversely, any increase in the value of the NIS in relation to the dollar has
the effect of increasing the dollar value of any of our unlinked NIS assets and the dollar
amounts of any of our unlinked NIS liabilities and expenses. For example, during 2007, the
NIS appreciated against the U.S. dollar, which resulted in a significant increase in the
U.S. dollar cost of our operations in Israel, and this trend has continued in 2008. As a
result of this differential, we have experienced increases in the costs of our operations.

The
following table presents information about the rate of inflation in Israel, the rate of
devaluation of the NIS against the U.S. dollar, and the rate of inflation of Israel
adjusted for the devaluation:

|Year Ended December 31, | Israeli
Inflation
Rate | Israeli
Devaluation
Rate | Israel Inflation
Adjusted for
Devaluation
|----------------------- | ---------------------- | ------------------------ | -----------------------------------------
|
|
|
|
|1998                    |                        |                          |                                          
|1999                    |                        |                          |                                          
|2000                    |                        |                          |                                          
|2001                    |                        |                          |                                          
|2002                    |                        |                          |                                          
|2003                    |                        |                          |                                          
|2004                    |                        |                          |                                          
|2005                    |                        |                          |                                          
|2006                    |                        |                          |                                          
|2007                    |                        |                          |                                          

Because
exchange rates between NIS and the U.S. dollar fluctuate continuously, exchange rate
fluctuations will have an impact on our profitability and period-to-period comparisons of
our results. The effects of foreign currency re-measurements are reported in our
consolidated financial statements. Due to the fact that most of our revenues are in
dollars while approximately 50% of our expenses are linked to NIS, inflation in Israel has
not had a material effect on our results of operations, however, exchange rate
fluctuations between NIS and the U.S. dollar had a material effect on our results of
operation.

# Market Risk

For
information on our market risk, see Item 11Quantitative and Qualitative
Disclosures About Market Risk.

| | C. | Research
and Development, Patents and Licenses
| | -- | ----------------------------------------------

In
order to accommodate the rapidly changing needs of our markets, we place considerable
emphasis on research and development projects designed to improve our existing product
lines and to develop new product lines to meet the changing needs of our market. Our
research and development expenses, net were $4.8 million in 2007, $4.3 million in 2006 and
$3.6 million in 2005. As of March 31, 2008, 33 of our employees were engaged primarily in
research and development activities. We expect that we will continue to commit substantial
resources to research and development in the future.

# Grants from the Office
of the Chief Scientist

We
received grants under several programs from the OCS, until the end of 2006. From time to
time we may decide to apply for new programs.

33

---

---

We
recorded grant participations from the OCS totaling $0.2 million in 2006 and $0.5 million
in 2005. Pursuant to the terms of these grants we are obligated to pay royalties of
3%-3.5% of revenues derived from sales of products funded with these grants. As of
December 31, 2007, our contingent liability to the OCS for remaining programs, after
repayment of some of the programs as mentioned above, in respect of grants received was
approximately $0.4 million.

In
April 2006, we repaid to the OCS an amount of $0.4 million, which represents the entire
obligation of Telesoft, in connection with grants received by Telesoft in prior years.

During
the fourth quarter of 2006, we committed to repay in full all the grants related to
programs connected to our FraudView® solution. Pursuant to an agreement entered into
with the OCS, the OCS agreed to conclude its participation in the OCS sponsored research
and development programs relating to FraudView. As part of this agreement, we paid during
2007 to the OCS approximately $3 million, which includes interest accrued on the
outstanding balance of the royalties. Such royalties are presented in our cost of
revenues, see also Note 14D of our consolidated financial statements.

Support
received from the OCS is conditioned upon our ability to comply with certain applicable
requirements and conditions specified in the Chief Scientists program and with the
provisions of the Law for the Encouragement of Research and Development in the Industry,
1984, and the regulations promulgated thereunder, or the Research and Development Law.

Under
the Research and Development Law, research and development programs that meet specified
criteria and are approved by the research committee of the OCS are eligible for grants of
up to 50% of certain approved expenditures of such programs, as determined by said
committee.

In
exchange, the recipient of such grants is required to pay the OCS royalties from the
revenues derived from products incorporating know-how developed within the framework of
each such program or derived therefrom (including ancillary services in connection
therewith), up to an aggregate of 100% of the dollar-linked value of the total grants
received in respect of such program, plus interest, or up to 150% thereof in the case of
some of our earliest programs.

The
State of Israel does not own proprietary rights in technology developed with OCS funding
and there is no restriction on the export of products manufactured using technology
developed with OCS funding. The technology is, however, subject to transfer restrictions,
as described below. These restrictions may impair our ability to sell our technology
assets or to outsource manufacturing and the restrictions continue to apply even after we
have paid the full amount of royalties payable for the grants. In addition, the
restrictions may impair our ability to consummate a merger or similar transaction in which
the surviving entity is not an Israeli company.

The
transfer to a non-Israeli entity of technology developed with OCS funding, including
pursuant to a merger or similar transaction, and the transfer of rights related to the
manufacture of more than ten percent of a product developed with OCS funding are subject
to approval by an OCS committee and to the following conditions:

| |  | Transfer
of Technology. If the committee approves the transfer of OCS-backed technology, such
a transfer would be subject to the payment to the OCS of a portion of the consideration
we receive for such technology. The amount payable would be a fraction of the
consideration equal to the relative amount invested by the OCS in the development of such
technology compared to our total investment in the technology, but in no event less than
the amount of the grant. However, in the event that in consideration for our transfer of
technology out of Israel we receive technology from a non-Israeli entity for use in
Israel, we would not be required to make payments to the OCS if the approval committee
finds that such transfer of non-Israeli technology would significantly increase the
future return to the OCS.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transfer
of Manufacturing Rights. The committee is authorized to approve transfers of
manufacturing rights only if the transfer is conditioned upon either (1) payment of
increased aggregate royalties, ranging from 120% to 300% of the amount of the grant plus
interest, depending on the percentage of foreign manufacture or (2) a transfer of
manufacturing rights into Israel of another product of similar or more advanced
technology.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Merger
or Acquisition. If the committee approves a merger or similar transaction in which
the surviving entity is not an Israeli company, such a transaction would be subject to
the payment to the OCS of a portion of the consideration paid. The amount payable would
be a fraction of the consideration equal to the relative amount invested by the OCS in
the development of such technology compared to the total investment in the company, net
of financial assets that the company has at the time of the transaction, but in no event
less than the amount of the grant.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the event that the committee
believes that the consideration to be paid in a transaction requiring payment to the OCS
pursuant to the provisions of the law described above does not reflect the true value of
the technology or the company being acquired, it may determine an alternate value to be
used as the basis for calculating the requisite payments.

The
Research and Development Law imposes reporting requirements with respect to certain
changes in the ownership of a grant recipient. The law requires the grant recipient and
its controlling shareholders and interested parties to notify the OCS of any change in
control of the recipient or a change in the holdings of the means of control of the
recipient that results in a non-Israeli becoming an interested party directly in the
recipient and requires the new interested party to undertake to OCS to comply with the
Research and Development Law. In addition, the rules of OCS may require prior approval of
the OCS or additional information or representations in respect of certain of such events.
For this purpose, control is defined as the ability to direct the activities
of a company other than any ability arising solely from serving as an officer or director
of the company. A person is presumed to have control if such person holds 50% or more of
the means of control of a company. Means of control refers to voting rights or
the right to appoint directors or the chief executive officer. An interested
party of a company includes a holder of 5% or more of its outstanding share capital
or voting rights, its chief executive officer and directors, someone who has the right to
appoint its chief executive officer or at least one director, and a company with respect
to which any of the foregoing interested parties owns 25% or more of the outstanding share
capital or voting rights or has the right to appoint 25% or more of the directors.
Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be
required to notify the OCS that it has become an interested party and to sign an
undertaking to comply with the Research and Development Law.

34

---

---

The
funds available for OCS grants out of the annual budget of the State of Israel were
reduced in the past, and the Israeli authorities have indicated that the government may
further reduce or abolish OCS grants in the future. Even if these grants are maintained,
we cannot predict what would be the amounts of future grants, if any, which we might
receive if we decide to apply for new grants participation programs.

| | D. | Trend
Information
| | -- | -----------------

Beginning
in late 2000 and continuing into 2003, the deterioration of the global economy in general
and economic uncertainty in the telecommunications market in particular, resulted in a
decline of capital investment by telecommunications service providers. This decline in
capital expenditures had a negative impact on our sales and adversely affected the pricing
of our products. Recovery of the telecommunication market was evident in 2004 and 2005.

The
recent recession in the U.S. and global markets is affecting the global economy, causing
uncertainty in the telecommunication market, and may result in a decline of capital
investment by telecommunications service providers. This possible decline in capital
expenditures may have a negative impact on our sales and may adversely affect the pricing
of our products.

New
technologies, such as VoIP, are facilitating the use of cheaper communication media by
some telecom service providers. Such service providers may be less inclined to invest in
high-end solutions such as those offered by the Company. Moreover, since these
technologies enable service providers to offer relatively low calling rates to
subscribers, this may reduce the incentive to commit telecom fraud and thereby reduce the
demand for anti-fraud solutions. This trend may negatively impact our revenues and results
of operations.

Our
business depends on the purchases by large telecom companies. Since some of these telecom
providers operate according to annual budgets, their tendency is to approve budgets toward
the beginning of the fiscal year and utilize the budgets toward the end of the fiscal
year. This mode of operation may affect our results of operations throughout the year and
may cause certain seasonality in our financial results.

Currently,
the demand for revenue assurance and fraud prevention technologies is solid, especially in
large telecom providers. We expect the demand for revenue assurance and fraud prevention
technologies to remain solid in the near future. However, internal processes at our
prospective customers and resellers as well as competition, may affect our ability to
close deals and maintain profitability at current levels. In addition, the above factors
may cause fluctuations in our quarterly and annual results of operations. For example, in
April 2007, we announced that our first quarter revenues were lower than our internal work
plan following both a delay in the receipt of previously anticipated orders and a delay in
receiving acceptance for certain customer projects that were part of our backlog.

During
2007, the NIS appreciated by nine percent against the U.S. dollar, which resulted in a
significant increase in the U.S. dollar cost of our operations in Israel, and this trend
has continued in 2008. Although we have operations throughout the world, the majority of
our revenue and operating are denominated in, or linked to, the U.S. dollar. Accordingly,
we consider the U.S. dollar to be our functional currency. However, a significant portion
of our expenses is in NIS. Therefore, fluctuations in exchange rates between the NIS and
the U.S. dollar may have a negative effect on our results of operations and financial
condition. For further information regarding the effect of fluctuations in exchange rates
between NIS and the U.S. dollar on our results of operations and financial condition, see
Item 5Operating and Financial Review and Prospects.

| | E. | Off-Balance
Sheet Arrangements
| | -- | ------------------------------

In
the ordinary course of business, we have various commercial commitments that amounted, at
December 31, 2007, in the aggregate to approximately $1.4 million. These consist of
primarily performance bonds and other bonds and guarantees, such as tender guarantees.

We
do not believe that these commitments have or are reasonably likely to have a current or
future effect on our financial condition.

| | F. | Tabular
Disclosure of Contractual Obligations
| | -- | ---------------------------------------------

The
following table sets forth, as of December 31, 2007, our known contractual obligations by
type of obligation and for the periods indicated:

|                                 | Payments due by period (in thousands of U.S. dollars)
|-------------------------------- | -----------------------------------------------------
|
|
|
|
|Operating lease obligations      |                                                      
|(vehicles and facilities)        |                                                      
|Liability for employee severance |                                                      
|benefits                         |                                                      
|                                 |                                                      
|Total                            |                                                      

35

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# Item 6. Directors,
Senior Management and Employees

| | A. | Directors
and Senior Management
| | -- | -------------------------------

The
following table sets forth information with respect to our directors and senior managers

|Name                   | Age | Position                                               
|---------------------- | --- | -------------------------------------------------------
|                      
|Itzik Weinstein        | 49  | President and Chief Executive Officer                  
|Michael Neumann        | 44  | Senior Vice President and Chief Financial Officer      
|Benny Yehezkel         | 41  | Executive Vice President, Worldwide Marketing and Sales
|Yoav Geva              | 43  | Vice President, Professional Services and Operations   
|Michael Bar Joseph     | 50  | Vice President, Research and Development               
|Liat Inbar-Arad        | 42  | Vice President, Human Resources                        
|Hadar Solomon          | 51  | Vice President, General Counsel and Corporate Secretary
|                      
|Yair Cohen (1) (3)     | 53  | Chairman of the Board                                  
|Ra'anan Cohen          | 40  | Director                                               
|Sami Totah (1) (2) (3) | 50  | Director                                               
|Rami Entin (1) (2) (3) | 56  | Director                                               
|Mali Baron (1) (2)     | 60  | Director                                               

(1)
          Member of the compensation committee

(2)
          Member of the audit committee

(3)
          Member of the investment committee

Itzik Weinstein has served as
our President and Chief Executive Officer since May 1, 2007. Previously, he served as our
Executive Vice President for Professional Services and Operations since July 2004. Prior
to this position, he was Vice President Customer Services and Product Management at VocalTec since the year 2000. Prior to
that, Mr. Weinstein served as Engineering Site Manager at NetManage since the year 1999,
and Software Engineering Manager of KLA-Tencor Corporations optical metrology
division since the year 1995. Mr. Weinstein holds an MBA from the Kellogg-Recanati
Executive MBA Program of Tel Aviv University and a B.Sc. in Computer Engineering from the
Technion  Israeli Institute of Technology.

Michael
Neumannhas served as our Senior Vice President and Chief Financial Officer since July
2007. Previously, Mr. Neumann worked for 12 years at Cellcom Israel Ltd. (Nasdaq: CEL),
where he served as Vice President Economics and Control and interim Chief Financial
Officer, among other managerial positions. Prior to that, Mr. Neumann was Finance Manager
at Fibronics Ltd. (of the Elron Group), where he was responsible for the companys
worldwide financial activities. Mr. Neumann holds a B.Sc. in Economics and Management from
the Technion  Israeli Institute of Technology.

Benny
Yehezkel has served as our Executive Vice President of Worldwide Sales
since September 2006. In late 2007 he also assumed the role of Executive Vice President of
Worldwide Marketing. He joined us as the Senior Vice President of Telesoft following our
December 2005 acquisition of Telesoft, where he had served as CEO since November 2002.
Prior to Telesoft, Mr. Yehezkel served in various executive positions in the Elron
Electronic Industries Group, including Vice President of Business Development of Elbit
Ltd., Chief Executive Officer of Dealigence Inc. Previously, Mr. Yehezkel was the Chief
Executive Officer of Sintec Call Centers (SCC). Mr. Yehezkel holds an MBA from Tel Aviv
University and a B.Sc. in Computer Science from the Technion  Israeli Institute of
Technology.

Yoav
Geva has served as our Vice President of Professional Services and Operations since
January 2008. Mr. Geva has been with the Company since 2001, and served as Vice President
Corporate Development, Commercial Director, and Financial Sales Support Manager.
Previously, he served as a Sales Manager in the International Marketing Division at Rotem
Amfert Negev of the ICL Group since 1999. Prior to that, he served as the Manager of the
Guarantees Division at the Israel Foreign Trade Risks Insurance Corporation and as the
Manager of the Short Term Credit Insurance Division at the Israel Foreign Trade Risks
Insurance Corporation. Mr. Geva holds an MBA from the Executive MBA program of Bar Ilan
University and a B.A. in Economics from Tel Aviv University.

Michael
Bar Josephjoined us in January 2008 as Vice President of Research and Development.
Prior to that, Mr. Bar-Joseph served as General Manager of Skyriders center in
Israel, where he led and managed many innovative developments in the P2P arena. Prior to
Skyrider, he was Executive Vice President of Research and Development at Red Bend
Software, the worlds leading provider of over-the-air software updates for mobile
devices, successfully installed in Nokia, Sony Ericsson and other major enterprises.
Previously, Mr. Bar-Joseph was the General Manager of Tundo Communication and Telephony
Ltd., where he managed the R&D and engineering efforts for the companys
industry-leading IP telephony system. Prior to that, Mr. Bar-Joseph led an
engineering team at RAD Data Communications, where he was responsible for designing and
delivering the companys key products. He also was senior software engineer at
Advanced Technology Ltd., and software engineer at Israel Aircraft Industries. Mr.
Bar-Joseph received his B.Sc. in Aeronautical Engineering from the Technion Israeli
Institute of Technology, with honors.

36

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Liat
Inbar-Arad has served as our Vice President of Human Resources and a member of our
executive management team since October 2007. Previously, Ms. Inbar-Arad served
as Vice President Human Resources in Finjan Software. Prior to that, Ms. Inbar-Arad was
the organizational development and training manager of Orbotech (Nasdaq: ORBK). She also
served as training development manager at ECI Telecom. Prior to that, Ms. Inbar-Arad held
various lecture and research positions at the Open University and Tel Aviv University. Ms.
Inbar-Arad holds an M.A. in Labor Studies and a B.A. in Humanities from Tel Aviv
University, with honors.

Hadar
Solomon joined us in March 2003 and has served as Vice President, General Counsel and
Corporate Secretary since May 2003. From February 2002 until March 2003, he was Managing
Director of Lumenis Luxembourg Sarl, Schaffhausen Branch. Prior to that, Mr. Solomon
served as Executive Vice President, General Counsel and Corporate Secretary of Lumenis
Ltd. and as Vice President, Corporate Affairs, General Counsel and Secretary of Laser
Industries Ltd. since May 1988. Mr. Solomon is a Graduate of the Faculty of Law of the
Hebrew University of Jerusalem and is a member of the Israeli Bar.

Yair
Cohen has served as the Chairman of our Board since August 2006. Mr. Cohen has served
as a Vice President of Elron Electronic Industries Ltd. (Elron) since July
2005. From 2000 until joining Elron, Mr. Cohen served as a Brigadier General in Unit 8200,
the central military intelligence unit of the Israeli Defense Force, engaged in the
development of advanced technology. Mr. Cohen serves on the boards of several Elron group
companies. Mr. Cohen holds a B.A. degree in History and Arabic (summa cum laude)
from Bar-Ilan University, Israel, and an M.A. degree in Management of National Resources
(summa cum laude) from Industrial College (NDU), United States.

Raanan
Cohen has served as one of our directors since July 2007. Mr. Cohen was appointed
Chief Executive Officer of Koor in July 2006. Mr. Cohen served as President and Chief
Executive Officer of Scailex Corporation Ltd. (formerly Scitex) from 2004 to July 2006. He
also serves as Vice President of Discount Investments Corporation Ltd. (DIC),
Koors controlling shareholder, since August 2001 and previously served as
Executive Assistant to the Chief Executive Officer of DIC from 1999. Prior to joining DIC,
Mr. Cohen was an associate with McKinsey & Company, Inc. in London, beginning in 1997.
Mr. Cohen is a lawyer, admitted to the Israel Bar. Mr. Cohen is a member of the board of
directors of a number of companies in the IDB group, including Makhteshim Agan Industries
Ltd. and Cellcom Israel Ltd. Mr. Cohen holds a B.A. degrees in Law and in Economics from
Tel Aviv University and an M.A. in management from J.L. Kellogg Graduate School of
Management at Northwestern University, United States.

Sami
Totah has served as one of our directors since September 2006. Mr. Totah has served as
chairman of the board of directors of several Israeli start-up companies since 2003,
including Pilat Media, Sheer Networks, Red Bend, and Flash Networks. From 1984 until 2002,
Mr. Totah served in various positions at Amdocs, including the position of Chief
Operations Officer. Mr. Totah is a practical software engineer and participated in
professional courses over the years, including courses of the Executive MBA program of the
Hebrew University Business School.

Rami
Entin has served as one of our directors since June 2004. From 2001 until 2003, Mr.
Entin was the chairman of the Hashavim Group, a data center for direct taxation and
employment laws and a processor of wages and personnel data. From 1999 until 2001, Mr.
Entin was Co-Chief Executive Officer and a director of Hilan-Tech Ltd., where he was in
charge of financial, personnel, sales and marketing and Lotus Notes operations. From 1985
until 1999, he was financial manager and a director of Hilan Ltd., where he was in charge
of financial and personnel operations. From 1981 until 1985, Mr. Entin worked for
Kesselman & Kesselman, an accounting firm, where he served various publicly traded
companies engaged in the services and industry fields. Mr. Entin is an external director
of Solomon Holdings Ltd., Cimatron Ltd and of BSP Ltd., and is director of Hilan Tech Ltd.
and of Gilon BI Limited. Mr. Entin holds a B.A. degree in Accounting and Economics and an
MBA degree from the Tel Aviv University, and he is a certified accountant in Israel. He is
also a graduate of the Advanced Management Program at Harvard University, United States.

Mali
Baronhas served as our external director since July 2007. From 1997 until 2006, Ms.
Baron served as Senior Assistant General Manager, Head of Branches and Mortgages Division
of Mercantile Discount Bank. From 1990 until 1996, she held various positions with United
Mizrahi Bank, including the Director of the Business Credit Division, General Manager of
Bank Mizrahi for Industry, Director of B.N.S. Leasing Company of Bank Mizrahi and Director
of the Economic Division of the bank. From 1988 to 1989, Ms. Baron served as the Head
Economist and Director of Human Resources for the General Bank. From 1986 to 1987, she
served as an economic consultant for the First International Bank. From 1975 to 1985, Ms.
Baron worked in the Budget Department of the Ministry of Finance and served as its Deputy
Director from 1982-1985. Ms. Baron serves as an External Director of Bank Hapoalim Ltd.
and as member of the Investment Committee of the Phoenix Insurance Company Ltd. She holds
a B.A. in Economics and Developing Countries from Tel Aviv University and an MBAin
Business Administration from Hebrew University. Ms. Baron has also completed course work
toward a Masters in Economics.

There
are no family relationships between any directors or senior managers.

| | B. | Compensation
| | -- | ------------

The
aggregate direct remuneration paid during 2007 to executive officers and directors as a
group (17 persons), as well as remuneration paid to former executives in connection with
their services during 2007 and payments made in connection with their termination, was
approximately $2.8 million (including bonuses and deposits to pension funds). This does
not include amounts expended by us for automobiles made available to our officers,
expenses (including business travel, professional and business association dues and
expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by
companies in Israel. In addition, we recorded an amount of $0.9 million of share-based
compensation expenses, in accordance with SFAS 123R, which relate to our executive
officers and directors.

Our
board of directors granted options to executive officers and directors to purchase an
aggregate of 620,000 ordinary shares, at exercise prices ranging from $3.28 to $3.49 per
share, during 2007. The exercise price was equal to the fair market value of our ordinary
shares on the date of grant. The vesting of these options is spread over various periods
commencing on various dates from May 2008 and ending August 2011, unless terminated
sooner, in accordance with their terms.

37

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| | C. | Board
Practices
| | -- | ---------------

Appointment of Directors
and Terms of Office

According
to the Companies Law and our articles of association, the management of our business is
vested in our board of directors. The board of directors may exercise all powers and may
take all actions that are not specifically granted to our shareholders. As part of its
powers, our board of directors may cause us to borrow or secure payment of any sum or sums
of money for our purposes, at times and upon terms and conditions as it thinks fit,
including the grant of security interests in all or any part of our property.

Our
directors are elected at annual meetings of our shareholders. Except for outside directors
appointed according to the Companies Law, our directors hold office until the next annual
meeting of shareholders following the annual meeting at which they were appointed, which
is required to be held at least once during every calendar year and not more than fifteen
months after the last preceding meeting. Directors may be removed earlier from office by
resolution passed at a general meeting of our shareholders. Our board of directors may
temporarily fill vacancies in the board until the next annual meeting of shareholders.

There
are no arrangements or understandings between us and any of our directors for benefits
upon termination of service, except that the vesting date of the options held by directors
may accelerate upon termination in certain circumstances.

The
terms of office of our directors, Yair Cohen, Rami Entin and Raanan Cohen, expire at
our 2008 annual general meeting. The terms of office of our external directors, Mr. Totah
and Ms. Baron, expire in September 2009 and July 2010, respectively.

# Audit Committee

Nasdaq
Requirements

Our
ordinary shares are listed for quotation on the Nasdaq Global Market, and we are subject
to the rules of Nasdaq applicable to listed companies. Pursuant to the current listing
requirements of the Nasdaq Global Market, we are required to have at least three
independent directors on our audit committee. We have appointed such directors to our
audit committee. Pursuant to the Sarbanes-Oxley Act of 2002, the Nasdaq Global Market has
introduced listing standards requiring all members of an audit committee to comply with
tightened independence requirements. All members of our audit committee currently comply
with those requirements.

We
have adopted an audit committee charter, which sets forth the powers and responsibilities
of our audit committee. Our audit committee assists the board in fulfilling its
responsibility for oversight of the quality and integrity of our accounting, auditing and
financial reporting practices and financial statements and the independence qualifications
and performance of our independent auditors. Our audit committee also has the authority
and responsibility to oversee our independent auditors, to recommend for shareholder
approval the appointment and, where appropriate, replacement of our independent auditors
and to pre-approve audit engagement fees and all permitted non-audit services and fees.

Our
board of directors has resolved to authorize our audit committee to serve as our qualified
legal compliance committee. As such, our audit committee will be responsible for
investigating reports made by attorneys appearing and practicing before the SEC in
representing us with respect to perceived material violations of U.S. federal or state
securities laws, breaches of fiduciary duty or similar violations by us or any of our
agents.

The
members of our audit committee are Messrs. Totah and Entin, and Ms. Baron, each of whom is
an independent director under the requirements of the SEC and Nasdaq. Our board of
directors has determined that Mr. Entin qualifies as a financial expert for purposes of
SEC and Nasdaq rules. As stated above, Mr. Totah and Ms. Baron qualify as external
directors under the Israeli Companies Law. Our board of directors has determined that Mr.
Rami Entin qualifies as our audit committee financial expert.

Companies
Law Requirements

Under
the Companies Law, the board of directors of a public company is required to appoint an
audit committee, which must be comprised of at least three directors and include all of
the outside directors, but may not include:

| |  | the
chairman of the board of directors;
| | - | ---------------------------------------

| |  | any
controlling shareholder or any relative of a controlling shareholder; and
| | - | -----------------------------------------------------------------------------

| |  | any
director employed by the company or providing services to the company on a regular basis.
| | - | ---------------------------------------------------------------------------------------------

The
duty of the audit committee is to identify flaws in the management of the companys
business, including in consultation with the internal auditor and the companys
independent accountants, and to recommend remedial action. In addition, the approval of
the audit committee is required under the Companies Law to effect certain related-party
transactions.

38

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# Independent Directors

Nasdaq
Marketplace Rules require that the board of directors of a Nasdaq-listed company have a
majority of independent directors, each of whom satisfies the independence
requirements of Nasdaq, and its audit committee must have at least three members and be
comprised only of independent directors, each of whom satisfies the respective
independence requirements of Nasdaq and the SEC. Our board of directors has
determined that each of Rami Entin, Mali Baron and Sami Totah qualifies as an independent
director under the requirements of the SEC and Nasdaq.

# Outside Directors

Under
the Companies Law,  public  companies are required to have at least two outside
 directors.  Our outside directors are Mr. Sami Totah and Ms. Mali Baron.

The
Companies Law provides that a person may not be appointed as an outside director of a
company if the person or the persons relative, partner, employer or any entity under
the persons control has, as of the date of the persons appointment to serve as
an outside director, or had, during the two years preceding that date any affiliation
with:

| |  | the
company;
| | - | ------------

| |  | any
entity controlling the company; or
| | - | --------------------------------------

| |  | any
entity controlled by the company or by its controlling entity.
| | - | ------------------------------------------------------------------

The
term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

The
Companies Law defines the term office holder of a company to include a
director, the chief executive officer, the chief business manager, a vice president and
any officer that reports directly to the chief executive officer.

No
person can serve as an outside director if the persons position or other business
creates, or may create conflict of interests with the persons responsibilities as an
outside director or may otherwise interfere with the persons ability to serve as an
outside director. Until the lapse of two years from termination of office, a company may
not engage an outside director to serve as an office holder and cannot employ or receive
services from that person, either directly or indirectly, including through a corporation
controlled by that person.

Outside
directors are to be elected by a majority vote at a shareholders meeting, provided
that either:

| |  | at
least one third of the shares of  non-controlling  shareholders  voted at the meeting
vote in favor               of the election; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares voted against the election of the outside director does not exceed
one percent of the aggregate voting rights in the company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

The
initial term of an outside director is three years and may be extended for an additional
three years. Outside directors may be removed from office only by the same percentage of
shareholders as is required for their election, or by a court, and then only if the
outside directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the company. If all directors are of the same
gender, the next new outside director elected must be of the other gender.

Each
committee of a companys board of directors is required to include at least one
outside director, except for the audit committee, which is required to include all outside
directors. Pursuant to regulations promulgated under the Companies Law, each public
company must have one outside director who has financial and accounting expertise and any
other external directors must either have such financial and accounting expertise or meet
certain professional qualifications. A director with financial and accounting expertise is
a director who, due to his/her education, experience, and skills, possesses capabilities
relating to, and an understanding of, business and accounting matters and financial
statements, which enable him/her to understand in depth the companys financial
statements and to initiate a debate regarding the manner in which the companys
financial information is presented. A director who meets certain professional
qualifications is a director who satisfies one of the following requirements: (i) the
director holds an academic degree in either economics, business administration,
accounting, law or public administration, (ii) the director either holds another academic
degree or has obtained other high education in the companys primary field of
business or in an area that is relevant to his position, or (iii) the director has at
least five (5) years of experience serving in one of the following capacities or an
aggregate of at least five (5) years of experience in two or more of the following
capacities: (a) a senior business management position of a company with a substantial
scope of business, (b) a senior position in the primary field of business of the company
or (c) a senior public administration position.

39

---

---

The
determination as to whether a director possesses accounting and financial expertise or
meets one of the required professional qualifications is made by the board of directors.
In making the determination as to a directors accounting and financial expertise,
the board of directors is required to consider, among other things, the education,
experience and knowledge of such person with respect to (i) accounting and internal
controls matters that are typical to the industry in which the company engages and to
companies of similar size and complexity to those of the company, (ii) the
responsibilities of the companys auditor and (iii) the preparation and approval of
financial statements under the Companies Law and the Israeli Securities Law.

These
regulations further provide that the declaration submitted by a proposed external director
to the company pursuant to the Companies Law (in which such person declares that he meets
all of the requirements for his appointment as an external director) will include a
declaration as to such persons education and experience, to the extent relevant to
examining whether such person meets the requirements set forth in the new regulations.
Such declaration shall be accompanied by documents and certifications supporting the
declaration.

# Other Committees

Subject
to the provisions of the Companies Law, our board of directors may delegate its powers to
committees consisting of board members. In addition to our audit committee, which is
described above, our board of directors has also appointed a compensation committee, which
reviews and handles certain compensation matters and investment committee, which reviews
and approves our investment policy.

The
members of our compensation committee are Messrs. Yair Cohen and Sami Totah, and Ms. Mali
Baron.

The
members of our investment committee are Messrs. Rami Entin and Sami Totah, and Ms. Mali
Baron.

# Internal Auditor

Under
the Companies Law, our board of directors is also required to appoint an internal auditor
proposed by the audit committee. The role of the internal auditor is to examine, among
other things, whether our activities comply with the law and orderly business procedure.
The internal auditor may not be an interested party or office holder, or a relative of any
interested party or office holder, nor a member or representative of our independent
accounting firm. The Companies Law defines the term interested party to
include a person who holds 5% or more of the companys outstanding share capital or
voting rights, a person who has the right to appoint one or more directors or the general
manager, or any person who serves as a director or as the general manager. Our internal
auditor is Mr. Israel Rubin, of Chaikin, Cohen, Rubin & Gilboa, an Israeli auditing
firm.

# Nasdaq Listing
Requirements

Nasdaq
rules enable foreign private issuers, such as us, to comply with the prevalent practice in
our jurisdiction of incorporation in place of certain Nasdaq listing requirements. To the
extent that we choose to do so, we are required to disclose in our annual reports filed
with the Commission each Nasdaq listing requirement that we do not follow and describe the
home country practice we follow in lieu of such requirement. Pursuant to the Companies
Law, the quorum requirement for general meetings of our shareholders is 25% of the voting
power in our company, rather than 33%, as is otherwise required by Nasdaq rules.

| | D. | Employees
| | -- | ---------

The
following table describes the number of our employees as of March 31, 2008 and December 31
of each of the indicated years:

|                                                          | March 31,
2008 | December 31,
2007 | December 31,
2006 | December 31,
2005 *
|--------------------------------------------------------- | -------------- | ----------------- | ----------------- | -------------------
|
|
|
|
|Approximate numbers of employees by geographic location:  |                |                   |                   |                    
|Israel                                                    |                |                   |                   | 128                
|United States                                             |                |                   |                   | 12                 
|Europe and elsewhere                                      |                |                   |                   | 27                 
|                                                          |                |                   |                   |                    
|Total workforce                                           |                |                   |                   | 167                
|Approximate numbers of employees by category of activity: |                |                  
|Management and administration                             |                |                   |                   | 29                 
|Research and development                                  |                |                   |                   | 33                 
|Professional services and operations                      |                |                   |                   | 81                 
|Sales and marketing                                       |                |                   |                   | 24                 
|                                                          |                |                   |                   |                    
|Total workforce                                           |                |                   |                   | 167                

* Includes employees of
Telesoft

40

---

---

Relationship
with Employees. Competition for highly-qualified technical and engineering personnel
in the telecommunications industry is intense. We believe we have been able to attract
talented engineering and other technical personnel. None of our employees are represented
by a labor union, and we have not experienced any work stoppage. We believe our relations
with our employees to be good and that our future success will depend in part on a
continuing ability to hire, assimilate and retain qualified personnel.

Labor
Laws, Pension Funds. Israeli labor laws and regulations apply to all of our employees
in Israel. The laws principally concern matters such as paid vacation, paid sick days,
length of the workday, payment for overtime and severance payments upon the retirement or
death of an employee or termination of employment under specified circumstances. The
severance payments may be funded, in whole or in part, through Managers Insurance or
a Pension Fund, as described below. The payments to the Managers Insurance fund or
Pension Fund toward severance amount to 8.3% of wages. Furthermore, Israeli employees and
employers are required to pay predetermined sums to the National Insurance Institute,
which is similar to the U.S. Social Security Administration. Since January 1, 1995, these
amounts also include payments for health insurance. The payments to the National Insurance
Institute amount to approximately 14.5% of wages, of which the employee contributes 66%
and the employer contributes 34%.

Our
general practice is to contribute funds on behalf of all of our employees to
Managers Insurance or a Pension Fund. Each employee who agrees to participate in the
Managers Insurance plan contributes 5% of his or her base salary and we contribute
13.3%. Each employee who agrees to participate in the Pension Fund contributes 5.5% of his
or her base salary and we contribute 14.3%. Another savings plan we offer some of our
employees, although not legally required, is known as the Advanced Studies Fund. Each
employee who agrees to participate in the Advanced Studies fund contributes 2.5% of his or
her base salary and we contribute 7.5%.

Labor
Unions. We are a member of the Industrialists Association in Israel, an
employers union. As a result of this membership, a number of collective bargaining
agreements apply to us. These agreements principally concern cost-of-living wage
increases, paid vacation and holidays, length of the workday, wage tariffs, termination,
severance payments and other conditions of employment. We provide our employees with
benefits and working conditions that are at least as favorable as the conditions specified
in the collective bargaining agreements.

| | E. | Share
Ownership
| | -- | ---------------

# Security Ownership of
Our Directors and Executive Officers

Other than Raanan Cohen, as of
March 31, 2008, none of our directors or executive officers beneficially owned shares,
including options to acquire our ordinary shares that are vested or vest within 60 days,
which represent more than 1% of our outstanding ordinary shares. Mr. Raanan Cohen,
in the capacity of his position as Chief Executive Officer of Koor Industries Ltd., may be
deemed to beneficially own the 3,498,836 shares of our company owned by Koor. All our
officers and directors listed in Item 6A above, but excluding Raanan Cohen, were
granted options to acquire our ordinary shares. As of May 31, 2008, they held, as a group,
14,165 of our ordinary shares and options to purchase additional 1,341,931 ordinary
shares. The following table sets forth detailed information about the granted options, for
the periods indicated:

|Grant
date | Exercise price | Granted
amount | Cancelled
amount | Vested
options | Non-vested
options | Options which
were exercised
|---------- | -------------- | -------------- | ---------------- | -------------- | ------------------ | ----------------------------
|
|
|
|
|2003       |                |                | $                | 4.67           |                    |                             
|2004       |                |                | $                | 2.63-3.14      |                    |                             
|2005       |                |                | $                | 3.64-4.97      |                    |                             
|2006       |                |                | $                | 4.47-4.86      |                    |                             
|2007       |                |                | $                | 3.28-3.49      |                    |                             
|           |                |                |                  |                |                    |                             
|           |                |                |                  |                |                    |                             

All these options expire in period of
six and ten years after the date of grant, unless terminated sooner in accordance with
their terms.

# Options to Purchase Our
Ordinary Shares

In
1998, our board of directors adopted a share option plan for our employees. In 1999, our
board of directors adopted a share option plan for our non-employee directors. Terms of
the options granted under the plans, such as length of term, exercise price, vesting and
exercisability, are determined by our board of directors.

41

---

---

In
2003, our board of directors adopted the ECtel Ltd. 2003 Share Option Plan for
our officers, directors and consultants who are Israeli residents. Pursuant to the Israeli
tax reform (described below under Item 10ETaxationIsraeli
Taxation), our board of directors resolved to elect the capital gains
route. Accordingly, subject to the fulfillment of certain conditions, gains realized
by Israeli residents from the sale of shares issued upon exercise of options will be taxed
at a rate of only 25% and not at the marginal income tax rate applicable to the grantee
(up to 50%). Also in 2003, our board of directors adopted the ECtel Ltd. U.S.
Employee Stock Option Plan for residents of the United States to enable eligible
grantees to benefit from favorable U.S. federal income tax treatment of options that
qualify as incentive stock options. These plans were approved by our shareholders and
currently have pools of 1,700,000 shares and 50,000 ordinary shares, respectively. Terms
of the options granted under the plans, such as length of term, exercise price, vesting
and exercisability, are determined by our board of directors.

In
September 2004, our shareholders resolved to increase the number of ordinary shares
underlying our 2003 Share Option Plan from 200,000 ordinary shares to 1,700,000 ordinary
shares and to decreases the number of ordinary shares underlying our other share option
plans (other than the 2003 U.S. Stock Option Plan) by an aggregate of (i) 490,266 ordinary
shares as of the date of said resolution and (ii) 437,933 ordinary shares underlying the
then outstanding options, which were scheduled to expire within 30 days following the date
of said resolution.

In
April 2006, our shareholders resolved to approve an amendment to our 2003 Share Option
Plan (the 2003 Plan and as amended by such amendment, the Amended
Plan) intended to, among other things, increase the number of shares reserved for
issuance under the Amended Plan by 2,000,000 shares, from 1,700,000 shares to 3,700,000
shares, add Restricted Stock Units and Stock Appreciation Rights to the types of awards
available for issuance under the Amended Plan, terminate our ECtel Ltd. 2003 U.S. Employee
Stock Option Plan and consolidate its terms into the Amended Plan so that we would have
only one equity incentive plan under which we make awards.

As
of March 31, 2008, options to purchase a total of 2,118,499 of our ordinary shares were
outstanding. During 2007 and through March 31, 2008, 321,733 options to purchase an
aggregate of ordinary shares granted under the plans had been exercised and 830,000
options had been granted.

# Item 7. Major
Shareholders and Related Party Transactions

| | A. | Major
Shareholders
| | -- | ------------------

The
following table shows the number of our ordinary shares beneficially owned by the only
shareholders known to us as of April 30, 2008 to beneficially own more than 5% of our
outstanding ordinary shares. As of that date, 16,686,401 of our ordinary shares were
issued and outstanding. In accordance with the rules of the SEC, the number of ordinary
shares used in calculating the percentage for each person listed below includes the shares
underlying options or warrants held by such person that are exercisable within 60 days,
but excludes the shares underlying any other options or warrants held by these persons.
None of our shareholders, including our major shareholders have special voting rights.

|                                                      | Shares Beneficially Owned
|----------------------------------------------------- | -------------------------
|
|
|
|
|IDB Holding Corporation Ltd. and its subsidiaries (1) |                          
|Diker GP, LLC (2)                                     |                          
|Potomac Capital Management LLC (3)                    |                          
|                                                     

(1)
          Based upon notifications from IDB Holding Corporation Ltd. (IDBH),
          Koor Industries Ltd (Koor) and Clal Industries and Investments Ltd.
          (Clal) sent to us on June 5, 2008, June 2, 2008 and May 28, 2008,
          respectively. This number of shares includes: (a) 3,498,836 of our ordinary
          shares held by Koor which is an Israeli corporation. Koors ordinary shares
          are traded on the Tel Aviv Stock Exchange (the TASE); (b) 2,767,153
          of our ordinary shares held directly by Clal Electronics Industries Ltd.
          (CEI), which is a wholly-owned subsidiary of Clal. CEI and Clal are
          Israeli corporations. Clals shares are traded on TASE; (c) 9,483 of our
          ordinary shares held directly by IDB Development Corporation Ltd.
          (IDBD), (but does not include (i) 4,899 ordinary shares held for
          members of the public through, among others, provident funds, mutual funds,
          pension funds, exchange-traded funds and insurance policies that are managed by
          subsidiaries of Clal Insurance Enterprises Holdings Ltd. (CIEH), a
          majority-owned subsidiary of IDBD (CIEH) and (ii) 177 ordinary
          shares that are held by unaffiliated third-party client accounts managed by
          subsidiaries of CIEH as portfolio managers). IDBD and Clal Insurance are Israeli
          corporations, whose shares are traded on TASE; and (d) 9,483 of our ordinary
          shares held by Badal Securities Ltd. (Badal), a wholly-owned
          subsidiary of IDBH. Badal and IDBH are Israeli corporations. IDBHs shares
          are traded on TASE.

Approximately 49.5% of Koors
ordinary shares are held by Discount Investment Corporation Ltd. (DIC), and
approximately 10% of Koors ordinary shares are held directly by IDBD. DIC is an
Israeli corporation whose shares are traded on TASE. Clal and DIC are controlled by IDBD.
IDBD is controled by IDBH.

IDBH is controlled as follows: (a)
Ganden Holdings Ltd. (Ganden), a private Israeli company controlled by Nochi
Dankner and his sister Shelly Bergman, holds, directly and through a wholly-owned
subsidiary, approximately 52.04 of the outstanding shares of IDBH; (b)Shelly Bergman,
through a wholly-owned company, holds approximately 4.23% of the outstanding shares of
IDBH; (c) Avraham Livnat Ltd (Livnat), a private Israeli company controlled by
Avraham Livnat, holds directly and through a wholly-owned subsidiary, approximately 12.36%
of the outstanding shares of IDBH; and (d) Manor Holdings BA Ltd. (Manor), a
private company controlled by Ruth Manor holds, directly and through a majority-owned
subsidiary, approximately 12.35% of the outstanding shares of IDBH.

42

---

---

Subsidiaries of Ganden, Livnat and
Manor have entered into a shareholders agreement with respect to shares of IDBH
constituting 31.02%, 10.34% and 10.34%, respectively, of the outstanding shares of IDBH
for the purpose of maintaining and exercising control of IDBH as a group. Their additional
holdings in IDBH are not subject to the shareholders agreement. The term of the
shareholders agreement expires in May 2023.

Based on the foregoing, IDBH (by
reason of its control of Badal and IDBD, and by reason of IDBDs control of Clal,
CEI, Clal Insurance, DIC, Koor, Ganden, Manor and Livnat (by reason of their control of
IDBH) and Nochi Dankner, Shelly Bergman, Ruth Manor and Avraham Livnat (by reason of their
control of Ganden, Manor and Livnat, respectively) may be deemed to share with Badal,
IDBD, Clal, CEI, Clal Insurance, DIC and Koor the power to vote and dispose of our
ordinary shares held by these entities.

(2)
          Based upon a Form 4 filed with the SEC on March 28, 2008. As the sole general
          partner of the Diker Funds (Diker Value Tech Fund, LP, Diker Value Tech QP Fund,
          LP, Diker Micro-Value Fund, LP, the Diker Micro-Value QP Fund, LP, Diker Micro
          & Small Cap Fund LP and Diker M&S Cap Master Ltd.), Diker GP, LLC,
          Delaware limited liability company (Diker GP) has the power to vote
          and dispose of the ordinary shares owned by the Diker Funds and, accordingly,
          may be deemed the beneficial owner of such shares. Pursuant to investment
          advisory agreements, Diker Management, LLC, a Delaware limited liability
          company, (Diker Management) serves as the investment manager of the
          Diker Funds. Accordingly, Diker Management, LLC, may be deemed the beneficial
          owner of shares held by the Diker Funds. Charles M. Diker and Mark N. Diker are
          the managing members of each of Diker GP, LLC and Diker Management, LLC and in
          that capacity direct their operations. Therefore, Charles M. Diker and Mark N.
          Diker may be beneficial owners of shares beneficially owned by Diker GP and
          Diker Management.

(3)
          Based upon a Schedule 13F filed with the SEC on December 31, 2007. Following are
          the entities which acquired the shares which are the subject of the
          aforementioned Schedule 13F: (a) Potomac Capital Partners LP, a private
          investment partnership formed under the laws of State of Delaware. Potomac
          Capital Management LLC is the General Partner of Potomac Capital Partners LP.
          Mr. Paul J. Solit is the Managing Member of Potomac Capital Management LLC; (b)
          Potomac Capital International Ltd., an international business company formed
          under the laws of the British Virgin Islands. Potomac Capital Management Inc. is
          the Investment Manager of Potomac Capital International Ltd. Paul J. Solit is
          the President and sole owner of Potomac Capital Management Inc., and a Director
          of Potomac Capital International Ltd.; (c) Pleiades Investment Partners-R, LP, a
          private investment partnership formed under the laws of the State of Delaware.
          Potomac Capital Management Inc. is the Investment Manager of a managed account
          of Pleiades Investment Partners-R, LP. Paul J. Solit is the President and sole
          owner of Potomac Capital Management Inc.

Record Holders

As
of March 31, 2008, there were 317 holders of record of our ordinary shares. 237 record
holders, holding 12,475,542 shares, or approximately 75%, of our outstanding ordinary
shares, were located in the United States. These numbers are not representative of the
number of beneficial holders of our shares nor is it representative of where such
beneficial holders reside since many of these ordinary shares were held of record by
brokers or other nominees.

There
is currently no trading market for our ordinary shares outside of the United States.

| | B. | Related
Party Transactions
| | -- | --------------------------

Supply
Agreement with ECI

In
February 2004, we executed a supply agreement with ECI, which replaced an earlier supply
agreement entered into in October 1999. Under the terms of such supply agreement, ECI
supplies us with the components (so-called modules) for use in our products.
We agreed on the prices for these modules after negotiations with ECI. In accordance with
its right under the Supply Agreement, ECI stopped manufacturing some of these components
as of August 2006. Accordingly, we contracted with an alternate supplier for the
manufacture of these components.

Distribution
Agreement with ECI

In
June 2005, we entered into a distribution agreement with ECI under which we appointed ECI
as our exclusive distributor in the Russian Federation, Ukraine and Kazakhstan,
territories. Under this agreement, ECI, among other things, maintains a business and sales
organization in these territories to promote and/or affect the sale of those of our
products and services covered by the agreement. The agreement is subject to termination by
either party upon three months notice. In addition, either party may terminate the
agreement at any time upon a material breach by the other party or in the event of
liquidation or similar consequences of the other party.

Registration
Rights Agreement with members of the IDB Group

In
April 2008, we entered into a Registration Rights Agreement with our two largest
shareholders: (a) Koor Industries Ltd. and (b) Clal Electronics Industries Ltd., a
wholly-owned subsidiary of Clal Industries and Investments Ltd., both of which are members
of the IDB Group, and their affiliates IDB Development Corporation Ltd. and Badal
Securities Ltd. Koor Industries Ltd., Clal Electronics Industries Ltd., IDB Development
Corporation Ltd. and Badal Securities Ltd. will be jointly referred to herein as
Holders. For additional information regarding our major shareholders, please
refer to Item 7AMajor Shareholders. Pursuant to this Registration
Rights Agreement, we granted to the Holders rights in connection with sales, from time to
time, of our ordinary shares held by such Holders. As required by the Israeli Companies
Law, this agreement was approved by our audit committee, board of directors and a special
majority of our shareholders. Under this agreement, the Holders are entitled to demand and
piggyback registration rights. The first of such demand registrations must be for an
offering to be made on a delayed or continuous basis pursuant to Rule 415 of the
Securities Act registering the resale from time to time by the Holders (commonly known as
a shelf registration), and the second demand registration may only be effected
not less than 2 years after the effective date of the shelf registration. In addition, if
we propose to register for public sale any of our ordinary shares under the Securities
Act, the Holders would be entitled to request that we include some of their ordinary
shares in such registration (commonly known as piggyback registration rights).
The Registration Rights Agreement has a term of five years provided that it will terminate
earlier upon the percentage holdings of the Holders falling below a specified threshold.

43

---

---

For
additional information regarding the Registration Rights Agreement, please refer to
Item 10CMaterial Contracts.

| | C. | Interests
of Expert and Counsel
| | -- | -------------------------------

Not
Applicable.

# Item 8. Financial
Information

| | A. | Consolidated
Financial Statements and Other Financial Information
| | -- | -----------------------------------------------------------------

# Financial Statements

See
Item 18.

# Legal Proceedings

On
October 19, 2004, a class action complaint (the Class Action Complaint), Leumi
Gemel Ltd. v. ECtel Ltd., et al., Case No. 8:04-CV-03380-RWT, was filed in the United
States District Court for the District of Maryland. Named as defendants are ECtel Ltd.,
ECI Telecom Ltd., and certain of ECtels directors and officers. The Class Action
Complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange
Act, and Rule 10b-5 promulgated thereunder, by making false and misleading statements in
the Companys SEC filings and press releases during a period beginning April 24,
2001, and lasting through April 2, 2003. The claims are purportedly brought on behalf of
all persons who purchased our stock during that period. The plaintiffs seek unspecified
compensatory damages against the defendants, as well as attorneys fees and costs.

The
Company filed a motion to dismiss the class action complaint. At a hearing on this motion
held on July 17, 2006, the court granted our motion to dismiss the class action complaint.
Following the dismissal, the plaintiff filed a motion to further amend the class action
complaint. We responded by requesting that the court deny the motion to amend. On March 6,
2007, the court denied the plaintiffs motion to further amend the class action.
Plaintiff filed an appeal of the district courts orders with the United States Court
of Appeals for the Fourth Circuit. After briefing in the Fourth Circuit but before oral
argument or any decision thereon, the parties reached an agreement in principle to resolve
the litigation. The parties have executed a stipulation of settlement documenting their
agreement. The stipulation of settlement must be approved by the district court which has
not yet occurred.

# Dividend Policy

We
did not pay any cash dividends during 2007, and we do not expect paying any in the
foreseeable future.

We
participate in the alternative benefits program under the Israeli Law for the
Encouragement of Capital Investments, 1959, under which we realize certain tax exemptions.
If we distribute a cash dividend from tax-exempt income, we would have to pay corporate
tax at a rate of up to 25% on the amount distributed and to withhold an additional 15% of
the amount distributed on behalf of the recipient. For more information about the
alternative benefits program, see Item
10ETaxationIsraeli TaxationTax Benefits Under the Law for the
Encouragement of Capital Investments, 1959.

Dividends
on our ordinary shares may be paid only out of profits and other surplus, as defined in
the Israeli Companies Law, as of the end of the most recent fiscal period or as accrued
over a period of two years, whichever is higher. Our board of directors is authorized to
declare dividends, provided that there is no reasonable concern that the dividend will
prevent us from satisfying our existing and foreseeable obligations as they become due.
Notwithstanding the foregoing, dividends may be paid with the approval of a court,
provided that there is no reasonable concern that the dividend will prevent us from
satisfying our existing and foreseeable obligations as they become due.

| | B. | Significant
Changes
| | -- | -------------------

There has been no significant change
in our financial position since December 31, 2007 other than as stated in Item
5AOperating ResultsOverview.

44

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# Item 9. The Offer and
Listing

| | A. | Offer
and Listing Details
| | -- | -------------------------

Our
ordinary shares have been quoted on the Nasdaq Global Market under the symbol
ECTX since October 26, 1999. The following table sets forth, for the periods
indicated, the high and low closing prices of our ordinary shares, as reported on the
Nasdaq Global Market (in U.S. dollars):

| |                   | High | Low
| | ----------------- | ---- | ---
|
|
|
|
| | Calendar Year:    |      |    
| | 2003              |      |    
| | 2004              |      |    
| | 2005              |      |    
| | 2006              |      |    
| | 2007              |      |    
| |                   |      |    
| | Calendar Quarter: |      |    
| | 2006:             |      |    
| | First Quarter     |      |    
| | Second Quarter    |      |    
| | Third Quarter     |      |    
| | Fourth Quarter    |      |    
| |                   |      |    
| | 2007:             |      |    
| | First Quarter     |      |    
| | Second Quarter    |      |    
| | Third Quarter     |      |    
| | Fourth Quarter    |      |    
| |                   |      |    
| | 2008:             |      |    
| | First Quarter     |      |    
| |                   |      |    
| | Calendar Month    |      |    
| | November 2007     |      |    
| | December 2007     |      |    
| | January 2008      |      |    
| | February 2008     |      |    
| | March 2008        |      |    
| | April 2008        |      |    
| | May 2008          |      |    

| | B. | Plan
of Distribution
| | -- | --------------------

Not
Applicable.

| | C. | Markets
| | -- | -------

Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol ECTX.

| | D. | Selling
Shareholders
| | -- | --------------------

Not
Applicable.

| | E. | Dilution
| | -- | --------

Not
Applicable.

| | F. | Expenses
of the Issue
| | -- | ---------------------

Not
Applicable.

45

---

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# Item 10. Additional
Information

| | A. | Share
Capital
| | -- | -------------

Not Applicable.

| | B. | Memorandum
and Articles of Association
| | -- | --------------------------------------

We
were first registered under Israeli law on April 4, 1990 as a private company, and on
October 29, 1999 became a public company. Our registration number with the Israeli
registrar of companies is 52-004446-2.

# Objects and Purposes

Our
object is to engage, directly or indirectly, in any lawful undertaking or business
whatsoever, including, without limitation, as stipulated in our memorandum of association.
See Article 1 of our articles of association, which sets forth our purposes.

The
following sections, to the extent they refer to our articles of association are qualified
in their entirety by the articles themselves, filed as an exhibit to our annual report
submitted for 2005.

# Transfer and Ownership
of Shares; Notices

The
ownership or voting of our ordinary shares by non-residents of Israel, except for citizens
of countries that are in a state of war with Israel, is not restricted in any way by our
memorandum or articles of association or by the laws of the State of Israel.

Fully
paid ordinary shares may be freely transferred pursuant to our articles of association
unless the transfer is restricted or prohibited by another instrument. Unless otherwise
prescribed by law, each shareholder of record will be provided at least 21 calendar
days prior notice of any general shareholders meeting.

# Dividend and Liquidation
Rights

Dividends
on our ordinary shares may be paid only out of profits and other surplus, as defined in
the Israeli Companies Law, as of the end of the most recent financial statements or as
accrued over a period of two years, whichever is higher. Our board of directors is
authorized to declare dividends, provided that there is no reasonable concern that payment
of the dividend will prevent us from satisfying our existing and foreseeable obligations
as they become due. Notwithstanding the foregoing, dividends may be paid with the approval
of a court, provided that there is no reasonable concern that payment of the dividend will
prevent us from satisfying our existing and foreseeable obligations as they become due.
Dividends that remain unclaimed after seven years will generally be forfeited and returned
to the company. In the event of our liquidation, after satisfaction of liabilities to
creditors, our assets will be distributed to the holders of ordinary shares in proportion
to their respective holdings. These dividend and liquidation rights may be affected by the
grant of preferential dividends or liquidation rights to the holders of a class of shares
with preferential rights that may be authorized in the future.

# Voting,
Shareholders Meetings and Resolutions

Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Under the Companies Law and our articles of association, all
resolutions of our shareholders, except for a resolution to liquidate the company, require
approval by a simple majority of the ordinary shares voting thereon. These voting rights
may be affected by the grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized in the future. No cumulative voting
is permitted.

We
have two types of general shareholders meetings: the annual general meetings and
extraordinary general meetings. These meetings may be held either in Israel or in any
other place the board of directors determines. An annual general meeting must be held in
each calendar year, but not more than 15 months after the last annual general meeting. Our
board of directors may convene an extraordinary meeting, from time to time, at its
discretion and is required to do so upon the request of shareholders holding at least 5%
of our ordinary shares or at least two directors or one quarter of our directors then
serving.

The
quorum required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy who hold or represent in the aggregate at least 25% of the
outstanding voting shares. A meeting adjourned for lack of a quorum generally is adjourned
to the same day in the following week at the same time and place or any time and place as
the chairman may designate with the consent of the holders of a majority of the voting
power represented at the meeting and voting on the matter adjourned.

# Mergers and Acquisitions
under Israeli Law

The
Israeli Companies Law includes provisions that allow a merger transaction and requires
that each company that is a party to a merger have the transaction approved by its board
of directors and a vote of the majority of its shares, at a shareholders meeting
called on at least 21 days prior notice. For purposes of the shareholder vote,
unless a court rules otherwise, the merger will not be deemed approved if a majority of
the shares held by parties other than the other party to the merger, or by any person who
holds 25% or more of the shares or the right to appoint 25% or more of the directors of
the other party, vote against the merger. Upon the request of a creditor of either party
to the proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger, the surviving company
will be unable to satisfy the obligations of any of the parties to the merger. In
addition, a merger may not be completed unless at least 50 days have passed from the date
that a proposal of the merger was filed with the Israeli Registrar of Companies by each
merging company and 30 days from the date that shareholder approval of both merging
companies was obtained. The request for the approval of a merger may be filed once a
shareholder meeting has been called to approve the merger.

46

---

---

The
Companies Law also provides that an acquisition of shares of a public company must be made
by means of a tender offer if as a result of the acquisition the purchaser would become a
25% shareholder of the company and there is not any other existing shareholder who holds
25% or more of the company. In addition, an acquisition of shares of a public company must
be made by means of a tender offer if as a result of the acquisition the purchaser would
become a 45% shareholder of the company unless there already is another 45% shareholder in
the company. If following any acquisition of shares, the acquiror will hold 90% or more of
the companys shares, the acquisition may not be made other than through a tender
offer to acquire all of the shares of such class. If more than 95% of the outstanding
shares are tendered in the tender offer, all the shares that the acquirer offered to
purchase will be transferred to it. However, the remaining minority shareholders may seek
to alter the tender offer consideration by court order.

Lastly,
Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an
Israeli company and a foreign company less favorably than U.S. tax laws. For example,
Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his
ordinary shares for shares in another corporation, to taxation prior to the sale of the
shares received in such stock-for-stock swap.

# Modification of Class
Rights

Our
articles of association provide that the rights attached to any class (unless otherwise
provided by the terms of that class), such as voting, rights to dividends and the like,
may be varied by a shareholders resolution, subject to the sanction of a resolution passed
by the holders of a majority of the shares of that class at a separate class meeting.

# Fiduciary Duties of
Office Holders

The
Israeli Companies Law imposes a duty of care and a duty of loyalty on all office holders
of a company.

The
duty of care requires an office holder to act with the level of care with which a
reasonable office holder in the same position would have acted under the same
circumstances. The duty of care includes a duty to use reasonable means to obtain:

| |  | information
 on the  advisability  of a given  action  brought for his approval or performed by him
by               virtue of his position; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

The duty of loyalty of an office
holder includes a duty to:

| |  | refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
 from  exploiting  any  business  opportunity  of the  company to receive a personal
 gain for               himself or others; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to the companys affairs which
the office holder has received due to his position as an office holder.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Approval of
Related-Party Transactions Under Israeli Law

The
Israeli Companies Law requires that an office holder of a company disclose to the company
any personal interest that he may have and all related material information known to him,
in connection with any existing or proposed transaction by the company. The disclosure is
required to be made promptly and in any event no later than the board of directors meeting
in which the transaction is first discussed. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held by:

| |  | the
office holder's spouse, siblings,  parents,  grandparents,  descendants,  spouse's
descendants and               the spouses of any of these people; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
corporation in which the office holder is a 5% or greater shareholder, director or
general manager or in which he has the right to appoint at least one director or the
general manager.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Companies Law, an
extraordinary transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | otherwise
than on market terms; or
| | - | ----------------------------------

| |  | that
is likely to have a material impact of the company's profitability, assets or liabilities.
| | - | -----------------------------------------------------------------------------------------------

47

---

---

Once
an office holder complies with the above disclosure requirement, the board of directors
may approve a transaction between the company and an office holder, or a third party in
which an office holder has a personal interest. A transaction that is adverse to the
companys interest may not be approved.

If
the transaction is an extraordinary transaction, approval of both the audit committee and
the board of directors is required. Under specific circumstances, shareholder approval may
also be required. A director who has a personal interest in an extraordinary transaction
which is considered at a meeting of the board of directors or the audit committee may not
be present at this meeting or vote on this matter, unless a majority of the members of the
board of directors or the audit committee, as the case may be, has a personal interest in
the matter. If a majority of members of the board of directors have a personal interest
therein, shareholder approval is also required.

Under
the Companies Law, all arrangements as to compensation of directors in public companies
generally require the approvals of the audit committee, board of directors and
shareholders, in that order.

# Duties of Shareholders

Disclosure
of Personal Interests of a Controlling Shareholder

Under
the Israeli Companies Law, the disclosure requirements that apply to an office holder also
apply to a controlling shareholder of a public company. A controlling shareholder is a
shareholder who has the ability to direct the activities of a company, including a
shareholder that owns 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights, but excluding a shareholder whose power derives solely from
his or her position on the board of directors or any other position with the company.
Extraordinary transactions with a controlling shareholder or in which a controlling
shareholder has a personal interest, and the engagement of a controlling shareholder as an
office holder or employee, require the approvals of the audit committee, the board of
directors and the shareholders of the company, in that order. The shareholder approval
must be by a majority of the shares voted on the matter, provided that either:

| |  | at
least  one-third of the shares of  shareholders  who have no personal  interest in the
 transaction               and who vote on the matter vote in favor thereof; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
shareholders who have no personal interest in the transaction who vote against the
transaction do not represent more than one percent of the voting rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Shareholders
generally have the right to examine document in the companys possession pertaining
to any matter that requires shareholder approval.

Duties
of Good Faith and Fairness

In
addition, under the Companies Law, each shareholder has a duty to act in good faith toward
the company and other shareholders and to refrain from abusing his or her power in the
company, such as in shareholder votes. In addition, specified shareholders have a duty of
fairness toward the company. These shareholders include any controlling shareholder, any
shareholder who knows that it possesses the power to determine the outcome of a
shareholder vote and any shareholder who, pursuant to the provisions of the articles of
association, has the power to appoint an office holder or any other power with respect to
the company. However, the Companies Law does not define the substance of this duty of
fairness except to state that the remedies generally available upon a breach of contract
will apply also in the event of a breach of the duty to act with fairness.

# Indemnification of
Directors and Officers

Exculpation
of Office Holders

Under
the Companies Law, an Israeli company may not exempt an office holder from liability for
breach of his duty of loyalty, but may exempt in advance an office holder from liability
to the company, in whole or in part, for a breach of his duty of care provided that the
articles of association of the company allow it to do so. Our articles of association
allow us to exempt our office holders to the fullest extent permitted by law.

Insurance
Relating to Office Holders

Our
articles of association provide that, subject to the provisions of the Companies Law, we
may enter into an insurance contract which would provide coverage for any monetary
liability incurred by any of our office holders, with respect to an act performed in the
capacity of an office holder for:

| |  | a
breach of his duty of care to us or to another person;
| | - | --------------------------------------------------------

| |  | a
breach of his duty of loyalty to us, provided that the office holder acted in good faith
and had reasonable cause to assume that his act would not prejudice our interests; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

---

| |  | a
financial liability imposed upon him in favor of another person.
| | - | ------------------------------------------------------------------

We
have obtained liability insurance covering our officers and directors.

Indemnification
of Office Holders

An
Israeli company may indemnify an office holder in respect of certain liabilities following
an event or in advance of an event, provided that a provision authorizing such
indemnification is inserted in its articles of association and that the companys
undertaking to indemnify an office holder is limited to such events which the board of
directors shall deem to be likely to occur in light of the operations of the company at
the time that the undertaking is made and for such amounts or criteria which the board of
directors may, at the time, deem to be reasonable under the circumstances. Our articles of
association were amended on September 2005 to contain such an authorization. An
undertaking by an Israeli company to indemnify an office holder with respect to a
financial liability for acts performed as an office holder imposed on him or her in favor
of another person pursuant to a judgment, settlement or arbitrators award approved
by court must be limited to foreseeable liabilities and reasonable amounts determined by
the board of directors. In addition, a company may indemnify an office holder against the
following liabilities incurred for acts performed as an office holder:

Our
articles of association provide that we may indemnify an office holder against the
following obligations and expenses imposed on the office holder with respect to an act
performed in the capacity of an office holder:

| |  | a
 financial  obligation  imposed  on him or her in  favor  of  another  person  by a court
 judgment,               including a compromise judgment or an arbitrator's award
approved by court; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him by a court in connection with:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | proceedings
we institute against him or that are instituted on our behalf or by another person;
| | - | -----------------------------------------------------------------------------------------------

| |  | a
criminal charge from which he is acquitted; or
| | - | ------------------------------------------------

| |  | a
criminal  proceeding  in which he is convicted of an offense that does not require proof
of criminal               intent.
| | - | ----------------------------------------------------------------------------------------------------------------------------

Our
articles of association also include provisions:

| |  | authorizing
us to undertake to indemnify an office holder as described above, and
| | - | ---------------------------------------------------------------------------------

| |  | setting
forth such events which our board of directors  deems to be anticipated  when the
 undertaking               is given and such;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | amounts
 and/or  criteria   determined  by  our  board  of  directors  to  be  reasonable   under
 the               circumstances; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | authorizing
us to retroactively indemnify an officer or director.
| | - | -----------------------------------------------------------------

Limitations
on Exculpation, Insurance and Indemnification

The
Companies Law provides that a company may not exculpate or indemnify an office holder, or
enter into an insurance contract which would provide coverage for any monetary liability
incurred as a result of any of the following:

| |  | a
breach by the office holder of his duty of loyalty unless, with respect to insurance
coverage, the office holder acted in good faith and had a reasonable basis to believe
that the act would not prejudice the company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
prohibited dividend or distribution to shareholders;
| | - | ------------------------------------------------------

| |  | a
breach by the office holder of his duty of care if the breach was committed intentionally
or recklessly (excluding a breach arising out of negligent conduct of the office holder);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
act or omission committed with the intent to derive an illegal personal benefit; or
| | - | ---------------------------------------------------------------------------------------

| |  | any
fine imposed on the office holder.
| | - | --------------------------------------

In
addition, under the Companies Law, exculpation and indemnification of, and procurement of
insurance coverage for our office holders must be approved by our audit committee and our
board of directors and, if the beneficiary is a director, by our shareholders.

49

---

---

Our
articles of associations also provide that, subject to the provisions of applicable law,
we may procure insurance for, or indemnify, any person who is not an office holder,
including without limitation, any of our employees, agents, consultants or contractors.

| | C. | Material
Contracts
| | -- | ------------------

For
a description of material agreements other than the ones described below that we entered
into with ECI, please refer to Item 7B  Related Party Transactions.

Transaction with Compwise
Ltd.

On
March 24, 2008, we agreed to purchase substantially all the assets of Compwise Ltd. (Compwise),
an Israeli based company, a provider of business analytic solutions for telecommunication
operators. The transaction was consummated on April 30, 2008. The material terms of our
asset purchase agreement and ancillary agreements with Compwise are summarized below.
This summary is qualified in its entirety by reference to the full agreements filed as
exhibits to this Annual Report. See Item 19Exhibits.

Pursuant
to the asset purchase agreement, we purchased substantially all the assets of Compwise
for approximately $1.3 million in cash. The transferred assets included mainly
intellectual property and goodwill associated therewith, contracts with customers ,
accounts receivables, backlog contracts and third-party software licenses. The assumed
liabilities included support and maintenance obligations arising under Compwises
contracts with its customers. In addition, upon consummation of the transaction, we
hired 5 employees of Compwise.

Following
consummation of the transaction, Compwise is to take all required actions in order to
effect voluntary liquidation.

Compwise
and certain of its employees and shareholders undertook certain non-compete,
non-solicitation and confidentiality commitments.

Registration Rights
Agreement

Our
former shareholder, ECI Telecom Ltd. (ECI), had registration rights pursuant
to an agreement entered into in 2002 for our owned by it, pursuant to which ECI was
entitled to five demand registrations and unlimited piggyback registrations. Prior to May
10, 2004, ECI held of record 10,490,325, or approximately 57.9%, of our outstanding shares
at that time. Over the course of 2004 and 2006 ECI distributed all those shares to its
shareholders, including the Holders, as defined below. While pursuant to its
registration rights agreement with us ECI had the right to assign its registration rights
thereunder to its transferees, it did not do so.

Therefore,
in April 2008, we entered into a Registration Rights Agreement with our two largest
shareholders Koor Industries Ltd. and Clal Electronics Industries Ltd., a wholly-owned
subsidiary of Clal Industries and Investments Ltd., both members of the IDB Group, and
their affiliates IDB Development Corporation Ltd. and Badal Securities Ltd. Koor
Industries Ltd.; Clal Electronics Industries Ltd.; IDB Development Corporation Ltd. and
Badal Securities Ltd. will be jointly referred to herein as Holders. For
additional information regarding our major shareholders, please refer to Item
7A  Major Shareholders. Pursuant to this Registration Rights Agreement we
granted to the Holders rights in connection with sales, from time to time, of our ordinary
shares held by such Holders. As required by the Israeli Companies Law, the agreement was
approved by our audit committee, board of directors and a special majority of our
shareholders. Under this agreement, the Holders are entitled to demand and piggyback
registration rights. The first of such demand registrations must be for an offering to be
made on a delayed or continuous basis pursuant to Rule 415 of the Securities Act
registering the resale from time to time by the Holders (commonly known as a
shelf registration) and the second demand registration may only be effected
not less than 2 years after the effective date of the shelf registration. In addition, if
we propose to register for public sale any of our ordinary shares under the Securities
Act, the Holders would be entitled to request that we include some of their ordinary
shares in such registration (commonly known as piggyback registration rights).
The Registration Rights Agreement has a term of five years provided that it will terminate
earlier upon the percentage holdings of the Holders falling below a specified threshold.

The
demand and piggyback registrations are subject to customary covenants and conditions, such
as possible limitations on the number of shares that may be underwritten (commonly known
as underwriter cut-backs) and cross-indemnification for liabilities and
expenses that may be incurred in connection with the registration. In the event that our
company, from time to time, effects an underwritten public offering of its shares held by
the Holders, either at their request or upon our initiative, the Agreement requires us to
enter into an underwriting agreement in a form usual and customary for such offerings.
Underwriting agreements typically include, among other things, an undertaking of the
issuer to indemnify the underwriters and selling shareholders for liabilities and expenses
that may be incurred in connection with the public offering.

Demand
registrations are also subject to certain customary limitations, such as a requirement
that any demand registration involve registration of not less than 30% of shares held by
the Holders as of the date of the agreement, and the right of the company, exercisable
once in any 12-month period, to postpone a demand registration for up to 90 days if it
believes that effecting a registration then would be detrimental to the company and its
shareholders. Upon certain conditions, the Holders are entitled to assign their
registration rights under the Agreement to transferees of the shares.

All
expenses incurred in connection with any piggyback registration and in connection with a
demand registration in which the company includes securities to be sold for its own
account will be borne by the company and the participating Holders, which expenses will be
allocated among them pro rata to the number of securities registered by each of them,
except that any expenses incurred by advisors to a Holder will be borne by that Holder.
All expenses incurred in connection with any demand registration in which the company does
not sell shares for its own account will be borne by the Holders.

The
Agreement includes a covenant of the Holders not to sell any of their shares covered by
the Agreement for 90 days following the effective date of any underwritten public offering
(commonly known as a lock-up agreement). This covenant, which is a customary
condition of underwritten public offerings, applies whether or not the Holders are selling
shares in the public offering.

As
required by the Companies Law, the agreement was approved by our audit committee, our
board of directors and a special majority of our shareholders.

50

---

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| | D. | Exchange
Controls
| | -- | -----------------

# Exchange Controls and
Other Limitations Affecting Security Holders

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding certain transactions. However, legislation remains in effect under which
currency controls may be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

| | E. | Taxation
| | -- | --------

The
following is a general summary only and should not be considered as income tax advice or
relied upon for tax planning purposes. Holders of our ordinary shares should consult their
own tax advisors as to the United States, Israeli or other tax consequences of the
purchase, ownership and disposition of ordinary shares, including, in particular, the
effect of any foreign, state or local taxes.

# CERTAIN U.S. FEDERAL
INCOME TAX CONSIDERATIONS

Subject
to the limitations described below, the following discussion summarizes certain U.S.
federal income tax consequences of the purchase, ownership and disposition of our ordinary
shares to a U.S. holder that owns our ordinary shares as a capital asset, generally, for
investment. A U.S. holder is a holder of our ordinary shares who is, for U.S. federal
income tax purposes:

| |  | an
individual citizen or resident of the United States,
| | - | -------------------------------------------------------

| |  | a
 corporation  (or other  entity  taxable as a  corporation  for U.S.  federal  income tax
 purposes)               created or organized  in the United  States or under the laws of
the United  States,  or               any political subdivision thereof, or the District
of Columbia,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate, the income of which is subject to U.S. federal income tax regardless of its
source, or
| | - | -------------------------------------------------------------------------------------------------

| |  | a
trust if, in general,  (i) a court within the United States is able to exercise primary
 supervision               over its  administration  and one or more U.S. persons have
the authority to control all               of its  substantial  decisions,  or (ii)  that
 has in  effect  a valid  election  under               applicable U.S. Treasury
Regulations to be treated as a U.S. person.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
discussion considers only U.S. holders that will own their ordinary shares as capital
assets (generally for investment) and does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to each persons decision to
purchase our ordinary shares.

If
a partnership (or any other entity treated as a partnership for U.S. Federal income tax
purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in
such partnership will generally depend on the status of the partner and the activities of
the partnership. Such a partner or partnership should consult its tax advisor as to its
tax consequences.

Certain
 aspects of U.S.  federal  income tax is relevant to a holder of our  ordinary  shares
that is not a U.S. holder (a "non-U.S. holder") are also discussed below.

This
discussion is based on current provisions of the Internal Revenue Code of 1986 as amended
(the Code), current and proposed Treasury Regulations promulgated thereunder,
and administrative and judicial decisions as of the date of this Annual Report, all of
which are subject to change, possibly on a retroactive basis. This discussion does not
address all aspects of U.S. federal income taxation that may be relevant to any particular
U.S. holder in light of the holders individual circumstances. In particular, this
discussion does not address the potential application of the alternative minimum tax or
the U.S. federal income tax consequences to U.S. holders that are subject to special
treatment, including U.S. holders that:

| |  | are
broker-dealers or insurance companies,
| | - | ------------------------------------------

| |  | have
elected mark-to-market accounting,
| | - | ---------------------------------------

| |  | are
tax-exempt organizations or retirement plans,
| | - | -------------------------------------------------

51

---

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| |  | are
grantor trusts,
| | - | -------------------

| |  | are
certain former citizens or long-term residents of the United States,
| | - | ------------------------------------------------------------------------

| |  | are
financial institutions or financial services entities,
| | - | ----------------------------------------------------------

| |  | hold
ordinary shares as part of a straddle, hedge or conversion transaction with other
investments,
| | - | ---------------------------------------------------------------------------------------------------

| |  | acquired
 their  ordinary  shares  upon the  exercise  of  employee  stock  options  or  otherwise
 as               compensation,
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | are
real estate investment trusts or regulated investment companies,
| | - | --------------------------------------------------------------------

| |  | own
directly, indirectly or by attribution at least 10% of our voting power, or
| | - | -------------------------------------------------------------------------------

| |  | have
a functional currency that is not the U.S. dollar.
| | - | -------------------------------------------------------

In
addition, this discussion does not address any aspect of state, local or non-U.S. tax laws
or the possible application of United States federal gift or estate taxes.

Each
holder of our ordinary shares is advised to consult his or her own tax advisor with
respect to the specific tax consequences to him or her of purchasing, holding or disposing
of our ordinary shares, including the applicability and effect of federal, state, local
and foreign income and other tax laws in his or her particular circumstances.

Taxation of Dividends
Paid on Ordinary Shares

Subject
to the discussion below under Tax Consequences if We are a Passive Foreign
Investment Company, a U.S. holder will be required to include in gross income as
dividend income the amount of any distribution paid on our ordinary shares, including any
non-U.S. taxes withheld from the amount paid, on the date the distribution is received to
the extent the distribution is paid out of our current or accumulated earnings and
profits, as determined for U.S. federal income tax purposes. Distributions in excess of
earnings and profits will be applied against and will reduce the U.S. holders tax
basis in our ordinary shares and, to the extent in excess of that basis, will be treated
as gain from the sale or exchange of our ordinary shares. The dividend portion of such
distribution generally will not qualify for the dividends received deduction otherwise
available to corporations.

Dividends
that are received by U.S. holders that are individuals, estates or trusts will be taxed at
the rate applicable to long-term capital gains currently (a maximum rate of 15% for
taxable years beginning on or before December 31, 2010), provided that such dividends meet
the requirements of qualified dividend income. Dividends that fail to meet
such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary
income rates. No dividend received by a U.S. holder will be a qualified dividend (1) if
the U.S. holder held the ordinary share with respect to which the dividend was paid for
less than 61 days during the 121-day period beginning on the date that is 60 days before
the ex-dividend date with respect to such dividend, excluding for this purpose, under the
rules of Code Section 246(c), any period during which the U.S. holder has an option to
sell, is under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect to, such
ordinary share (or substantially identical securities) or (2) to the extent that the U.S.
holder is under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in property substantially similar or related to the
ordinary share with respect to which the dividend is paid. If we were to be a
passive foreign investment company, (as such term is defined in the Code) for
any year, dividends paid on our ordinary shares in such year or in the following year
would not be qualified dividends. In addition, a non-corporate U.S. holder will be able to
take a qualified dividend into account in determining its deductible investment interest
(which is generally limited to its net investment income) only if it elects to do so; in
such case the dividend will be taxed at ordinary income rates.

Distributions
of current or accumulated earnings and profits paid in foreign currency to a U.S. holder
(including any non-U.S. taxes withheld from the distributions) will be includible in the
income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange
rate on the date of the distribution. A U.S. holder that receives a foreign currency
distribution and converts the foreign currency into dollars after the date of distribution
may have foreign exchange gain or loss based on any appreciation or depreciation in the
value of the foreign currency against the U.S. dollar, which will generally be U.S. source
ordinary income or loss.

U.S.
          holders will have the option of claiming the amount of any non-U.S. income
taxes           withheld on dividend distribution either as a deduction from gross income
or as           a dollar-for-dollar credit against their U.S. federal income tax
liability.           Individuals who do not claim itemized deductions, but instead
utilize the           standard deduction, may not claim a deduction for the amount of the
non-U.S.           income taxes withheld, but such amount may be claimed as a credit
against the           individuals U.S. federal income tax liability. The amount of
non-U.S.           income taxes that may be claimed as a credit in any year is subject to
complex           limitations and restrictions, which must be determined on an individual
basis by           each shareholder. These limitations include, amongst others, rules
which limit           foreign tax credits allowable with respect to specific classes of
income to the           U.S. federal income taxes otherwise payable on each such class of
income. The           total amount of allowable foreign tax credits in any year cannot
exceed the           pre-credit U.S. tax liability for the year attributable to foreign
source           taxable income.

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A
U.S.  holder will be denied a foreign tax credit for non-U.S.  income taxes withheld from
a dividend received on the ordinary shares:

| |  | If
the U.S. holder has not held the ordinary shares for at least 16 days of the 31day
period beginning on the date which is 15 days before the ex-dividend date with respect to
such dividend; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
the extent the U.S. holder is under an obligation to make related payments with respect
to positions in substantially similar or related property.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

Any
days during which a U.S. holder has substantially diminished its risk of loss on the
ordinary shares are not counted toward meeting the required 16-day holding period.
Distributions of current or accumulated earnings and profits will generally be foreign
source passive income for U.S. foreign tax credit purposes.

Taxation of the
Disposition of Ordinary Shares

Subject
to the discussion below under Tax Consequences if We are a Passive Foreign
Investment Company, upon the sale, exchange or other disposition of our ordinary
shares, a U.S. holder will recognize capital gain or loss in an amount equal to the
difference between the U.S. holders basis in such ordinary shares, which is usually
the cost to the U.S. holder of such ordinary shares, and the amount realized on the
disposition. A disposition of ordinary shares generally will be considered to occur on the
trade date, regardless of the holders method of accounting. Capital gain from the
sale, exchange or other disposition of ordinary shares held more than one year is
long-term capital gain and may be subject to a reduced rate of taxation for individuals
(long-term capital gains are currently taxable at a maximum rate of 15% for taxable year
beginning in or before December 31, 2010). Gain or loss recognized by a U.S. holder on a
sale, exchange or other disposition of ordinary shares will generally be treated as U.S.
source income for U.S. foreign tax credit purposes. The deductibility of a capital loss
recognized on the sale, exchange or other disposition of ordinary shares is subject to
limitations.

A
U.S. holder that uses the cash method of accounting calculates the dollar value of the
proceeds received on the sale as of the date that the sale settles. However, a U.S. holder
that uses the accrual method of accounting is required to calculate the value of the
proceeds of the sale as of the trade date and may therefore realize foreign currency gain
or loss. A U.S. holder may avoid realizing foreign currency gain or loss if he or she has
elected to use the settlement date to determine its proceeds of sale for purposes of
calculating the foreign currency gain or loss. In addition, a U.S. holder that receives
foreign currency upon disposition of ordinary shares and converts the foreign currency
into dollars after the settlement date or trade date (whichever date the U.S. holder is
required to use to calculate the value of the proceeds of sale) will have foreign exchange
gain or loss based on any appreciation or depreciation in the value of the foreign
currency against the dollar, which will generally be U.S. source ordinary income or loss.

Tax Consequences if we
are a Passive Foreign Investment Company

There
is a substantial risk that we are a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes. Our treatment as a PFIC could result in a reduction in the
after-tax return to the U.S. Holders of our ordinary shares and may cause a reduction in
the value of such shares.

For
U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in
which either (i) 75% or more of our gross income is passive income, or (ii) at least 50%
of the average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, cash is considered to be an asset
which produces passive income. Passive income includes dividends, interest, royalties,
rents, annuities and the excess of gains over losses from the disposition of assets which
produce passive income. As a result of our substantial cash position and the decline in
the value of our stock, we are a PFIC under a literal application of the asset test that
looks solely to market value. If we are a PFIC for U.S. federal income tax purposes, U.S.
Holders of our ordinary shares would be required, in certain circumstances, to pay an
interest charge together with tax calculated at maximum rates on certain excess
distributions, including any gain on the sale of ordinary shares.

The
consequences described above can be mitigated if the U.S. Holder makes an election to
treat us as a qualified electing fund, or QEF. A shareholder making the QEF election is
required for each taxable year to include in income a pro rata share of the ordinary
earnings and net capital gain of the QEF, subject to a separate election to defer payment
of taxes, which deferral is subject to an interest charge. We have agreed to supply U.S.
Holders with the information needed to report income and gain pursuant to a QEF election.
The QEF election is made on a shareholder-by-shareholder basis and can be revoked only
with the consent of the Internal Revenue Service, or IRS.

As
an alternative to making the QEF election, the U.S. Holder of PFIC stock which is
publicly traded could mitigate the consequences of the PFIC rules by electing to mark the
stock to market annually, recognizing as ordinary income or loss each year an amount
equal to the difference as of the close of the taxable year between the fair market value
of the PFIC stock and the U.S. Holders adjusted tax basis in the PFIC stock. Losses
would be allowed only to the extent of net mark-to-market gain previously included by the
U.S. Holder under the election for prior taxable years.

All
U.S. Holders are advised to consult their own tax advisers about the PFIC rules generally
and about the advisability, procedures and timing of their making any of the available tax
elections, including the QEF or mark-to-market elections.

Tax Consequences for
Non-U.S. Holders of Ordinary Shares

Except
as described in Information Reporting and Back-up Withholding below, a
non-U.S. holder of ordinary shares will not be subject to U.S. federal income or
withholding tax on the payment of dividends on, and the proceeds from the disposition of,
our ordinary shares, unless, in the case of U.S. federal income taxes:

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| |  | such
item is effectively connected with the conduct by the non-U.S. holder of a trade or
business in the United States and in the case of a resident of a country which has a
treaty with the United States, the item is attributable to a permanent establishment; or
in the case of an individual, the item is attributable to a fixed place of business in
the United States; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
the case of a disposition of our ordinary shares, the non-U.S. holder is an individual
who holds the ordinary shares as a capital asset and is present in the United States for
183 days or more in the taxable year of the disposition and certain other conditions are
met.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Information Reporting and
Back-up Withholding

U.S.
          holders (other than exempt recipients such as corporations) generally are
          subject to information reporting requirements with respect to dividends paid in
          the United States on or proceeds from the disposition of our ordinary shares.
In           addition, a U.S. holder may be subject, under certain circumstances, to
backup           withholding at a rate of up to 28% with respect to dividends paid on or
proceeds           from the disposition of our ordinary shares unless the U.S. holder
provides           proof of an applicable exemption or correct taxpayer identification
number and           otherwise complies with applicable requirements of the backup
withholding rules.           A U.S. holder of our ordinary shares who does not provide a
correct taxpayer           identification number may be subject to penalties imposed by
the IRS. Amounts           withheld under the backup withholding rules are not an
additional tax and may be           refunded or credited against the holders
federal income tax liability,           provided the required information is furnished to
the IRS.

Non-U.S.
          holders generally are not subject to information reporting or back-up
          withholding with respect to dividends paid on, or proceeds from the disposition
          of, our ordinary shares, provided that the non-U.S. holder provides taxpayer
          identification number, certifies to its foreign status, or establishes another
          exemption to the information reporting or back-up withholding requirements.

# ISRAELI TAXATION

The
following summary describes the current tax structure applicable to companies incorporated
in Israel, with special reference to its effect on us. It also discusses Israeli tax
consequences material to persons purchasing our ordinary shares. To the extent that the
summary is based on new tax legislation yet to be judicially or administratively
interpreted, we cannot be sure that the views expressed will accord with any future
interpretation by the Israeli tax authorities or courts. The summary is not intended, and
should not be construed, as legal or professional advice and does not exhaust all possible
tax considerations. Accordingly, you should consult your tax advisor as to the particular
tax consequences of an investment in our ordinary shares.

# Transfer Pricing

In
accordance with Section 85A of the Israeli Tax Ordinance, if, in an international
transaction, (whereby at least one party is a foreigner or all or part of the income from
such transaction is to be taxed abroad as well as in Israel) there is a special
relationship (including, but not limited to family relationship or a relationships of
control between companies) between the parties, and due to this relationship the price set
for an asset, right, service or credit was determined or other conditions for the
transaction were set such that a smaller profit was realized then what would have been
expected to be realized from a transaction of this nature, then such transaction shall be
reported in accordance with customary market conditions and tax shall be charged
accordingly. This Section shall apply solely to transactions which transpire after
November 29, 2006 at which time regulations with respect to this section were legislated.
The assessment of whether a transaction falls under the aforementioned definition shall be
implemented in accordance with one of the procedures mentioned in the regulations and is
based, among others, on comparisons of characteristics which portray similar transactions
in ordinary market conditions, such as profit, the area of activity, nature of the asset,
the contractual conditions of the transaction and according to additional terms and
conditions specified in the regulations.

# General Corporate Tax
Structure

Generally,
Israeli companies are subject to corporate tax on taxable income. The corporate tax rate
was reduced to 31% for the 2006 tax year, 29% for the 2007 tax year, 27% for the 2008 tax
year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. However, the
effective tax rate payable by a company that derives income from an approved enterprise
(as discussed below) may be considerably less. Israeli companies are also subject to
capital gains tax at a rate of 25% on capital gains (other than gains derived from the
sale of listed securities that are taxed at the prevailing corporate tax rates) derived
after January 1, 2003. Also, regarding assets acquired prior to January 1, 2003, the
reduced tax rate will apply to a proportionate part of the gain, in accordance with the
holding periods of the asset, before or after January 1, 2003, on a linear basis.

# Tax Benefits Under the
Law for the Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments, 1959 (the Investments Law)
provides that upon application to the Investment Center of the Ministry of Industry, Trade
and Labor of the State of Israel, a proposed capital investment in eligible facilities may
be designated as an approved enterprise. Each certificate of approval for an approved
enterprise relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics, such as the
equipment to be purchased and utilized pursuant to the program. The tax benefits derived
from any such certificate of approval relate only to taxable income derived from the
specific approved enterprise. If a company has more than one approval or only a portion of
its capital investments are approved, its effective tax rate is the result of a weighted
combination of the applicable rates. The tax benefits under the Investments Law are not
generally available with respect to income derived from products manufactured outside of
Israel.

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The
Investments Law was amended in 2005, although we are subject to both the new provisions of
the law as well as the old provisions, as certain of our approved enterprises were
approved by the Israeli government prior to the amendment of the law, while other approved
enterprises were approved by the government following the amendment.

Prior
to the amendment, taxable income of a company derived from an approved enterprise
(including income generated by a company from the grant of a usage right with respect to
know-how developed by the approved enterprise, income generated from royalties and income
derived from a service which is auxiliary to such usage right or royalties, provided that
such income is generated within the approved enterprises ordinary course of
business) is subject to company tax at the maximum rate of 25%, rather than the usual rate
for the Benefit Period. The Benefit Period is seven years (and under certain
circumstances, as further detailed below, ten years), commencing with the year in which
the approved enterprise first generates taxable income, and is limited to 12 years from
commencement of production or 14 years from the date of approval, whichever is earlier.

A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign
investors company is a company more than 25% of whose shares of capital stock
and combined share capital and loan, without interest charge, is owned by non-Israeli
residents. A company that qualifies as a foreign investors company and has an
approved enterprise program is eligible for tax benefits for a ten-year benefit period and
to a reduced tax rate of 10% to 25% depending on the level of foreign investment in each
year.

A
company owning an approved enterprise may elect (as we have done) to forego certain
government grants extended to approved enterprises in return for an alternative package of
benefits. Under the alternative package, the companys undistributed income derived
from an approved enterprise will be exempt from tax for a period of between two and ten
years from the first year of taxable income, depending on the geographic location of the
approved enterprise within Israel, and the company will be eligible for the reduced tax
benefits under the law for the remainder of the benefit period.

The
Investment Center bases its decision of whether to approve or reject a companys
application for designation as an approved enterprise, among other things, on criteria set
forth in the law and related regulations, the then prevailing policy of the Investment
Center and the specific objectives and financial criteria of the applicant. Accordingly, a
company cannot be certain in advance whether its application will be approved. In
addition, the benefits available to an approved enterprise are conditional upon compliance
with the conditions stipulated in the law and related regulations and the criteria set
forth in the specific certificate of approval. In the event that a company violates these
conditions, in whole or in part, it may be required to refund the amount of tax benefits
plus an amount linked to the Israeli consumer price index and interest.

A
major portion of our production facilities have been granted the status of approved
enterprises. Income arising from our approved enterprises facilities is tax-free under the
alternative package of benefits described above for the period in which such alternative
package is in effect and thereafter, entitled to reduced tax rates based on the level of
foreign ownership for specified periods. We have derived, and expect to continue to
derive, a substantial portion of our income from our approved enterprises facilities.
Subject to compliance with applicable requirements, the benefits for most of our
production facilities in Israel will continue until termination between the years 2001 and
2008. Our current investments in development facilities are made under new approvals. If
we fail for any reason to meet the conditions of the approved revised investment program,
our future tax benefits under the Law for the Encouragement of Capital Investments may be
materially reduced. In light of our carry forward losses, we are currently not in a
taxable position.

We
received an approval in principle from the Investment Center with respect to the sale of
our government surveillance business to Verint in March 2004. If the Investment Center
declines, for any reason, to grant us the final approval, our future tax benefits under
the Investments Law will be materially reduced.

All
dividends are considered to be attributable to the entire enterprise and their effective
tax rate is the result of a weighted combination of the applicable tax rates. We currently
intend to reinvest the amount of our income and not to distribute such income as a
dividend. In the event that we do pay a dividend from income that is derived from our
approved enterprises pursuant to the alternative package of benefits, which income would
normally be tax-exempt, we would be required to pay tax on the amount intended to be
distributed as dividends at the rate which would have been applicable had we not elected
the alternative package of benefits, which rate is ordinarily up to 25%, and to withhold
at source on behalf of the dividend recipient an additional 15% of the amount distributed
as dividends.

The
Investments Law also provides that an approved enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program.

In
March 2005, the government of Israel passed an amendment to the Investments Law in which
it revised the criteria for investments qualified to receive tax benefits as a benefited
enterprise. Among other things, companies that meet the criteria of the alternate package
of tax benefits will receive those benefits without prior approval. However, no assurance
can be given that we will in the future be eligible to receive additional tax benefits
under this law.

The
reform primarily included the following provisions:

| | n | Companies
that meet the criteria of the Alternate Path will receive its benefits
without need for prior approval. In addition, such companies will not be required to file
reports with the Investment Center. Such companies will be able to request to obtain
pre-rulings.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | n | Tax
benefits of the Alternate Path include lower tax rates or exemptions, depending upon the
field in which a company engages and the path chosen, as well as lower tax
rates on dividends and accelerated depreciation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | In
order to receive benefits within the framework of the Grant Path, under which a company
may elect to receive certain grants instead of being eligible for tax reductions or
exemptions, or the Alternate Path, the Industrial Enterprise must be deemed to contribute
to the economic independence of the State of Israels economy in one of
the following manners:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | its
primary activity involves the biotechnology or nanotechnology fields and
          pre-approval is received from the head of research and development at the OCS;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | its
revenue derived from activity within a specific market does not exceed 75%           of
its total revenues in such year;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------

| | (iii) | 25%
or more of its revenues are derived from a specific market of at least 12
          million residents.
| | ----- | ----------------------------------------------------------------------------------------------------------

| | n | Upon
the establishment of an approved enterprise, an investment, within three years, of at
least NIS 300,000 in production machinery and equipment within is required.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | In
order to be eligible for increased tax benefits under an expansion of the Industrial
Enterprise, a company is required to invest, within three years of the expansion of a
benefited enterprise, the greater of NIS 300,000 in production machinery and equipment or
a certain percentage of its existing production machinery and equipment as follows:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Production assets         | % of required investment | Required investment       
|------------------------- | ------------------------ | --------------------------
|                          |                          |                           
|Up to NIS140 million      | 12%                      | Up to NIS 16.8 million    
|From NIS140 - 500 million | 7%                       | From NIS 16.8 - 42 million
|Over NIS 500 million      | 5%                       | From NIS 42 million       

# Tax Benefits for
Research and Development

Israeli
tax ordinance allows, under specified circumstances, a tax deduction for expenditures in
the year incurred, including capital expenditures, in scientific research and development
projects, if the expenditures are approved by the relevant Israeli government ministry and
the research and development is for the promotion of the company and carried out by or on
behalf of the company seeking such deduction. However, the amount of such deductible
expenses must be reduced by the sum of any funds received through government grants for
the finance of such scientific research and development projects. Expenditures not so
approved are deductible over a three-year period.

# Tax Benefits Under the
Law for the Encouragement of Industry (Taxes), 1969

According
to the Law for the Encouragement of Industry (Taxes), 1969 (the Industry
Encouragement Law), an Industrial Company is a company located in
Israel, at least 90% of the income of which, in any tax year, exclusive of income from
defense loans, capital gains, interest and dividends, is derived from an Industrial
Enterprise owned by it. An Industrial Enterprise is defined as an
enterprise whose major activity in a given tax year is industrial production activity. We
believe that we currently qualify as an Industrial Company within the definition of the
Industry Encouragement Law.

Under
the Industry Encouragement Law, Industrial Companies are entitled to preferred corporate
tax benefits, among others, such as:

| |  | deduction
of purchases of know-how and patents over an eight-year period for tax purposes;
| | - | ------------------------------------------------------------------------------------------

| |  | deduction
over a three-year  period of expenses  involved with the issuance and listing of shares
on a               stock exchange;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | the
right to elect, under certain conditions, to file a consolidated tax return with related
Israeli Industrial Companies that satisfy conditions set forth in the Industry
Encouragement Law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

Eligibility
for the benefits under the law is not subject to receipt of prior approval from any
governmental authority. However, the Israeli tax authorities may determine that we do not
qualify as an Industrial Company. In addition, we might not continue to qualify as an
Industrial Company in the future. As a result of either of the foregoing, the benefits
described above might not be available in the future.

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# Special Provisions
Relating to Taxation Under Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments), 1985 represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing inflation. The law
is highly complex. Its features that are material to us can be described as follows:

| |  | A
special tax adjustment for the preservation of equity whereby certain corporate assets
are classified broadly into fixed (inflation immune) assets and non-fixed (soft) assets.
Where a companys equity, as defined in the law, exceeds the depreciated cost of its
fixed assets, as defined in the law, the company may take a deduction from taxable income
that reflects the effect of multiplication of the annual rate of inflation on such
excess, up to a ceiling of 70% of taxable income in any single tax year, with the unused
portion carried forward, linked to the increase in the consumer price index. If the
depreciated cost of fixed assets exceeds a companys equity, then the excess
multiplied by the annual rate of inflation is added to taxable income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to certain limitations set forth in the law, depreciation deductions on fixed assets and
losses carried forward are adjusted for inflation based on the increase of the Israeli
consumer price index.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Taxable
gains on certain traded securities, which are taxed at a reduced tax rate with respect to
individuals following the Tax Reform (and which were previously exempt from tax), are
taxable at the companys tax rate in certain circumstances.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 26, 2008, the Israeli
Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of
Application)  2008 (the Amendment) was passed by the Knesset. According
to the Amendment, the Inflationary Adjustments Law will no longer be applicable subsequent
to the 2007 tax year, except for certain transitional provisions.

Further, according to the Amendment,
commencing with the 2008 tax year, the adjustment of income for the effects of inflation
for tax purposes will no longer be calculated. Additionally, depreciation on fixed assets
and tax loss carryforwards will no longer be linked to future changes in the CPI, such
that these amounts will continue to be linked only to the CPI as of the end of the 2007
tax year and will not be linked to CPI changes after this date.

Measurement of results for tax
purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting
Records of Foreign Invested Companies and Certain Partnerships and Determining Their
Taxable Income)  1986

The
Company has determined that it is a foreign invested company as defined in the
Investments Law. Our management has elected to apply Income Tax Regulations (Rules for
Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and
Determining Their Taxable Income)  1986 beginning on January 1, 2007. Accordingly,
its taxable income or loss is calculated in U.S. dollars.

# Capital Gains Tax

Until the end of the year 2002 and
provided we maintained our status as an industrial corporation, capital gains from the
sale of our securities were generally exempt from Israeli Capital Gains Tax. This
exemption did not apply to companies, to a shareholder whose taxable income is determined
pursuant to the Israeli Income Tax Law (Inflationary Adjustments) 1985, or to a person
whose gains from selling or otherwise disposing of our securities were deemed to be
business income.

On January 1, 2006 an amendment to
the Israeli tax regime, or the 2006 Tax Reform, became effective. The 2006 Tax Reform
significantly changed the tax rates applicable to income derived from shares.

According to the 2006 Tax Reform, an
individual is subject to a 20% tax rate on real capital gains derived from the sale of
shares, as long as the individual is not a substantial shareholder (generally
a shareholder with 10% or more of the right to profits, right to nominate a director and
voting rights) in the company issuing the shares. The tax rate for gains from publicly
traded shares realized before January 1, 2006 was 15%.

A substantial shareholder will be
subject to tax at a rate of 25% in respect of real capital gains derived from the sale of
shares issued by a company in which he or she is a substantial shareholder. The
determination of whether the individual is a substantial shareholder will be made on the
date on which the securities are sold. In addition, the individual will be deemed to be a
substantial shareholder if at any time during the 12 months preceding the date of sale, he
or she was a substantial shareholder.

Non-Israeli residents are exempt from
Israeli capital gains tax on any gains derived from the sale of shares in an Israeli
corporation publicly traded on TASE and/or on a foreign stock exchange, provided such
gains do not derive from a permanent establishment of such shareholders in Israel and that
such shareholders did not acquire their shares prior to the issuers initial public
offering. However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident has a controlling interest of 25% or more in such non-Israeli
corporation, or is the beneficiary of, or is entitled to, 25% or more of the revenues or
profits of such non-Israeli corporation, whether directly or indirectly.

In some instances where our
shareholders may be liable for Israeli tax on the sale of their ordinary shares, the
payment of the consideration may be subject to the withholding of Israeli tax at the
source.

Pursuant to the treaty between the
governments of the United States and Israel with respect to taxes on income, or the
U.S.-Israel tax treaty, the sale, exchange or disposition of our ordinary shares by a
person who qualifies as a resident of the United States under the treaty and who is
entitled to claim the benefits afforded by the treaty, will generally not be subject to
Israeli capital gains tax. This exemption does not apply to a person who held, directly or
indirectly, shares representing 10% or more of the voting power in our company during any
part of the 12 month period preceding the sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of our shares by a U.S. resident
qualified under the treaty, who held, directly or indirectly, shares representing 10% or
more of the voting power in our company at any time during the 12 month period preceding
such sale, exchange or disposition, would be subject to Israeli tax, to the extent
applicable; however, under the treaty, this U.S. resident would be permitted to claim a
credit for these taxes against the U.S. income tax with respect to the sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.

57

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# Taxation of Dividends

Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends (other than
bonus shares or stock dividends) to Israeli individuals and foreign resident individuals
and corporations we would be required to withhold income tax at the rate of 20% (25% if
the shareholder holds 10% or more of the means of control of the company, as
such term is defined by the law). If the income out of which the dividend is being paid is
attributable to an Approved Enterprise or Benefited Enterprise under the Investment Law,
the rate is 15%. A different rate may be provided for in a treaty between Israel and the
shareholders country of residence. Under the U.S.-Israel tax treaty, if the income
out of which the dividend is being paid is not attributable to an Approved Enterprise or
Benefited Enterprise, then we are required to withhold income tax at a rate of 12.5% with
respect to shareholders that are U.S. corporations and held at least 10% of our voting
power in the 12 month period preceding the distribution of such dividends.

Residents
of the United States will generally have taxes in Israel withheld at source. Such persons
generally would be entitled to a credit or deduction for United States Federal income tax
purposes for the amount of such taxes withheld, subject to limitations applicable to
foreign tax credits.

| | F. | Dividends
and Paying Agents
| | -- | ---------------------------

Not
Applicable.

| | G. | Statement
by Experts
| | -- | --------------------

Not
Applicable.

| | H. | Documents
on Display
| | -- | --------------------

We
are subject to the informational requirements of the Exchange Act, as amended, applicable
to foreign private issuers and fulfill the obligations with respect to such requirements
by filing reports with the SEC. You may read and copy any document we file, including any
exhibits, with the SEC without charge at the SECs public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from
the Public Reference Branch of the SEC at such address, at prescribed rates. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of
our SEC filings are also available to the public at the SECs website at
http://www.sec.gov.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required
under the Exchange Act to file periodic reports and financial statements with the SEC as
frequently or as promptly as United States companies whose securities are registered under
the Exchange Act.

| | I. | SUBSIDIARY
INFORMATION
| | -- | ----------------------

Not
Applicable.

# Item 11. Quantitative
and Qualitative Disclosures about Market Risk

Through
our normal operations, we are exposed to market risks including movements in currency
exchange rates and interest rates. We are exposed to currency risks mainly because we
generate most of our revenues in dollars but incur a majority of our salaries and related
expenses and part of our other expenses in New Israeli shekels. We do not actively hedge
interest rate exposure or engage in other transactions intended to manage risks relating
to interest rate fluctuations. We do hedge assets or liabilities denominated in currencies
other than the dollar.

Generally,
we invest our excess cash in instruments that are liquid and generate yields, with
conservative and low risk. As of December 31, 2007, we had $7.4 million of principal
invested in ARS. The Company has a long history of investing excess cash under a
conservative corporate policy that only allows investments in highly rated
investment-grade securities, with preservation of capital and liquidity as primary
objectives. The Companys ARS were ranked as AAA and AA at the time of purchase, and
there had been no change in their rating, until the end of the first quarter of 2008 in
which they experienced a rating downgrade. All securities continue to pay interest in
accordance with their stated terms. However, since these ARS have experienced multiple
failed auctions due to a lack of liquidity in the market for these securities, based on
initial third-party indications, the Company has impaired its ARS portfolio. As a result,
the Company recorded, an impairment charge of $1.6 million in the consolidated statement
of operations, which is considered other than temporary, and an
unrealized loss of $0.2 million in other comprehensive income as a reduction of
shareholders equity, which is considered as a temporary
impairment. All of these ARS are classified as of December 31, 2007 as long-term
investments. As of March 31, 2008, the Company had $2.4 million of principal invested in
Auction Rate Securities (ARS). The Company recorded in the first quarter of 2008 an
unrealized loss of $0.3 million in other comprehensive income as a reduction of
shareholders equity, which is considered a temporary impairment.

58

---

---

# Presentation of interest
rate risk (position as of December 31, 2007)

We
do not use any derivative instruments to protect us from fluctuations in interest rates.
Details regarding our interest rate exposure are set forth in the table below. Interest
rate exposure is monitored by tracking actual and projected commitments and through the
use of a sensitivity analysis.

|                                   | Total as of | Settlement Date | Fair valueas of
|---------------------------------- | ----------- | --------------- | ---------------
|
|
|
|
|Assets that incur interest         |             |                 |                
|A. Cash and cash equivalents       |             |                
|U.S. dollars                       |             |                 |                
|Weighted-average interest rate     |             |                 |                
|NIS                                |             |                 |                
|Weighted-average interest rate     |             |                 |                
|EUR                                |             |                 |                
|Weighted-average interest rate     |             |                 |                
|B. Short-term investments          |             |                
|U.S. dollars                       |             |                 |                
|Weighted-average interest rate     |             |                 |                
|C. Long-term marketable securities |             |                
|U.S. dollars                       |             |                 |                
|Weighted-average interest rate     |             |                 |                

Exchange Rate Risk
Management

Our
functional currency and that of our subsidiaries is the dollar. From time to time, we
enter into forward exchange contracts to reduce the impact of fluctuations of foreign
currencies against the dollar resulting from existing trade receivables and trade
payables. We do not believe that our activities in entering into these contracts subject
us to exchange rate risk because gains and losses on these contracts offset losses and
gains on the trade receivables or trade payables that are hedged.

As
at December 31, 2007, we had not entered into any currency forward contracts.

59

---

---

# Presentation of foreign
currency-denominated assets and liabilities(position as of
December 31, 2007)

Details
regarding our foreign exchange exposure are set forth in the table below. Foreign exchange
exposure is monitored by tracking actual and projected commitments and through the use of
a sensitivity analysis.

|                      | Total as of | Settlement Date | Fair valueas of
|--------------------- | ----------- | --------------- | ---------------
|
|
|
|
|
|Current Assets        |             |                 |                
|NIS                   |             |                 |                
|Euro                  |             |                 |                
|Other                 |             |                 |                
|Total                 |             |                 |                
|Long-term assets      |             |                
|NIS                   |             |                 |                
|Current liabilities   |             |                
|NIS                   |             |                 |                
|Euro                  |             |                 |                
|Other                 |             |                 |                
|Total                 |             |                 |                
|Long-term liabilities |             |                
|NIS                   |             |                 |                

# Item 12. Description of
Securities Other than Equity Securities

Not
Applicable.

60

---

---

# PART II

# Item 13. Defaults,
Dividend Arrearages and Delinquencies

Not
Applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

# Modification of Rights

Not
Applicable.

# Use of Proceeds

In
April 2006, we announced a plan to repurchase our ordinary shares on the open market in an
amount in cash of up to $15 million. Since we adopted the plan, we repurchased an amount
of 2,304,794 of our ordinary shares for total consideration of $11.5 million. The plan
expired in April 2007. As of December 31, 2007, our total cash and investments, subsequent
to the share repurchase, was approximately $29.1 million.

# Item 15. Controls and
Procedures

(a)
Disclosure Controls and Procedures

Our
Chief Executive Officer and Chief Financial Officer are responsible for establishing and
maintaining our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act. These controls and procedures were designed to ensure that
information required to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. Our management evaluated these disclosure
controls and procedures under the supervision of our Chief Executive Officer and Chief
Financial Officer as of December 31, 2007. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were (i) effective as of December 31, 2007, in that they provide reasonable assurance that
the information required to be disclosed in filings and submissions under the Exchange Act
is recorded, processed, summarized, and reported within the time periods specified by the
SECs rules and forms and (ii) designed to ensure that material information related
to us and our consolidated subsidiaries is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions about required disclosure.

(b)
Management's Annual Report on Internal Control Over Financial Reporting

Our
management, under the supervision of our Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act.
Our internal control system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and fair presentation of our
consolidated financial statements for external purposes in accordance with generally
accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer
assessed the effectiveness of our internal control over financial reporting as of December
31, 2007. In making this assessment, they used the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this assessment, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of December 31, 2007, our internal
control over financial reporting is effective based on those criteria. Notwithstanding the
foregoing, all internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not prevent or
detect misstatements and can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

This
Annual Report does not include an attestation report of the Companys registered
public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered
public accounting firm pursuant to temporary rules of the SEC that permit the Company to
provide only managements report in this Annual Report.

(c)
Changes in Internal Control Over Financial Reporting

During
the period covered by this Annual Report, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

# Item 16A. Audit
Committee Financial Expert

Our
board of directors has determined that Mr. Rami Entin qualified as our audit committee
financial expert. Our board has determined that Mr. Entin is independent as
defined by Nasdaq Rule 4200(a)(15).

61

---

---

# Item 16B. Code of Ethics

Our
board of directors has adopted our Code of Ethics and Business Conduct, a code that
applies to all of our directors and employees. A copy of our Code of Ethics and Business
Conduct may be obtained, free of charge, by writing to ECtel Ltd., Attention: Corporate
Secretary, 10 Amal Street, Rosh Haayin, Israel.

# Item 16C. Principal
Accountant Fees and Services

At
the annual meeting held in July 30, 2007, our shareholders re-appointed Somekh Chaikin, a
member firm of KPMG International, to serve as our independent auditors.

The
following table presents fees for professional audit services rendered by Somekh Chaikin
for the audit of the Companys annual financial statements for 2007 and 2006 and for
certain taxation matters (in thousands of U.S. dollars):

|               | Year Ended December 31,
|-------------- | -----------------------
|
|
|
|
|Audit Fees     |                        
|Tax Fees       |                        
|All Other Fees |                        
|               |                        
|               |                        
|Total          |                        

Audit
Fees are the aggregate fees billed and billable for the audit of our annual
financial statements. This category also includes services that generally the independent
accountant provides, such as statutory audits (including audits required by the OCS and
other Israeli government institutes), and consents and assistance with and review of
documents filed with the SEC.

Tax
Fees are the aggregate fees billed for professional services rendered for tax
compliance, other than in connection with the audit.

All
Other Fees are the aggregate fees billed for non-audit fees with regards to a
Transfer Pricing Study.

Our
audit committees policy is to approve each audit and non-audit service to be
performed by our independent accountant before the accountant is engaged.

# Item 16D. Exemptions
from Listing Standards for Audit Committees

Not
Applicable.

# Item 16E. Purchases of
Equity Securities by the Issuer and Affiliated Purchasers

In
April 2006, we announced a plan to repurchase our ordinary shares on the open market in an
amount in cash of up to $15 million. Since we adopted the plan, we repurchased an amount
of 2,304,794 of our ordinary shares for total consideration of $11.5 million.

# ISSUER PURCHASES OF
EQUITY SECURITIES

|Period         | Total Number of Shares
Purchased | Average Price
Paid per Share | Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plan
|-------------- | -------------------------------- | ---------------------------- | ---------------------------------------------------------------------------
|
|
|
|
|September 2006 |                                  |                              |                                                                            
|               |                                  |                             
|October 2006   |                                  |                              |                                                                            
|               |                                  |                             
|November 2006  |                                  |                              |                                                                            
|               |                                  |                             
|Total          |                                  |                              |                                                                            

62

---

---

# PART III

# Item 17. Financial
Statements

We
have responded to Item 18 in lieu of this item.

# Item 18. Financial
Statements

See
pages F-1 through F- 57, incorporated herein by reference.

# Item 19. Exhibits

|Exhibit No. |  | Description
|----------- |  | -----------

|1.1 |  | Memorandum
of Association  (previously  filed as Exhibit to our Registration  Statement on Form
                    F-1, and incorporated herein by reference).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Amended
and Restated  Articles of  Association  (as amended on September 26, 2005)  (previously
                    filed as Exhibit  to our Annual  Report on Form 20-F for the  fiscal
 year ended  December  31,                     2005, filed June 15, 2006, and
incorporated herein by reference).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)1* |  | Registration
 Rights  Agreement,  dated March 24, 2008, by and among certain  investors and the
                    Registrant.
|------- |  | -------------------------------------------------------------------------------------------------------------------------------

|4.(c)1 |  | ECtel
Managers and Employees Option Allotment Plan, as amended  (previously filed as Exhibit to
                    our Annual  Report on Form 20-F for the fiscal year ended  December
 31,  1999,  filed June 30,                     2000, and incorporated herein by
reference) (1).
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)2 |  | ECtel
International  Employee Stock Option Plan, as amended (previously filed as Exhibit to our
                    Annual  Report on Form 20-F for the fiscal year ended  December 31,
1999,  filed June 30, 2000,                     and incorporated herein by reference).
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)3 |  | ECtel
 Director  Share  Option  Plan 1999  (previously  filed as  Exhibit  to our  Registration
                    Statement on Form F-1, and incorporated herein by reference).
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)4 |  | ECtel
2003 Share  Option Plan  (previously  filed as Exhibit to our Annual  Report on Form 20-F
                    for the fiscal year ended  December 31, 2003,  filed June 28, 2004
and  incorporated  herein by                     reference).
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)5 |  | ECtel
2003 U.S.  Employee Stock Option Plan  (previously  filed as Exhibit to our Annual Report
                    on Form 20-F for the fiscal year ended December 31, 2003,  filed June
28, 2004 and incorporated                     herein by reference).
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)6 |  | 2003
Equity Incentive Plan  (previously  filed as Exhibit to our Annual Report on Form 20-F
for                     the fiscal year ended  December  31,  2005,  filed June 15, 2006,
 and  incorporated  herein by                     reference).
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(c)7* |  | Form
of Indemnification Letter
|------- |  | ------------------------------

|8.1* |  | List
of Subsidiaries
|---- |  | --------------------

|12.1* |  | Certification
 of Principal  Executive  Officer  pursuant to 17 CFR  240.13a-14(a),  as adopted
                    pursuant toss.302 of the Sarbanes-Oxley Act
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.2* |  | Certification
 of Principal  Financial  Officer  pursuant to 17 CFR  240.13a-14(a),  as adopted
                    pursuant toss.302 of the Sarbanes-Oxley Act
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.1* |  | Certification
of Principal  Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant
                    toss.906 of the Sarbanes-Oxley Act
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|13.2* |  | Certification
of Principal  Financial Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant
                    toss.906 of the Sarbanes-Oxley Act
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1* |  | Consent of Independent Registered Public Accounting Firm
|----- |  | --------------------------------------------------------

|(1) |  | English
translation from Hebrew original.
|--- |  | -----------------------------------------

|(*) |  | Filed
herewith.
|--- |  | ---------------

63

---

---

# SIGNATURES

The
Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this Annual Report on
its behalf.

| |  | ECTEL LTD.(Registrant)By: /s/ Itzik WeinsteinItzik WeinsteinPresident and Chief Executive OfficerDate: June 18, 2008
| |  | ----------------------------------------------------------------------------------------------------------------------------------

64

---

---

ECtel Ltd. and Subsidiaries
Consolidated Financial
Statements
as at and for the year ended
December 31, 2007



---

---

ECtel Ltd. and Subsidiaries

|                                                                                
|--------------------------------------------------------------------------------
|Consolidated Financial Statements as at and for the year ended December 31, 2007
|                                                                                

Contents

|                                                                                | Page
|------------------------------------------------------------------------------- | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm                         | F-2 
|                                                                               
|Consolidated Balance Sheets as at                                              
|December 31, 2007 and 2006                                                      | F-3 
|                                                                               
|Consolidated Statements of Operations for the                                  
|years ended December 31, 2007, 2006 and 2005                                    | F-5 
|                                                                               
|Consolidated Statements of  Shareholders' Equity and Comprehensive Loss for the
|years ended December 31, 2007, 2006 and 2005                                    | F-6 
|                                                                               
|Consolidated Statements of Cash Flows for the                                  
|years ended December 31, 2007, 2006 and 2005                                    | F-7 
|                                                                               
|Notes to the Consolidated Financial Statements                                  | F-10
|                                                                                |     



---

---



| |                                 |           |                 
| | ------------------------------- | --------- | ----------------
| | Somekh Chaikin                  | Telephone | 972 3  684  8000
| | KPMG Millennium Tower           | Fax       | 972 3  684  8444
| | 17 Ha'arba'a Street, PO Box 609 | Internet  | www.kpmg.co.il  
| | Tel Aviv 61006 Israel           |           |                 

To the Board of Directors and Shareholders
ECtel Ltd.:

We have audited the accompanying
consolidated balance sheets of ECtel Ltd. and its subsidiaries (the Company),
as at December 31, 2007 and 2006 and the related consolidated statements of operations,
shareholders equity and comprehensive loss and cash flows for each of the years in
the three-year period ended December 31, 2007. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the Company at December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the years in the three-year period ended
December 31, 2007 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 10I to the
consolidated financial statements, a class action lawsuit has been filed against the
Company.

As discussed in Note 2N to the
consolidated financial statements, effective January 1, 2006, the Company adopted the fair
value method of accounting for stock-based compensation as required by Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment.

Somekh Chaikin
Certified Public Accountants (Israel)
Member Firm of KPMG International
Tel Aviv, Israel
June 18, 2008

F - 2

---

---

ECtel Ltd. and Subsidiaries

|                                             
|---------------------------------------------
|Consolidated Balance Sheets as at December 31
|                                             

|                                              |  | 2007 | 2006
|--------------------------------------------- |  | ---- | ----
|
|
|
|
|Assets                                        |  |      |     
|                                              |  |     
|Current assets                                |  |     
|Cash and cash equivalents                     |  |      |     
|Short-term investments                        |  |      |     
|Receivables:                                  |  |     
|Trade, net of allowance for doubtful accounts |  |      |     
|Other                                         |  |      |     
|Related parties                               |  |      |     
|Work in progress                              |  |      |     
|Inventories                                   |  |      |     
|                                              |  |      |     
|                                              |  |     
|Total current assets                          |  |      |     
|                                              |  |      |     
|                                              |  |     
|Long-term marketable securities               |  |      |     
|                                              |  |      |     
|                                              |  |     
|Long-term other assets                        |  |      |     
|                                              |  |      |     
|                                              |  |     
|Property, plant and equipment, net            |  |      |     
|                                              |  |      |     
|                                              |  |     
|Goodwill                                      |  |      |     
|                                              |  |      |     
|                                              |  |     
|Other intangible assets, net                  |  |      |     
|                                              |  |      |     
|                                              |  |     
|Total assets                                  |  |      |     
|                                              |  |      |     

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

F - 3

---

---

ECtel Ltd. and Subsidiaries

|
|
|
|

|                                                          |  | 2007 | 2006
|--------------------------------------------------------- |  | ---- | ----
|
|
|
|
|Liabilities and Shareholders' equity                      |  |      |     
|                                                          |  |     
|Current liabilities                                       |  |     
|Payables:                                                 |  |     
|Trade                                                     |  |      |     
|Related parties                                           |  |      |     
|Advances from customers                                   |  |      |     
|Other payables and accrued liabilities                    |  |      |     
|                                                          |  |      |     
|                                                          |  |     
|Total current liabilities                                 |  |      |     
|                                                          |  |      |     
|                                                          |  |     
|Long-term liabilities                                     |  |     
|Liability for employee severance benefits                 |  |      |     
|                                                          |  |      |     
|                                                          |  |     
|Total liabilities                                         |  |      |     
|                                                          |  |      |     
|                                                          |  |     
|Commitments and contingencies                             |  |      |     
|                                                          |  |     
|Shareholders' equity                                      |  |      |     
|Share capital                                             |  |     
|Ordinary shares NIS 0.04 par value per share, Authorized  |  |     
|125,000,000 shares; issued and outstanding 16,686,401     |  |     
|shares as at December 31, 2007 and 16,364,668 shares      |  |     
|as at December 31, 2006                                   |  |      |     
|Treasury shares at cost - 2,304,794 ordinary shares as at |  |     
|December 31, 2007 and 2006                                |  |      |     
|Capital surplus                                           |  |      |     
|Accumulated loss                                          |  |      |     
|Accumulated other comprehensive loss                      |  |      |     
|                                                          |  |      |     
|                                                          |  |     
|Total shareholders' equity                                |  |      |     
|                                                          |  |      |     
|                                                          |  |     
|Total liabilities and shareholders' equity                |  |      |     
|                                                          |  |      |     
|                                                          |  |      |     

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

F - 4

---

---

ECtel Ltd. and Subsidiaries

|                                                                     
|---------------------------------------------------------------------
|Consolidated Statements of Operations for the years ended December 31
|                                                                     

|                                           |  | 2007 | 2006 | 2005   
|------------------------------------------ |  | ---- | ---- | -------
|
|
|
|
|Revenues                                   |  |      |      | 14E    
|Cost of revenues                           |  |      |      | 13, 14F
|                                           |  |      |      |        
|                                           |  |     
|Gross profit                               |  |      |      |        
|Research and development costs, net        |  |      |      | 13, 14G
|Selling and marketing expenses             |  |      |      | 13, 14H
|General and administrative expenses        |  |      |      | 13, 14I
|Restructuring and related impairment costs |  |      |      | 17     
|Acquisition-related expenses               |  |      |      | 18     
|Amortization of acquisition-related        |  |     
|intangible assets                          |  |      |      | 7      
|                                           |  |      |      |        
|                                           |  |     
|Operating loss                             |  |      |      |        
|Financial expenses                         |  |      |      | 13, 14J
|Financial income                           |  |      |      | 14J    
|Impairment of Auction Rate Securities      |  |      |      | 4      
|                                           |  |      |      |        
|                                           |  |     
|Loss before taxes on income                |  |      |      |        
|                                           |  |     
|Income tax benefit (expense)               |  |      |      | 12     
|                                           |  |      |      |        
|                                           |  |     
|Net loss                                   |  |      |      |        
|                                           |  |      |      |        
|                                           |  |     
|Loss per ordinary share                    |  |     
|Net basic and diluted loss per             |  |     
|ordinary share:                            |  |      |      |        
|                                           |  |      |      |        
|                                           |  |     
|Weighted average number  of                |  |     
|shares outstanding                         |  |      |      |        
|                                           |  |      |      |        
|                                           |  |      |      |        

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

F - 5

---

---

ECtel Ltd. and Subsidiaries

|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|Consolidated Statements of  Shareholders' Equity and Comprehensive Loss for the years ended December 31,
2007, 2006 and 2005
|                                                                                                                            

|                                         | Ordinary
shares | Share
capital | Treasury
shares | Capital
surplus | Accumulated
loss | Accumulated
other
comprehensive
loss | Comprehensive
loss | Total
shareholders'
equity
|---------------------------------------- | --------------- | ------------- | --------------- | --------------- | ---------------- | ------------------------------------ | ------------------ | --------------------------
|
|
|
|
|Balance at December 31, 2004             |                 |               |                 | 18,151,172      |                  |                                      | 214                |                           
|                                         |                 |              
|Exercise of stock options                |                 |               |                 | 17,917          |                  |                                      | *                  |                           
|Net loss                                 |                 |               |                 | -               |                  |                                      | -                  |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|Comprehensive loss                       |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |              
|Balance at December 31, 2005             |                 |               |                 | 18,169,089      |                  |                                      | 214                |                           
|                                         |                 |              
|Exercise of stock options                |                 |               |                 | 500,373         |                  |                                      | 4                  |                           
|Share-based compensation                 |                 |               |                 | -               |                  |                                      | -                  |                           
|Repurchase of shares                     |                 |               |                 | (2,304,794      | )                |                                      | -                  |                           
|Net loss                                 |                 |               |                 | -               |                  |                                      | -                  |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|Comprehensive loss                       |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |              
|Balance at December 31, 2006             |                 |               |                 | 16,364,668      |                  |                                      | 218                |                           
|                                         |                 |              
|Exercise of stock options                |                 |               |                 | 321,733         |                  |                                      | 3                  |                           
|Share-based compensation                 |                 |               |                 | -               |                  |                                      | -                  |                           
|Comprehensive loss:                      |                 |              
|Net loss                                 |                 |               |                 | -               |                  |                                      | -                  |                           
|Unrealized loss on marketable securities |                 |               |                 | -               |                  |                                      | -                  |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |              
|Comprehensive loss                       |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |              
|Balance at December 31, 2007             |                 |               |                 | 16,686,401      |                  |                                      | 221                |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           
|                                         |                 |               |                 |                 |                  |                                      |                    |                           

* Represents an amount less than $1
thousand.

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

F - 6

---

---

ECtel Ltd. and Subsidiaries

|                                                                     
|---------------------------------------------------------------------
|Consolidated Statements of Cash Flows for the years ended December 31
|                                                                     

|                                                              | 2007 | 2006 | 2005
|------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Cash flows from operating activities                          |      |      |     
|Net loss                                                      |      |      |     
|                                                              |      |     
|Adjustments to reconcile net loss to                          |      |     
|cash (used in) provided by operating activities:              |      |     
|                                                              |      |     
|Depreciation and amortization                                 |      |      |     
|Impairment of Auction Rate Securities                         |      |      |     
|Loss on sale of long-term marketable securities               |      |      |     
|(Gain) loss on sale of property, plant and equipment          |      |      |     
|Premium amortization of long-term marketable securities       |      |      |     
|Share-based compensation expenses                             |      |      |     
|                                                              |      |     
|Changes in operating assets and liabilities:                  |      |     
|(Increase) decrease in trade receivables, net                 |      |      |     
|Decrease (increase) in other receivables                      |      |      |     
|Decrease in inventories                                       |      |      |     
|Decrease (increase) in work in progress                       |      |      |     
|Deposits in respect of employee severance obligations         |      |      |     
|Increase (decrease) in trade payables                         |      |      |     
|Increase (decrease) in advances from customers                |      |      |     
|Changes in related parties, net                               |      |      |     
|(Decrease) increase in other payables and accrued liabilities |      |      |     
|Increase (decrease) in liability for employee                 |      |     
|severance benefits                                            |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|Net cash (used in) provided by operating activities           |      |      |     
|                                                              |      |      |     
|                                                              |      |      |     

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

F - 7

---

---

ECtel Ltd. and Subsidiaries

|                                                                              
|------------------------------------------------------------------------------
|Consolidated Statements of Cash Flows for the years ended December 31 (cont'd)
|                                                                              

|                                                          | 2007 | 2006 | 2005
|--------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Cash flows from investing activities                      |      |      |     
|Changes in short-term investments, net                    |      |      |     
|Capital expenditure on property, plant and equipment      |      |      |     
|Acquisition of consolidated subsidiaries, less cash       |      |     
|acquired (see A below)                                    |      |      |     
|Payments in consideration of acquisition of newly         |      |     
|consolidated subsidiaries                                 |      |      |     
|Long-term (funding) deposits withdrawal                   |      |      |     
|Proceeds from sale of property, plant and equipment       |      |      |     
|Proceeds from maturity of long-term marketable securities |      |      |     
|Investment in long-term marketable securities             |      |      |     
|                                                          |      |      |     
|                                                          |      |     
|Net cash (used in) provided by investing activities       |      |      |     
|                                                          |      |      |     
|                                                          |      |     
|Cash flows from financing activities                      |      |     
|Repurchase of shares                                      |      |      |     
|Exercise of stock options                                 |      |      |     
|                                                          |      |      |     
|                                                          |      |     
|Net cash (used in) provided by financing activities       |      |      |     
|                                                          |      |      |     
|                                                          |      |     
|Net decrease in cash and cash equivalents                 |      |      |     
|                                                          |      |     
|Cash and cash equivalents at beginning of the year        |      |      |     
|                                                          |      |      |     
|                                                          |      |     
|Cash and cash equivalents at end of the year              |      |      |     
|                                                          |      |      |     
|                                                          |      |     
|Supplemental disclosures:                                 |      |     
|                                                          |      |     
|Interest expenses paid                                    |      |      |     
|Income taxes paid, net                                    |      |      |     
|                                                          |      |      |     
|                                                          |      |      |     

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

F - 8

---

---

ECtel Ltd. and Subsidiaries

|                                                                              
|------------------------------------------------------------------------------
|Consolidated Statements of Cash Flows for the years ended December 31 (cont'd)
|                                                                              

|                                                    | 2005
|--------------------------------------------------- | ----
|
|
|
|
|                                                    |     
|A.         Acquisition of consolidated subsidiaries |     
|                                                    |     
|Trade receivables                                   |     
|Inventory                                           |     
|Other receivables                                   |     
|Trade payables                                      |     
|Other payables and accrued liabilities              |     
|Property, plant and equipment, net                  |     
|Goodwill                                            |     
|Third party relations                               |     
|Core technology                                     |     
|Customer contracts                                  |     
|Contractual customer relations                      |     
|Long-term assets                                    |     
|Liability for employees severance benefits          |     
|                                                    |     
|                                                    |     
|Cash paid for net assets acquired                   |     
|                                                    |     

|B. | Non-cash
transactions
|-- | ---------------------

|                                          | 2007 | 2006 | 2005
|----------------------------------------- | ---- | ---- | ----
|
|
|
|
|Purchase of property, plant and equipment |      |      |     
|not yet paid                              |      |      |     
|                                          |      |      |     

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

F - 9

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 1  General

| | ECtel
Ltd. and its subsidiaries (hereinafter  the Company) provide Integrated
Revenue Management (IRM) solutions for communications services providers. ECtel Ltd. was
established and commenced operations in April 1990. In October 1999, the Company
completed an initial public offering of its ordinary shares on the Nasdaq National
Market.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 29, 2005, ECtel Ltd. acquired all of the outstanding shares of Elron Telesoft
Ltd. and Elron Telesoft Export Ltd., two sister companies held by Elron Electronic
Industries Ltd., (see Note 7).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel
Ltd.s eight subsidiaries are ECtel Inc., ECtel (2000) UK Limited, ECtel B.V, ECtel
GmbH, Telrad Hawk Net-I Ltd. (in voluntary liquidation), ECtel Telesoft Ltd., ECtel
Telesoft Export (98) Ltd. and ECtel EOOD Bulgaria, which was incorporated in December
2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 2 
Significant Accounting Policies

| | The
 financial  statements  have  been  prepared  in  conformity  with  U.S.  generally
 accepted          accounting principles (U.S. GAAP).
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All intercompany transactions and balances
have been eliminated in consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Foreign
currency
| | -- | ----------------

| | The
currency of the primary economic environment in which the operations of the Company and
its subsidiaries are conducted is the U.S. dollar (dollar).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | Most
of the Companys sales are made outside of Israel (see Note 14E regarding
geographical distribution) and are made primarily in dollars. Most purchases of materials
and components, as well as most selling and other expenses incurred outside Israel, are
in dollars. In view of the foregoing, the dollar has been determined to be the Companys
functional currency.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances denominated in dollars are presented at their original amounts. Non-dollar
transactions and balances have been translated into dollars in accordance with the
principles set forth in Statement of Financial Accounting Standards (SFAS)
No. 52, Foreign Currency Translation, of the Financial Accounting Standards
Board (FASB) of the United States.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
exchange gains and losses resulting from monetary balance sheet items denominated in
non-dollar currencies are reflected in the statement of operations when they arise. Such
exchange gains and losses are included in the same statement of operations items in which
the related transactions are included.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | C. | Cash
and cash equivalents
| | -- | -------------------------

| | The
Company considers all highly liquid investments with original maturity of three months or
less at date of purchase, to be cash equivalents. Marketable securities that have an
original maturity of three months or less are considered to be cash equivalents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Short-term
investments
| | -- | ----------------------

| | Short-term
deposits and marketable securities with maturity dates between 91 to 365 days, are
considered to be short-term investments (see also Note 2G).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Allowance
for doubtful accounts receivable  trade
| | -- | --------------------------------------------------

| | The
Company maintains an allowance for doubtful accounts for estimated losses inherent in its
accounts receivable portfolio. In establishing the required allowance, management bases
its determination, among other factors, on information available about the debtorsfinancial
situation, the volume of their operations and evaluation of the security received from
them. Account balances are charged against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote (see Note 14B).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Inventories
| | -- | -----------

| | Inventories
are stated at the lower of cost or market. Cost is determined using the moving average
method.
| | ----------------------------------------------------------------------------------------------------------

| | G. | Long-term
marketable securities
| | -- | -------------------------------

| | Long-term
marketable securities consist of Corporate Bonds, Auction Rate Securities and U.S.
Government Agencies debt securities. The Company classifies its Corporate Bonds and U.S.
Government Agencies debt securities as held-to-maturity. Held-to-maturity securities are
those securities in which the Company has the ability and intent to hold the security
until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. The Company classifies its
Auction Rate Securities as available-for-sale. Marketable securities available-for-sale
are carried at fair value, held for an indefinite period of time and intended for use in
meeting the Companys ongoing liquidity needs. Unrealized gains and losses on
available-for-sale securities, which are deemed to be temporary, are reported as a
separate component of shareholders equity, net of tax.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Any
decline in the market value of any held-to-maturity or available-for-sale security below
cost, that is deemed to be other than temporary, results in a reduction in the carrying
amount to fair value. The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or accreted over the life
of the related held-to-maturity security as an adjustment to yield using the
straight-line method. Interest income is recognized when earned.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | H. | Property,
plant and equipment
| | -- | -----------------------------

| | 1. | Property,
plant and equipment are stated at cost less accumulated depreciation.
| | -- | -------------------------------------------------------------------------------

| | 2. | Depreciation
is computed using the straight-line method, over the estimated                useful life
of the assets as estimated by the Company.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

| |                                |                       
| | ------------------------------ | ----------------------
|
|
|
|
| | Machinery and equipment        | 10% - 33% (mainly 20%)
| | Office furniture and equipment | 6%                    
| |                                |                       

| | Leasehold
improvements are amortized by the straight-line method over the shorter of their useful
lives or the terms of the leases.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | 3. | Major
renewals and improvements are capitalized, while repairs and maintenance
               are expensed as incurred.
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | 4. | Upon
the sale or retirement of equipment, the cost and related accumulated
               depreciation and amortization are eliminated from the respective accounts
and                the resulting gain or loss is reflected in the consolidated statement
of                operations.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Goodwill
and other intangible assets
| | -- | ------------------------------------

| | Goodwill
represents the excess of the aggregate purchase price over the fair value of the net
assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment
at least annually in accordance with the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. The goodwill impairment test is a two-step process. Under
the first step, the fair value of the reporting unit is compared with its carrying value
(including goodwill). If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and the
enterprise must perform step two of the impairment test (measurement). Under step two, an
impairment loss is recognized for any excess of the carrying amount of the reporting units
goodwill over the implied fair value of that goodwill. Fair value of the reporting unit
is determined using a discounted cash flow analysis. If the fair value of the reporting
unit exceeds its carrying value, step two does not need to be performed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2007, 2006 and 2005, the Company performed its annual impairment review of goodwill and
concluded that there was no impairment in those years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets that have finite useful lives are amortized over their expected useful lives and
are evaluated for recoverability whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Revenue
recognition
| | -- | -------------------

| | 1. | Revenues
from product sales (which include software) are recognized, in                accordance
with Statement of Position (SOP) 97-2, Software                Revenue
Recognition, when all the following criteria are met: (1)                persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the
               vendors fee is fixed or determinable and (4) collectibility is
probable.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | J. | Revenue
recognition (contd)
| | -- | ----------------------------

| | The
Company includes post contract customer support (PCS) within the price of the product
sale. This PCS is for a one-year period and includes a standard product warranty and
upgrades and enhancements to correct minor bugs or errors in the software. The cost of
providing the PCS is insignificant and the warranty and bug fixes have been infrequent.
Therefore, the PCS revenue is recognized upon delivery of the product in accordance with
SOP 97-2.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company uses the residual method to recognize revenue when an arrangement includes one or
more elements to be delivered at a future date and vendor-specific objective evidence of
the fair value of all undelivered elements exists. Vendor-specific objective evidence of
fair value is based on the normal pricing practices for those products and services when
sold separately. Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as revenue. If
evidence of the fair value of one or more undelivered elements does not exist, the
revenue is deferred and recognized when delivery of those elements occurs or when fair
value can be established.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
a software product is sold together with implementation or consulting services, product
fees are recognized upon delivery, provided that the above criteria are met, payment of
the license fees is not dependent upon the performance of the services, and the services
do not provide significant customization or modification of the software products and are
not essential to the functionality of the software that was delivered.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If,
at the outset of an arrangement, the arrangement fee is determined as not fixed or
determinable, revenue is deferred until the arrangement fee becomes due. If, at the
outset of the arrangement, collectibility is determined to be not probable, revenue is
deferred until the earlier of when collectibility becomes probable or the receipt of
payment. If an arrangement provides for customer acceptance, revenue is not recognized
until the earlier of receipt of customer acceptance or expiration of the acceptance
period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Revenues
from product maintenance and support contracts are recognized on a
               straight-line basis over the term of the support period. The majority of
the                Companys maintenance agreements provide technical support as
well as                unspecified software product upgrades and releases when and if
made available by                the Company during the term of the support period.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Revenues
from contracts requiring significant design, development, modification                and
customization are recognized using the percentage of completion method,
               which is in accordance with SOP 81-1, Accounting for performance of
               construction type and certain production type contracts. The
percentage of                completion is determined as a ratio of the extent of the
progress toward                completion of the contract, using an input measure method
of labor hours                performed. In the event that management anticipates a loss
on a particular                contract, such anticipated loss is provided for in full in
the period when the                loss is first anticipated.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
collectibility is determined as not being probable, the Company recognizes revenues from
contracts with significant design, development, modification and customization of the
software, using the completed-contract method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | J. | Revenue
recognition (contd)
| | -- | ----------------------------

| | 4. | Value
added taxes applied on sales collected from customers and remitted to
               governmental authorities are accounted for on a net basis, and therefore,
are                excluded from revenues, in accordance with Emerging Issues Task Force
               (EITF) Issue No. 06-3, How taxes collected from
customers and                remitted to Governmental Authorities should be presented in
the Income                Statement. The Company has historically presented such
taxes on a net                basis.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Research
and development costs
| | -- | ------------------------------

| | 1. | Research
and development costs, are charged to the consolidated statements of
               operations as incurred. The Company records grants received from the
Office of                the Chief Scientist of the Israeli Ministry of Industry Trade
and Labor, (the                OCS) as a reduction of research and
development expenses. Royalties                payable to OCS are recognized pursuant to
sale of related products and are                classified as cost of revenues.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Software
development costs are expensed as incurred until the phase where
               technological feasibility has been established, at which time subsequent
costs                are capitalized until the product is available for general release
to customers.                To date, either the establishment of technological
feasibility of the                Companys products and their general release has
substantially coincided or                costs incurred subsequent to the achievement of
technological feasibility have                not been material. Accordingly, no software
development costs have been                capitalized by the Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Liability
for employee severance benefits
| | -- | -----------------------------------------

| | The
Companys liability for severance pay for its Israeli employees is calculated
pursuant to Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date. Employees
are entitled to one months salary for each year of employment or a portion thereof.
Certain senior executives are entitled to receive additional severance pay. The Companys
liability for all of its Israeli employees is partly provided for by monthly deposits in
insurance policies and by an accrual. The value of these policies is recorded as an asset
in the Companys balance sheet.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assets
held for employees severance benefits represent contributions to severance pay funds and
cash surrender value of life insurance policies that are recorded at their current
redemption value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Income
taxes
| | -- | ------------

| | The
Company accounts for income taxes under SFAS No. 109 Accounting for Income Taxes.
Income taxes are accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the tax bases of assets and liabilities and their respective
financial reporting amounts as well as tax loss and credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates in which those temporary
differences are expected to be reversed or settled. The tax effect resulting from a
change in tax rates is recognized in income in the period that includes the enactment
date. The Company provides a valuation allowance to reduce deferred tax assets to the
extent it believes it is more likely than not that such assets will not be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | M. | Income
taxes (contd)
| | -- | ---------------------

| | The
Companys accounting policy is to accrue interest related to unrecognized tax
benefits as a component of interest expense while penalties are included as a part of
general and administrative expenses in the consolidated statement of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Share
incentive plans
| | -- | ---------------------

| | Effective
January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment.
This statement replaces SFAS No. 123, and supersedes APB No. 25. SFAS 123(R)
requires that all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the fair value of the award on the date of
grant. This statement was adopted using the modified prospective method of application,
which requires the Company to recognize compensation cost on a prospective basis. In
March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123(R).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-based
compensation expense recognized during the period is based on the value of the portion of
share-based payment awards that is ultimately expected to vest during the period.
Stock-based compensation expense recognized in the Companys Consolidated Statement
of Operations for the years ended December 31, 2007 and 2006 includes compensation
expense for share-based payment awards granted prior to, but not yet vested as of
December 31, 2005 based on the grant date fair value, estimated in accordance with the
pro forma disclosure provisions of SFAS 123, and compensation expense for the share-based
payment awards granted subsequent to December 31, 2005 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the Companys pro
forma information required under SFAS 123 for the year ended December 31, 2005, the
Company accounted for forfeitures as they occurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimated
grant date fair value is determined using the Black-Scholes option-pricing
model. Effective January 1, 2006, the value of stock options is recognized as
compensation expense over the requisite service period of the entire award.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
purposes of the pro forma disclosure relating to year ended December 31, 2005 the value
of the options is estimated using a Black-Scholes option-pricing model and
amortized to expense over the options service periods with forfeitures recognized
as they occurred. The following table illustrates the effect on net loss for the year
ended December 31, 2005 as if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Companys stock plans prior
to adoption of SFAS No. 123(R) on January 1, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | N. | Share
incentive plans
| | -- | ---------------------

| |                                                     | Year ended
December 31
2005
| | --------------------------------------------------- | ---------------------------
|
|
|
|
| | Net loss as reported                                |                            
| | Less:       Application of Stock-Based compensation |                            
| | Expense according to SFAS 123                       |                            
| |                                                     |                            
| |                                                     |                            
| | Net loss - pro forma                                |                            
| |                                                     |                            
| |                                                     |                            
| | Basic and diluted loss per ordinary share ($):      |                            
| | As reported                                         |                            
| |                                                     |                            
| |                                                     |                            
| | Pro forma                                           |                            
| |                                                     |                            
| |                                                     |                            

| | O. | Derivative
financial instruments
| | -- | --------------------------------

| | The
Company accounts for derivative financial instruments according to SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. The Company utilizes derivative
financial instruments principally to manage market risks and reduce its exposure
resulting from fluctuations in foreign currency exchange rates. Derivative instruments
include forward exchange and purchase contracts. Under SFAS 133, the Company is required
to recognize all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive income under
shareholders equity until the hedged item is recognized in earnings. The
ineffective portion of a derivatives change in fair value will be immediately
recognized in earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not utilize derivative financial instruments for trading or other
speculative purposes. The Company actively evaluates the creditworthiness of the
financial institutions that are counter parties to derivative financial instruments, and
does not expect counter parties to fail to meet their obligations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Earnings
(loss) per Ordinary Share
| | -- | ----------------------------------

| | Basic
and diluted earnings (loss) per ordinary share are presented in conformity with SFAS No.
128, Earnings Per Share, for all years presented. Basic earnings (loss) per
ordinary share are calculated by dividing the net income (loss) attributable to ordinary
shares, by the weighted average number of ordinary shares outstanding. For the years
ended December 31, 2007, 2006 and 2005, diluted earnings (loss) per share is the same as
basic earnings (loss) per share as the effect of the inclusion of 2,090,999, 2,351,914
and 3,260,493 common stock equivalents in 2007, 2006 and 2005 respectively, would be
anti-dilutive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | Q. | Estimations
and assumptions in the financial statements
| | -- | -------------------------------------------------------

| | The
preparation of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
estimates and assumptions used are managements best estimates based on experience
and historical data, however actual results could differ from those estimates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | Accumulated
other comprehensive loss
| | -- | ------------------------------------

| | Accumulated
other comprehensive loss, presented in shareholders equity, includes unrealized
loss on marketable securities.
| | ---------------------------------------------------------------------------------------------------------------------------

| | S. | Long-lived
assets
| | -- | -----------------

| | The
Company accounts for long-lived assets under the provisions of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144
requires that long-lived assets 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 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 to the extent that the carrying amount value exceeds its
fair value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Accrued
warranty costs
| | -- | ----------------------

| | Accrued
warranty costs are calculated in respect of products sold and work performed (for periods
subsequent to delivery of the products or performance of the work) based on managements
estimation and in accordance with the Companys prior experience, (see also Note
10G).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U. | Recently
Issued Accounting Standards
| | -- | ------------------------------------

| | 1. | In
September 2006, the FASB issued FASB Statement No. 157, Fair Value
               Measurement (Statement 157). Statement 157 defines fair value,
               establishes a framework for the measurement of fair value, and enhances
               disclosures about fair value measurements. The Statement does not require
any                new fair value measures. The Statement is effective for fair value
measures                already required or permitted by other standards for fiscal years
beginning                after November 15, 2007. The Company is required to adopt
Statement 157                beginning on January 1, 2008. Statement 157 is required to
be applied                prospectively, except for certain financial instruments. Any
transition                adjustment will be recognized as an adjustment to opening
retained earnings in                the year of adoption. In February 2008, FASB Staff
Position 157-2 deferred the                effective date of Statement 157 to fiscal
years beginning after November 15,                2008. The Company is currently
evaluating the impact of adopting Statement 157                on its results of
operations and financial position.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 2 
Significant Accounting Policies (contd)

| | 2. | In
December 2007, the FASB issued FASB Statement No. 141R, Business
               Combinations (Statement 141R) and FASB Statement No. 160,
               Noncontrolling Interests in ConsolidatedFinancial
Statements                an amendment to ARB No. 51 (Statement 160).
Statements 141R and 160                require most identifiable assets, liabilities,
noncontrolling interests, and                goodwill acquired in a business combination
to be recorded at full fair                value and require noncontrolling
interests (previously referred to as                minority interests) to be reported as
a component of equity, which changes the                accounting for transactions with
noncontrolling interest holders. Both                Statements are effective for periods
beginning on or after December 15, 2008,                and earlier adoption is
prohibited. Statement 141R will be applied to business                combinations
occurring after the effective date. Statement 160 will be applied
               prospectively to all noncontrolling interests, including any that arose
before                the effective date. The Company is currently evaluating the impact
of adopting                Statement 141R and Statement 160 on its results of operations
and financial                position.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | V. | Recently
Adopted Accounting Standards
| | -- | -------------------------------------

| | The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an Interpretation of FASB Statement No. 109 (FIN 48)
on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with SFAS No. 109
and prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The adoption of
FIN 48 did not have an effect on the Companys financial condition, results of
operations or cash flows. Additional disclosures on FIN 48 are included in Note 12I.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | Reclassification
| | -- | ----------------

| | Certain
prior year figures have been reclassified to conform to current year presentation.
| | ------------------------------------------------------------------------------------------

# Note 3  Inventories

| | Inventories
consist of the following:
| | -------------------------------------

| |                              | December 31
| | ---------------------------- | -----------
|
|
|
|
| | Raw materials and components |            
| | Work in process              |            
| | Finished products            |            
| |                              |            
| |                              |            
| |                              |            
| |                              |            
| |                              |            

F - 18

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 4  Investment
in Marketable Securities and Deposits

| | The
Companys investments in marketable securities consist primarily of investments in
US Government Agencies, Auction Rate Securities and Corporate bonds.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | The
following table summarizes the Companys marketable securities and
               deposits at December 31, 2007 and 2006 (regarding assumptions used for
estimated                fair value, see Note 16):
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                             | December 31, 2007
| | ------------------------------------------- | -----------------
|
|
|
|
| | Held to maturity securities:                |                  
| | US Government agencies                      |                  
| | Corporate bonds                             |                  
| |                                             |                  
| |                                             |                  
| | Short-term investments                      |                  
| |                                             |                  
| |                                             |                  
| | Held to maturity securities:                |                  
| | US Government agencies                      |                  
| | Corporate bonds                             |                  
| | Available for sale securities:              |                  
| | Auction Rate Securities, net of impairments |                  
| | (see (4) below)                             |                  
| |                                             |                  
| |                                             |                  
| | Long-term marketable securities             |                  
| |                                             |                  

| |                                 | December 31, 2006
| | ------------------------------- | -----------------
|
|
|
|
|
| | Held to maturity securities:    |                  
| | US Government agencies          |                  
| | Corporate bonds                 |                  
| |                                 |                  
| | Available for sale securities:  |                  
| | Auction Rate Securities         |                  
| |                                 |                  
| | Short-term investments          |                  
| |                                 |                  
| |                                 |                  
| | Held to maturity securities:    |                  
| | US Government agencies          |                  
| | Corporate bonds                 |                  
| |                                 |                  
| |                                 |                  
| | Long-term marketable securities |                  
| |                                 |                  
| |                                 |                  

F - 19

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 4  Investment
in Marketable Securities and Deposits (contd)

| | (2) | The
following table summarizes the Companys marketable securities by
               maturity date as at December 31, 2007:
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| |                                                   | Amortized cost | Fair value
| | ------------------------------------------------- | -------------- | ----------
|
|
|
|
| | Maturity date of long-term marketable securities: |                |           
| | 2009                                              |                |           
| | 2010                                              |                |           
| |                                                   |                |           
| |                                                   |                |           
| |                                                   |                |           
| |                                                   |                |           
| |                                                   |                |           

| | (3) | The
following table shows the gross unrealized losses and fair value of the
               Companys investments in marketable securities with unrealized losses
that                are not deemed to be other-than-temporarily impaired, aggregated by
investment                category and length of time that individual securities have
been in a continuous                unrealized loss position.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007:
| | ------------------------

| |                 | Less than 12 months | 12 months or Greater |  |       
| | --------------- | ------------------- | -------------------- |  | ------
|
|
|
|
| | Auction Rate    |                     |                      |  |       
| | Securities      |                     |                      |  | 3,976 
| | US Government   |                     |                     
| | Agencies        |                     |                      |  | 7,561 
| | Corporate bonds |                     |                      |  | 1,504 
| |                 |                     |                      |  |       
| |                 |                     |                     
| | Total           |                     |                      |  | 13,041
| |                 |                     |                      |  |       
| |                 |                     |                      |  |       

| | As
of December 31, 2006:
| | ------------------------

| |                 | Less than 12 months | 12 months or Greater |  |       
| | --------------- | ------------------- | -------------------- |  | ------
|
|
|
|
| | Auction Rate    |                     |                      |  |       
| | Securities      |                     |                      |  | 8,310 
| | US Government   |                     |                     
| | Agencies        |                     |                      |  | 7,248 
| | Corporate bonds |                     |                      |  | 3,491 
| |                 |                     |                      |  |       
| |                 |                     |                     
| | Total           |                     |                      |  | 19,049
| |                 |                     |                      |  |       
| |                 |                     |                      |  |       

| | The
unrealized losses on the Companys investments in US Government Agencies and
Corporate bonds were caused by interest rate increases. Since the Company has the ability
and intent to hold these investments until a recovery of fair value, which may be
maturity, the Company does not consider these investments to be other-than-temporarily
impaired as of December 31, 2007 and 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 4  Investment
in Marketable Securities and Deposits (contd)

| | (4) | Auction
Rate Securities Impairments
| | --- | -----------------------------------

| | As
of December 31, 2007, the Company had $7,405 thousand of principal invested in Auction
Rate Securities (ARS). The Company has a long history of investing excess cash under a
conservative corporate policy that only allows investments in highly rated
investment-grade securities, with preservation of capital and liquidity as primary
objectives. The Companys ARS were ranked as AAA and AA at the time of purchase, and
there had been no change in their rating. All securities continue to pay interest in
accordance with their stated terms.  However, since these ARS have experienced
multiple failed auctions due to a lack of liquidity in the market for these securities,
the Company has recognized an impairment charge with respect to its ARS portfolio. As
a result, it has recorded, an impairment charge of $1,560 thousand, which is considered
other than temporary, and an unrealized loss of $178 thousand recorded
in other comprehensive loss as a reduction of shareholders equity, which is
considered a temporary impairment.  Based on managements
evaluation that the Companys ability and intent is to hold these investments for a
reasonable period of time sufficient for a forecasted recovery of fair value, the Company
does not consider these investments to be other-than-temporarily impaired at December 31,
2007. All of these ARS are classified as long-term investments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 5  Long-Term
Other Assets

| |                                             | December 31
| | ------------------------------------------- | -----------
|
|
|
|
| | Assets held for employee severance benefits |            
| | Long-term deposits                          |            
| |                                             |            
| |                                             |            
| |                                             |            
| |                                             |            
| |                                             |            

F - 21

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 6  Property,
Plant and Equipment, Net

| | Property,
plant and equipment consist of the following:
| | -------------------------------------------------------

| |                                    | Leasehold
improvements | Machinery
and
equipment | Office
furniture and
equipment | Total
| | ---------------------------------- | ---------------------- | ----------------------- | ------------------------------ | -----
|
|
|
|
| | Cost                               |                        |                         |                                |      
| | Balance at January 1, 2007         |                        |                         |                                | -    
| | Additions                          |                        |                         |                                | 2    
| | Disposals                          |                        |                         |                                | -    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Balance at December 31, 2007       |                        |                         |                                | 2    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Accumulated depreciation           |                        |                        
| | Balance at January 1, 2007         |                        |                         |                                | -    
| | Depreciation                       |                        |                         |                                | -    
| | Disposals                          |                        |                         |                                | -    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Balance at December 31, 2007       |                        |                         |                                | -    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Property, plant and equipment, net |                        |                        
| |                                    |                        |                        
| | Balance at December 31, 2007       |                        |                         |                                | 2    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Property, plant and equipment, net |                        |                        
| |                                    |                        |                        
| | Balance at December 31, 2006       |                        |                         |                                | -    
| |                                    |                        |                         |                                |      
| |                                    |                        |                         |                                |      

F - 22

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 7  Goodwill

| | Changes
in net carrying amount of goodwill were as follows:
| | -----------------------------------------------------------

| |                                              | Year ended December 31
| | -------------------------------------------- | ----------------------
|
|
|
|
| | Opening balance                              |                       
| | Adjustments relating to Telesoft acquisition |                       
| |                                              |                       
| |                                              |                       
| |                                              |                       
| |                                              |                       
| |                                              |                       

| | As
a result of the purchase of Elron Telesoft Ltd. and Elron Telesoft Export (98) Ltd. (Telesoft)
in 2005, goodwill in an amount of $3,558 thousand was created (as at the date of
purchase). During January 2006, the Company paid to the Seller an additional amount of
$21 thousand for adjustments, according to the purchase agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the date of acquisition, the Company identified a certain pre-acquisition liability
with respect to possible royalty payments to a third party in the amount of $400
thousand, which was not recorded in Telesofts books. During the year 2006, the
Company reevaluated the liability and decided to reverse it, due to managements
assessment and future estimations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company conducts its annual goodwill impairment test as of June 30 every year. The
Company performed annual impairment tests during 2007, 2006 and 2005 and did not identify
any further impairment losses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 8  Other
Intangible Assets, Net

| |                                       | December 31
| | ------------------------------------- | -----------
|
|
|
|
| | Telesoft acquisition - original cost: |            
| | Third party relations                 |            
| | Core technology                       |            
| | Customer contracts                    |            
| | Contractual customer relations        |            
| |                                       |            
| |                                       |            
| |                                       |            
| |                                       |            
| | Less - accumulated amortization       |            
| |                                       |            
| |                                       |            
| |                                       |            
| |                                       |            
| |                                       |            

| | The
amortization expenses were $94 thousand and $423 thousand for each of the years ended
December 31, 2007 and 2006, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------

F - 23

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 8  Other
Intangible Assets, Net (contd)

| | Future
estimated amortization expenses:
| | ---------------------------------------

| |       | Year ended
December 31,
2007
| | ----- | ----------------------------
|
|
|
|
| | 2008  |                             
| | 2009  |                             
| | 2010  |                             
| |       |                             
| |       |                             
| | Total |                             
| |       |                             
| |       |                             

# Note 9  Liability
for Employee Severance Benefits

| | A. | Employees
of the Israeli Companies
| | -- | ----------------------------------

| | Under
Israeli law and labor agreements, Israeli companies are required to make severance and
pension payments to its retired or dismissed employees and to employees leaving
employment in certain other circumstances.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | The
liability in respect of certain employees is discharged by participating in
               a defined contribution pension plan and making regular deposits with a
pension                fund. The custody and management of the amounts so deposited is
independent of                any control by the Israeli companies and accordingly such
amounts funded                (included in expenses on an accrual basis) and related
liabilities are not                reflected in the balance sheet.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
respect of the liability to other employees, individual insurance policies
               are purchased and deposits are made with recognized severance pay funds.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
liability for severance pay is calculated on the basis of the latest salary paid to each
employee multiplied by the number of years of employment. Withdrawals from the funds may
be made only for the purpose of disbursement of severance pay.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
some of the Companys employees, the payments to the pension funds and insurance
policies discharge the Companys obligation to the employees, as required by the
Severance Pay Law, in connection with Section 14.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accumulated
amounts in the pension funds and with the insurance companies are not under the control
or administration of the Company, and accordingly, neither those amounts nor the
corresponding accrual for severance pay are reflected in the balance sheet. The
obligation of the Company, under law and labor agreements, for termination benefits to
employees not covered by the aforementioned pension or insurance plans are included in
the balance sheet.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Expenses
recorded in respect of severance and pension pay for the years ended
               December 31, 2007, 2006 and 2005 are $718 thousand, $133 thousand and $124
               thousand, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 9  Liability
for Employee Severance Benefits (contd)

| | B. | Employees
of ECtel Inc.
| | -- | -----------------------

| | The
U.S consolidated subsidiary, ECtel Inc., sponsors a 401(K) defined contribution plan
which permits its employees to make contributions on a pre-tax basis subject to the
limits specified in the Internal Revenue Code. These contributions are not subject to
federal income taxes until distributed to the employees. The subsidiary matches the
employees contribution up to 5% of the employees earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
subsidiarys matching contributions with respect to this plan were $41 thousand, $36
thousand and $42 thousand in 2007, 2006 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 10 
Commitments and Contingencies

| | A. | Lease
commitments
| | -- | -----------------

| | The
Company has entered into operating leases (in respect of premises and motor vehicles) in
Israel and abroad. The agreements expire on various dates from 2008 to 2012 (some have
renewal options) and are in US dollars, local currencies or linked to the US dollar.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum annual rental payments which the Company is committed to pay under the above
leases, at rates in effect at December 31, 2007, are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31: | $ in thousands
| | ------------------------ | --------------
|
|
|
|
| | 2008                     |               
| | 2009                     |               
| | 2010                     |               
| | 2011                     |               
| | 2012                     |               
| |                          |               

| | As
to rent expense in connection with the Companys leased premises and vehicles, see
Note 14K.
| | -----------------------------------------------------------------------------------------------

| | B. | Royalty
commitments
| | -- | -------------------

| | The
Company is committed to pay royalties for several approved programs to the Government of
Israel, Ministry of Industry and Commerce and Office of Chief Scientist (hereinafter
 OCS), on proceeds from sales of products in which the Israeli
Government participated by way of grants for research and development. The royalties are
computed at the rate of 3%-3.5% of the aggregate proceeds from sale of such products, up
to an amount not exceeding 100% of such grants plus interest at the LIBOR rate. Royalties
to the Government of Israel are presented in cost of revenues (see Note 14F).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2006, the Company repaid to the OCS an amount of $364 thousand, which represents
the entire obligation of Telesoft, in connection with the grants participation received
in prior years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of 2006, the Company committed to repay in full its primary program,
which the OCS had sponsored during prior years and in the R&D efforts of which the
OCS had participated. The total amount to be paid to the OCS was approximately $3
million, which includes interest accrued on the outstanding balance of the amounts
funded. Such amounts funded were presented in the cost of revenues of 2006 (see also Note
14D). The repayment was made in five installments during 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2007, the balance of the grants received for remaining programs totaled
$432 thousand of which $90 thousand has been paid as royalties.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 10 
Commitments and Contingencies (contd)

| | C. | Capital
expenditure commitments
| | -- | -------------------------------

| | The
Company invests in capital expenditures according to Approved Enterpriseprograms.
As at December 31, 2007, no investments are to be made in current approved programs
pursuant to the Israeli Law for the Encouragement of Capital Investments 1959 (see
Note 12A1).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Guarantees
| | -- | ----------

| | At
December 31, 2007, the Company has granted guarantees to third parties in the sum of $1.4
million mainly as performance guarantees that can be demanded in case of material breach
of contracts. The expiration dates of the guarantees are from January 2008 through
December 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Financial
instruments
| | -- | ---------------------

| | 1. | Forward
exchange contracts
| | -- | --------------------------

| | The
geographical distribution of the Companys operations gives rise to exposure to
market risks mainly from changes in foreign currency exchange rates. Financial
instruments are utilized by the Company to reduce these risks.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company enters into forward exchange contracts to hedge existing non-dollar assets and
liabilities.
| | -------------------------------------------------------------------------------------------------------

| | As
at December 31, 2007, the Company had no open currency forward contracts.
| | ----------------------------------------------------------------------------

| | Since
the impact of fluctuations in currency exchange rates on foreign exchange contracts
offsets the impact on the underlying items being hedged, these instruments do not expose
the Company to risk that would otherwise result from fluctuations in currency exchange
rates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Concentrations
of credit risk
| | -- | -----------------------------

| | Financial
instruments, which potentially subject the Company to significant concentrations of
credit risk, consist principally of cash and cash equivalents, investments and trade
accounts receivable. The Company maintains cash and cash equivalents, marketable
securities, forward exchange contracts and certain other financial instruments with
various major financial institutions. These major financial institutions are located in
Israel and the United States, and the Companys policy is designed to limit exposure
to any one institution.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
respect to trade accounts receivable, the Company is subject to a concentration of credit
risk as a majority of its outstanding trade receivables relate to sales to a limited
number of customers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 10 
Commitments and Contingencies (contd)

| | F. | Commitments
to indemnify directors and office holders
| | -- | -----------------------------------------------------

| | The
Companys Articles of Association include, but are not limited to, the following
provisions in connection with the protection, indemnification and insurance of its
directors and officers:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | The
Company may prospectively exculpate an Office Holder from all or some of the
               Office Holders responsibility for damage resulting from the Office
               Holders breach of the Office Holders duty of care to the
Company to                the fullest extent permitted by the Companies Law.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
Company may indemnify an Officer Holder in respect of an obligation or
               expense imposed on the Office Holder in respect of an act performed in his
               capacity as an Office Holder, to the fullest extent permitted by the
Companies                Law.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
Company may enter into a contract for the insurance of all or part of the
               liability of any Office Holder imposed on the Office Holder in respect of
an act                performed in his capacity as an Office Holder, to the fullest
extent permitted                by the Companies Law.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
this regard, the Company enters into Indemnification Agreements with its directors and
officers and purchases D&O liability insurance coverage.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Liability
for warranty
| | -- | ----------------------

| | The
activity in liability for warranty accounts for the year ended December 31 is as follows:
| | ---------------------------------------------------------------------------------------------

| |                                                | December 31
| | ---------------------------------------------- | -----------
|
|
|
|
| | Balance outstanding at beginning of the year   |            
| | Warranty expenses                              |            
| | Warranties for products sold                   |            
| | Lapsed warranties                              |            
| | Balance related to the acquisition of Telesoft |            
| |                                                |            
| |                                                |            
| | Balance outstanding at end of the year         |            
| |                                                |            
| |                                                |            

| | Warranty
expenses are reported under cost of revenues.
| | ------------------------------------------------------

F - 27

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 10 
Commitments and Contingencies (contd)

| | H. | Negative
pledge
| | -- | ---------------

| | In
September 2002, the Company executed a negative pledge to an Israeli Bank in which it
undertook not to perform primarily the following without the Banks prior written
consent:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Mortgage,
or undertake to mortgage, in any manner or form, any of its assets in
               favor of any third party.
| | --- | ------------------------------------------------------------------------------------------------------------------------

| | (2) | Sell
assets (other than in the ordinary course of business) for consideration
               exceeding $1 million in the aggregate, on an annual basis.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
the basis of the above-mentioned negative pledge, the Bank has agreed to grant various
credit facilities and/or banking services to the Company. The credit facilities granted
by the Bank to the Company and outstanding as of December 31, 2007 are approximately $1.2
million (out of total guarantees granted of $1.4 million) for guarantees issued by the
Bank in favor of third parties, at the request of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Class
action complaint
| | -- | ----------------------

| | On
October 19, 2004, a class action complaint (the Class Action Complaint),
Leumi Gemel Ltd. v. ECtel Ltd., et al., Case No. 8:04-CV-03380-RWT, was filed in the
United States District Court for the District of Maryland. Named as defendants are ECtel
Ltd., ECI Telecom Ltd., and certain of ECtels directors and officers. The Class
Action Complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated thereunder, by making false and misleading
statements in the Companys SEC filings and press releases during a period beginning
April 24, 2001, and lasting through April 2, 2003. The claims are purportedly brought on
behalf of all persons who purchased the Companys stock during that period. The
plaintiffs seek unspecified compensatory damages against the defendants, as well as
attorneys fees and costs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company filed a motion to dismiss the class action complaint. At a hearing on this motion
held on July 17, 2006, the court granted the Companys motion to dismiss the class
action complaint. Following the dismissal, the plaintiff filed a motion to further amend
the class action complaint. The Company responded by requesting that the court deny the
motion to amend. On March 6, 2007, the court denied the plaintiffs motion to
further amend the class action. Plaintiff filed an appeal of the district courts
orders with the United States Court of Appeals for the Fourth Circuit. After briefing in
the Fourth Circuit but before oral argument or any decision thereon, the parties reached
an agreement in principle to resolve the litigation. The parties have executed a
stipulation of settlement documenting their agreement. The stipulation of settlement must
be approved by the district court which has not yet occurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 11 
Shareholders Equity

| | A. | Share
incentive (stock options and restricted shares plans)
| | -- | -----------------------------------------------------------

| | 1. | The
Companys Share Option Plan (the ECtel Plan) was adopted by
               the Board of Directors on June 15, 1998.
| | -- | -------------------------------------------------------------------------------------------------------------------------

| | The
ECtel Plan provides that options may be granted to senior employees or managers of the
Company or its subsidiaries pursuant to (a) one or more sub-plans designed to benefit
Israeli employees from the provisions of Section 102 of the Israeli Income Tax Ordinance
(New Version) 1961 and (b) any other share incentive plan approved by the Board of
Directors of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys 2003 Share Option Plan (the 2003 Share Option Plan) was
adopted by the Board of Directors on August 3, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------

| | The
purpose of the 2003 Share Option Plan is to provide incentives to employees, directors,
consultants and contractors of the Company, or its subsidiary, whether Israeli or
non-Israeli, by providing them with opportunities to purchase Ordinary Shares of the
Company. The 2003 Plan is designed to allow the grantees to benefit from the provisions
of either Section 102 or Section 3(9) of the Israeli Income Tax Ordinance (New
Version) 1961, or the Tax Ordinance, as applicable, and the rules and regulations
promulgated thereunder or any other tax ruling provided by the tax authorities to the
Company, or, with respect to non-Israeli grantees, the applicable laws relevant in the
country of residency of such grantees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2004, the Companys shareholders approved the increase in the number of
ordinary shares underlying the Companys 2003 Share Option Plan for international
grantees from 200,000 ordinary Shares to 1,700,000 ordinary shares and the decrease in
the number of ordinary Shares underlying the Companys other share option plans
(other than the Companys 2003 U.S. stock option plan covering 50,000 ordinary
shares) by an aggregate of (i) 490,266 ordinary shares as of the date of the resolution
and (ii) 437,933 ordinary shares underlying the then outstanding options, which were
scheduled to expire within 60 days following the date of the resolution, upon such
expiration (unless any of such options were exercised prior to such expiration).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company began using Stock Appreciation Rights (SAR) as its
               primary stock-based incentive compensation, in November 2006. Prior to
such                time, stock options were primarily used for stock-based
               incentive compensation.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2006, the Companys shareholders approved an amendment to 2003 Share Option
Plan (hereinafter  2003 Equity Incentive Plan).
| | ---------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 11 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)           (contd)
| | -- | -------------------------------------------------------------------------------

| | The
2003 Equity Incentive Plan: (i) increased the number of shares reserved for issuance
under the 2003 Equity Incentive Plan by 2,000,000 shares, from 1,700,000 shares to
3,700,000 shares, (ii) added Restricted Stock Units and Stock Appreciation Rights to the
types of awards available for issuance under the 2003 Equity Incentive Plan, (iii)
terminated the ECtel Ltd. 2003 U.S. Employee Stock Option Plan (the 2003 U.S. Plan)
and (iv) consolidated the terms of the 2003 U.S. Plan into the 2003 Equity Incentive Plan
so that the Company will have only one equity incentive plan under which it makes awards.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Stock
option grants during the reporting period
| | -- | -----------------------------------------------

| | 3.1 | In
February 2005, the Board of Directors authorized, under the 2003 Share Option Plan, the
grant to employees of options to purchase a total of 120,000 ordinary shares. In February
2005, the Company granted 120,000 options to employees. The exercise price is $3.64 per
share. These options vest in 12 equal quarterly installments commencing May 2005.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | In
May 2005, the Board of Directors authorized, under the 2003 Share Option Plan, the grant
to employees of options to purchase a total of 100,000 ordinary shares. In May 2005, the
Company granted 100,000 options to employees. The exercise price is $3.70 per share.
These options vest 25% after one year and the rest in 12 equal quarterly installments
commencing May 2006.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 | In
August 2005, the Board of Directors authorized, under the 2003 Share Option Plan, the
grant to employees of options to purchase a total of 45,000 ordinary shares. In August
2005, the Company granted 45,000 options to employees. The exercise price is $4.54 per
share. These options vest 25% after one year and the rest in 12 equal quarterly
installments commencing August 2006.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | In
November 2005, the Board of Directors authorized, under the 2003 Share Option Plan, the
grant to employees of options to purchase a total of 75,000 ordinary shares. In November
2005, the Company granted 75,000 options to employees. The exercise price is $4.97 per
share. These options vest 25% after one year and the rest in 12 equal quarterly
installments commencing November 2006.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.5 | In
January 2006, the Board of Directors authorized, under the 2003 Share Option Plan, the
grant to employees of options to purchase a total of 170,000 ordinary shares. In January
2006, the Company granted 170,000 options to employees. The exercise price is $4.47 4.63
per share. These options vest 25% after one year and the rest in 12 equal quarterly
installments commencing January 2007.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 11 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)           (contd)
| | -- | -------------------------------------------------------------------------------

| | 3.6 | In
November 2006, the Board of Directors authorized, under the 2003 Equity Incentive Plan,
the grant to employees of options to purchase a total of 640,000 ordinary shares. In
November 2006, the Company granted 620,000 options to employees and 20,000 options to
directors. The exercise price is $4.86 per share. The employee options vest in 4 equal
annually installments commencing November 2007. The director options vest 33% after one
year and the rest in 8 equal quarterly installments commencing November 2007.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.7 | In
May 2007, the Board of Directors authorized, under the 2003 Equity Incentive Plan, the
grant to employees of options to purchase a total of 300,000 ordinary shares. In May
2007, the Company granted 300,000 options to employees. The exercise price is $3.49 per
share. These options vest 33% after one year and the rest in 8 equal quarterly
installments commencing May 2008.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.8 | In
May 2007, the Board of Directors authorized, under the 2003 Equity Incentive Plan, the
grant to employees of options to purchase a total of 280,000 ordinary shares. In May
2007, the Company granted 280,000 options to employees. The exercise price is $3.49 per
share. These options vest 25% after one year and the rest in 12 equal quarterly
installments commencing May 2008.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.9 | In
August 2007, the Board of Directors authorized, under the 2003 Equity Incentive Plan, the
grant to employees of options to purchase a total of 140,000 ordinary shares. In November
2007, the Company granted 120,000 options to employees and 20,000 options to directors.
The exercise price is $3.28 per share. These options vest in 4 equal annual installments
commencing August 2008. The director options vest 33% after one year and the rest in 8
equal quarterly installments commencing August 2008.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2007 and 2006, the Company recorded share-based compensation expense in the amount of
$1,130 thousand and $995 thousand, respectively, in accordance with SFAS No. 123(R).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | None
of the above stock options were granted at exercise prices below the market price of the
ordinary shares on the date of the grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | The
total intrinsic value of abovementioned options that vested prior to December 31, 2005
was zero.
| | ----------------------------------------------------------------------------------------------------

| | The
total intrinsic value of options exercised during the year ended December 31, 2007 and
2006, was $  49 thousand and $42 thousand, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 11 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)                (contd)
| | -- | ------------------------------------------------------------------------------------

| | 4. | Following
is a summary of options activity under the Companys stock-based
               incentive compensation plans during the years ended December 31, 2007,
2006 and                2005:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              | Number of
shares | Weighted
average
exercise price | Weighted
average
remaining
contractual term | Aggregate
intrinsic value
| | ---------------------------- | ---------------- | ------------------------------- | ------------------------------------------- | -------------------------
|
|
|
|
| | Balance at January 1, 2005   |                  |                                 |                                             | 3,072,271                
| |                              |                  |                                
| | Granted                      |                  |                                 |                                             | 340,000                  
| | Exercised                    |                  |                                 |                                             | (17,917                  
| | Forfeited and expired        |                  |                                 |                                             | (133,861                 
| |                              |                  |                                 |                                             |                          
| |                              |                  |                                
| | Balance at December 31, 2005 |                  |                                 |                                             | 3,260,493                
| |                              |                  |                                
| | Granted                      |                  |                                 |                                             | 810,000                  
| | Exercised                    |                  |                                 |                                             | (500,373                 
| | Forfeited and expired        |                  |                                 |                                             | (1,218,206               
| |                              |                  |                                 |                                             |                          
| |                              |                  |                                
| | Balance at December 31, 2006 |                  |                                 |                                             | 2,351,914                
| |                              |                  |                                
| | Granted                      |                  |                                 |                                             | 720,000                  
| | Exercised                    |                  |                                 |                                             | (321,733                 
| | Forfeited and expired        |                  |                                 |                                             | (659,182                 
| |                              |                  |                                 |                                             |                          
| |                              |                  |                                
| | Balance at December 31, 2007 |                  |                                 |                                             | 2,090,999                
| |                              |                  |                                 |                                             |                          
| |                              |                  |                                
| | Exercisable at               |                  |                                
| | December 31, 2007            |                  |                                 |                                             | 1,077,369                
| |                              |                  |                                 |                                             |                          
| |                              |                  |                                 |                                             |                          

F - 32

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 11 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)                (contd)
| | -- | ------------------------------------------------------------------------------------

| | 5. | Following
is a summary of non-vested options activity as of December 31, 2007,                under
the Companys stock-based incentive compensation plans:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                 | Number of
shares | Weighted
average grant
date fair value
| | ------------------------------- | ---------------- | --------------------------------------
|
|
|
|
| | Non-vested at January 1, 2007   |                  |                                       
| | Granted                         |                  |                                       
| | Vested                          |                  |                                       
| | Forfeited                       |                  |                                       
| |                                 |                  |                                       
| | Non-vested at December 31, 2007 |                  |                                       
| |                                 |                  |                                       
| |                                 |                  |                                       

| | As
of December 31, 2007, there was $1,665 thousand of total unrecognized compensation cost
related to non-vested share-based compensation arrangements under Companys
stock-based incentive compensation plans which is expected to be recognized over the
weighted average period of 3 years. The total fair value of shares vested during the year
ended December 31, 2007 was $ 885 thousand.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Fair
value method
| | -- | -----------------

| | The
Company has determined the weighted average fair value per option of stock-based
arrangements granted during 2007, 2006 and 2005 to be $1.39, $2.29, and $2.79,
respectively. The fair values of the stock based compensation awards granted were
estimated using the Black Scholes option pricing model with the following
assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year of grant             | Expected
dividend yield | Expected
option life | Expected
volatility | Risk free
interest rate | Fair value
$
| | ------------------------- | ----------------------- | -------------------- | ------------------- | ----------------------- | ------------
|
|
|
|
| | February 2005             |                         |                      |                     | -                       |             
| | May 2005                  |                         |                      |                     | -                       |             
| | August 2005               |                         |                      |                     | -                       |             
| | November 2005             |                         |                      |                     | -                       |             
| | January 2006              |                         |                      |                     | -                       |             
| | January 2006              |                         |                      |                     | -                       |             
| | November 2006 (employees) |                         |                      |                     | -                       |             
| | November 2006 (directors) |                         |                      |                     | -                       |             
| | May 2007                  |                         |                      |                     | -                       |             
| | May 2007                  |                         |                      |                     | -                       |             
| | August 2007 (employees)   |                         |                      |                     | -                       |             
| | August 2007 (directors)   |                         |                      |                     | -                       |             
| |                           |                         |                      |                     |                         |             

F - 33

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 11 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)           (contd)
| | -- | -------------------------------------------------------------------------------

| | 6. | Fair
value method (contd)
| | -- | --------------------------

| | The
Company has determined the fair value of stock-based arrangements as follows:
| | ---------------------------------------------------------------------------------

| | The
expected option life represents the weighted average period of time that options granted
are expected to be outstanding. The expected life of the options granted to employees and
directors during 2005, 2006 and 2007, is calculated based on the Simplified Method as
allowed under SAB 107, giving consideration to the contractual term of the options
and their vesting schedules.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates its expected stock volatility based on its own historical stock
volatility.
| | -------------------------------------------------------------------------------------------------

| | B. | Treasury
Shares
| | -- | ---------------

| | In
April 2006, the Companys Board of Directors authorized a plan for repurchase of the
Companys ordinary shares on the open market in an amount in cash of up to $15
million. Under the repurchase plan, share purchases may be made from time to time
depending on market conditions, share price, trading volume and other factors. The
repurchase plan was for one year and may be suspended from time to time or discontinued.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007 and 2006, the Company repurchased 2,304,794 shares of its common
stock for total consideration of $11,472 thousand, at an average purchase price of $4.98
per share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
share repurchases were funded from available working capital.
| | -----------------------------------------------------------------

# Note 12  Income
Taxes

| | A. | Tax
programs under various Israeli tax laws:
| | -- | --------------------------------------------

| | Israeli
Companies
| | -----------------

| | (1) | Israeli
income tax is computed on the basis of the Israeli companies               results
in nominal NIS determined for statutory purposes. The Companies are
               assessed for tax purposes under the Income Tax Law (Inflationary
Adjustments                1985) (the Inflationary Adjustments Law), the
purpose of which is to                prevent taxation on inflationary profits.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Israeli Law for the Encouragement of Capital Investments  1959 (the Law),
ECtel Ltd. was awarded Approved Enterprise status under the alternative
benefits track. The approved program is for investments in the development of
infrastructure and for investments in locally produced and imported equipment. The main
benefits to which ECtel Ltd. will be entitled, if it implements all the terms of an
approved program, are the exemption from tax on income deriving from an Approved
Enterprise, and reduced tax rates on dividends originating from this income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | A. | Tax
programs under various Israeli tax laws: (contd)
| | -- | -----------------------------------------------------

| | Israeli
Companies (contd)
| | --------------------------

| | Under
the alternative benefits track, the income derived from an Approved Enterprise will be
exempt from tax for a two-year period followed by reduced tax rates for the remaining
years of the benefit period, commencing on the date that taxable income is first
generated by the Approved Enterprise (limited to the earlier of a maximum period of 12
years from the year of commencement of operations or 14 years from the year the approval
letter was received). At December 31, 2007, approximately 97% of the cost of ECtel Ltd.s
production facilities represented Approved Enterprise facilities (2006  97%; 2005
 87%).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Dividend
distributions originating from the income of an Approved Enterprise will be subject to
tax at the rate of 15%, provided that the dividend is distributed during the period
stipulated under Israeli law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of a dividend distribution (including withdrawals and charges that are deemed
to be dividends) out of the income originating from the Approved Enterprise, and on which
ECtel Ltd. received a tax exemption, the distribution is subject to corporate taxes at
rates varying from 10%  25%, depending on the percentage of foreign investment
holding in ECtel Ltd. as defined by the Law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 30, 2005, amendments to the Law became effective. The primary changes are as
follows:
| | ----------------------------------------------------------------------------------------------

| |  | Companies
that meet the criteria of the Alternate Path of tax benefits will receive those benefits
without prior approval. In addition, there will be no requirement to file reports with
the Investment Center. Companies will be required to notify the Israeli Income Tax
Authorities regarding the implementation of the Alternate Path. Audit will take place via
the Income Tax Authorities as part of the tax audits. Request for pre-ruling is possible.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Tax
benefits of the Alternate Path include lower tax rates or no tax depending on the area
and the path chosen, lower tax rates on dividends and accelerated depreciation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
order to receive the tax benefits in the Grant Path or the Alternate Path, the industrial
enterprise must contribute to the economic independence of Israels economy in one
of the following ways:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Its
primary activity is in the Biotechnology or Nanotechnology fields and
               pre-approval is received from the head of research and development at the
Office                of the Chief Scientist;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Its
revenue from a specific country is not greater than 75% of its total
               revenues that year;
| | -- | -----------------------------------------------------------------------------------------------------------

| | 3. | 25%
or more of its revenues are derived from a specific foreign market of at
               least 12 million residents.
| | -- | -----------------------------------------------------------------------------------------------------------------------

F - 35

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | A. | Tax
programs under various Israeli tax laws: (contd)
| | -- | -----------------------------------------------------

| | Israeli
Companies (contd)
| | --------------------------

| | The
amendments to the Law do not retroactively apply for investment programs having an
Approved Enterprise approval certificate from the Investment Center issued up to December
31, 2004 (even when investments under these programs are conducted after January 1,
2005). Consequently, the amendments should not impact an existing Approved Enterprise,
which received prior written approval. The new tax regime shall apply for a new Approved
Enterprise and for an Approved Enterprise expansion for which the first year of tax
benefits may be as early as 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2007, ECtel Ltd. has ended its investments in investment programs under
previous approval pursuant to the Law and is currently investing in accordance with the
abovementioned amendments to the Law. See also Note 10C. As of the date of these
financial statements, the Approved Enterprise tax benefits, pursuant to the amendments to
the Law have not yet commenced.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Tax
benefits under the Israeli Law for the Encouragement of Industry (Taxation),
          1969.
| | --- | ------------------------------------------------------------------------------------------------

| | ECtel
Ltd. has determined that it currently qualifies as an Industrial Company as
defined by the above law, and as such is entitled, among other benefits, to claim
accelerated depreciation of machinery and equipment as prescribed by regulations issued
under the Inflationary Adjustments Law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Tax
rates applicable to income from other sources in Israel.
| | --- | ------------------------------------------------------------

| | If
ECtel Ltd. derives income from sources other than the Approved Enterprise during the
relevant benefit period, such income will be taxable at regular corporate tax rates (see
Note 12H below).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Measurement
of results for tax purposes under the Israeli Income Tax Regulations
               (Rules for Maintaining Accounting Records of Foreign Invested Companies
and                Certain Partnerships and Determining Their Taxable Income)  1986
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel
Ltd. has determined that it is a foreign invested company as defined in the
Israeli Law for the Encouragement of Capital Investments 1959. ECtel Ltd.s
management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting
Records of Foreign Invested Companies and Certain Partnerships and Determining Their
Taxable Income)  1986 beginning on January 1, 2007. Accordingly, its taxable income
or loss is calculated in US Dollars.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Non-Israeli
subsidiaries
| | -- | ------------------------

| | The
non-Israeli subsidiaries are taxed based upon the respective tax laws in their countries
of domicile.
| | ---------------------------------------------------------------------------------------------------------

F - 36

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | C. | Taxes
on income
| | -- | ---------------

| | Income
tax expense (benefit) included in the consolidated statements of operations is comprised
as follows:
| | -----------------------------------------------------------------------------------------------------------

| |                              | Year ended December 31
| | ---------------------------- | ----------------------
|
|
|
|
| | Current:                     |                       
| | Israeli operations           |                       
| | Foreign operations           |                       
| |                              |                       
| |                              |                       
| |                              |                       
| |                              |                       
| | Deferred:                    |                       
| | Israeli operations           |                       
| | Foreign operations           |                       
| |                              |                       
| |                              |                       
| |                              |                       
| |                              |                       
| |                              |                       
| | Income tax expense (benefit) |                       
| |                              |                       
| |                              |                       

| | D. | Loss
before taxes on income from continuing operations
| | -- | ------------------------------------------------------

| |                                         | Year ended December 31
| | --------------------------------------- | ----------------------
|
|
|
|
| | ECtel Ltd. and its Israeli subsidiaries |                       
| | Foreign subsidiaries                    |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       

F - 37

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | E. | Reconciliation
of the statutory income tax expense (benefit) to actual income                taxexpense
(benefit)
| | -- | -----------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the statutory income tax expense (benefit), assuming all income is
taxed at the statutory rates applicable in Israel, and the actual income tax expense
(benefit) is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                          | Year ended December 31
| | -------------------------------------------------------- | ----------------------
|
|
|
|
| | Loss before taxes on income from continuing operations   |                       
| | as reported in the consolidated statements of operations |                       
| |                                                          |                       
| |                                                          |                       
| | Statutory tax rate                                       |                       
| |                                                          |                       
| | Benefit computed at statutory tax rate                   |                       
| | Foreign tax rate differentials                           |                       
| | Tax effect due to Approved Enterprise status             |                       
| | Change in valuation allowance                            |                       
| | Prior year adjustments                                   |                       
| | Non-deductible expenses                                  |                       
| | Other                                                    |                       
| |                                                          |                       
| |                                                          |                       
| | Actual income tax expense (benefit)                      |                       
| |                                                          |                       
| |                                                          |                       

F - 38

---

---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | F. | Components
of deferred income tax
| | -- | ---------------------------------

| | The
Company recognizes deferred tax benefits based on managements expectation that
future taxable earnings will be achieved. A valuation allowance has been recorded in
respect of the majority of the balance of deferred tax assets as management concluded
that at December 31, 2007 it is more likely than not that such assets will not be
realized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax effects of significant items comprising the Companys deferred tax assets are as
follows:
| | -------------------------------------------------------------------------------------------------

| |                                           | December 31
| | ----------------------------------------- | -----------
|
|
|
|
| | Current deferred tax assets:              |            
| |                                           |            
| | Accrued expenses                          |            
| | Inventory                                 |            
| | Vacation pay accruals                     |            
| | Allowance for doubtful accounts           |            
| | Research and development costs            |            
| |                                           |            
| |                                           |            
| | Gross current deferred tax assets         |            
| |                                           |            
| | Less - valuation allowance                |            
| |                                           |            
| |                                           |            
| | Net current deferred tax asset            |            
| |                                           |            
| |                                           |            
| | Long term deferred tax assets:            |            
| |                                           |            
| | Liability for employee severance benefits |            
| | Operating and capital loss carryforwards  |            
| | Property, plant and equipment             |            
| | Research and development costs            |            
| |                                           |            
| |                                           |            
| | Gross long term deferred tax assets       |            
| |                                           |            
| | Less - valuation allowance                |            
| |                                           |            
| |                                           |            
| | Net long-term deferred tax asset          |            
| |                                           |            
| |                                           |            
| | Net deferred tax asset                    |            
| |                                           |            
| |                                           |            

F - 39

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | F. | Components
of deferred income tax (contd)
| | -- | ------------------------------------------

| | Subsequently
recognized tax benefits related to the valuation allowance for deferred tax assets as of
December 31, 2007, will be allocated as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                  | $ in thousands
| | ------------------------------------------------ | --------------
|
|
|
|
| | Income tax benefit that would be reported in the |               
| | consolidated statements of operations            |               
| | Goodwill and intangible assets                   |               
| |                                                  |               
| |                                                  |               
| |                                                  |               
| |                                                  |               
| |                                                  |               

| | G. | Tax
assessments and tax loss carryforwards
| | -- | ------------------------------------------

| | Final
tax assessments have been received by the Israeli companies through the 2001 tax year.
| | --------------------------------------------------------------------------------------------

| | The
U.K. and U.S. Income Tax Authorities completed their examinations of the income tax
returns, respectively, for the U.K and U.S. subsidiaries in 2007. Final tax assessments
for the U.K and U.S subsidiaries have been received through the 2003 and 2005 tax years,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Israeli Companies have tax loss carryforwards of approximately $102 million, which can be
carried forward indefinitely.
| | ---------------------------------------------------------------------------------------------------------------------------

| | The
UK subsidiary has a tax loss carryforward of approximately $0.7 million, which can be
carried forward indefinitely. However, starting in 2006, the UK subsidiarys losses
cannot be offset against current income, in accordance with the tax laws of the United
Kingdom.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
US subsidiary has a tax loss carryforward of $6 million, which will expire between 2023
and 2024.
| | -----------------------------------------------------------------------------------------------------

| | The
German subsidiary has a tax loss carryforward of approximately $0.4 million, which can be
carried forward indefinitely.
| | ---------------------------------------------------------------------------------------------------------------------------

| | H. | Reduction
in the company tax rate
| | -- | ---------------------------------

| | On
July 25, 2005, the Knesset passed the Law for the Amendment of the Income Tax Ordinance
(No. 147 and Temporary Order)  2005 (hereinafter  the Amendment). The
Amendment provides for a gradual reduction in corporate tax rate in the following manner:
in 2008  27%, 2009  26% and from 2010 onward 25%. Furthermore, as from
2010, upon reduction of the corporate tax rate to 25%, capital gains will be subject to
tax of 25%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 12  Income
Taxes (contd)

| | I. | Accounting
for uncertainty in income taxes
| | -- | ------------------------------------------

| | The
Companys total unrecognized tax benefit as of December 31, 2007, was $1,208
thousand as a result of tax positions taken during a prior period. This amount has been
included as a component of current liabilities on the balance sheet. At January 1, 2007,
the total unrecognized tax benefit was $1,099 thousand. The change during 2007 was a
result of exchange rate differences. In addition, interest relating to the unrecognized
tax benefit has been included as a component of current liabilities on the balance sheet
as of December 31, 2007 in the amount of $164 thousand. The total unrecognized tax
benefit as of December 31, 2007 that, if recognized, would affect the Companys
effective tax rate was $1,208 thousand.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
is reasonably possible that the unrecognized tax benefit, primarily relating to the
deductibility of certain expenses for tax purposes, will significantly decrease within
the next 12 months as a result of a potential settlement with the taxing authorities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 13  Related
Party Transactions

| | A. | Generally,
related parties are comprised of principal shareholders (those owning                10%
or more of the Companys share capital) and their subsidiaries and
               affiliates as well as other affiliates of the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
with related parties are mainly comprised of sales of some of the Companys products
and purchases from related parties in respect of cost of revenues.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
transactions with related parties are in the ordinary course of business and at terms
identical to those applied to transactions with other customers or suppliers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Balances
due to or from related parties:
| | -- | ----------------------------------------

| |                        | December 31
| | ---------------------- | -----------
|
|
|
|
| | Assets:                |            
| | Trade receivables, net |            
| |                        |            
| | Liabilities:           |            
| | Trade payables         |            
| | Other payables         |            
| |                        |            

F - 41

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 13  Related
Party Transactions (contd)

| | C. | Income
from and expenses to related parties:
| | -- | --------------------------------------------

| |                                     | Year ended December 31
| | ----------------------------------- | ----------------------
|
|
|
|
| | Sales                               |                       
| | Purchase from related parties       |                       
| | Research and development costs      |                       
| | Selling and marketing expenses      |                       
| | General and administrative expenses |                       
| | Financial (income) expenses         |                       
| |                                     |                       

# Note 14 
Supplementary Financial Statement Information

| | Balance
sheet:
| | --------------

| | A. | Cash
and cash equivalents
| | -- | -------------------------

| | Cash
and cash equivalents include short-term deposits in the amount of $4,614 thousand as at
December 31, 2007 (December 31, 2006  $3,399 thousand).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Trade
Receivables
| | -- | -----------------

| | 1. | Net
of provision for doubtful accounts of $13,253 thousand as at December 31,
               2007 (December 31, 2006 - $13,374 thousand).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

| | The
activity in the allowance for doubtful accounts for the years ended December 31 is as
follows:
| | --------------------------------------------------------------------------------------------------

| |                                            | December 31
| | ------------------------------------------ | -----------
|
|
|
|
| | Allowance for doubtful accounts            |            
| | at the beginning of the year               |            
| | Additions charged to doubtful debt expense |            
| | Write-down charged against the allowance   |            
| | Recoveries of amounts previously reserved  |            
| |                                            |            
| | Allowance for doubtful accounts            |            
| | at the end of the year                     |            
| |                                            |            
| |                                            |            

| | 2. | A
substantial portion of the Companys sales are to large
               telecommunications service providers. In certain cases the Company obtains
               collateral from its customers, such as letters of credit and promissory
notes.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 14 
Supplementary Financial Statement Information (contd)

| | C. | Other
Receivables
| | -- | -----------------

| |                  | December 31
| | ---------------- | -----------
|
|
|
|
| | Prepaid expenses |            
| | Other            |            
| |                  |            
| |                  |            
| |                  |            
| |                  |            
| |                  |            

| | D. | Other
Payables and Accrued Liabilities
| | -- | --------------------------------------

| |                                           | December 31
| | ----------------------------------------- | -----------
|
|
|
|
| | Employees and social benefits             |            
| | Government authorities                    |            
| | Chief Scientist (see also Note 10B)       |            
| | Commissions payable                       |            
| | Product warranty liability (see Note 10G) |            
| | Other payables                            |            
| |                                           |            
| |                                           |            
| |                                           |            
| |                                           |            
| |                                           |            

| | E. | Disclosures
about segments and related information
| | -- | --------------------------------------------------

| | 1. | Information
on sales by geographic distribution:
| | -- | ------------------------------------------------

| | Revenues
are attributed to geographic distribution based on the location of the customer.
| | -----------------------------------------------------------------------------------------

| |                        | Year ended December 31
| | ---------------------- | ----------------------
|
|
|
|
| | Europe                 |                       
| | Americas               |                       
| | Asia Pacific and other |                       
| | Middle East and Africa |                       
| |                        |                       
| |                        |                       
| |                        |                       
| |                        |                       
| |                        |                       

F - 43

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ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 14 
Supplementary Financial Statement Information (contd)

| | E. | Disclosures
about segments and related information (contd)
| | -- | -----------------------------------------------------------

| | 2. | Revenues
from single customers exceeding 10% of Revenues:
| | -- | ---------------------------------------------------------

| |            | Year ended December 31
| | ---------- | ----------------------
|
|
|
|
| | Customer A |                       
| |            |                       
| |            |                       
| |            |                       
| |            |                       

| | 3. | Long-lived
assets on a geographical basis:
| | -- | ------------------------------------------

| |                   | Israel | Europe | Total
| | ----------------- | ------ | ------ | -----
|
|
|
|
| | December 31, 2007 |        |        |      
| | December 31, 2006 |        |        |      
| | December 31, 2005 |        |        |      
| |                   |        |        |      

| | F. | Cost
of revenues:
| | -- | -----------------

| |                                       | Year ended December 31
| | ------------------------------------- | ----------------------
|
|
|
|
| | Materials and components              |                       
| | Salaries, wages and employee benefits |                       
| | Depreciation                          |                       
| | Royalties to Chief Scientist          |                       
| | Share-based compensation              |                       
| | Other manufacturing and service costs |                       
| |                                       |                       
| |                                       |                       
| |                                       |                       
| | Decrease in inventories               |                       
| |                                       |                       
| |                                       |                       
| |                                       |                       
| |                                       |                       
| |                                       |                       

| | G. | Research
and development costs, net:
| | -- | ------------------------------------

| |                             | Year ended December 31
| | --------------------------- | ----------------------
|
|
|
|
| | Expenses incurred           |                       
| | Share-based compensation    |                       
| | Less - grant participations |                       
| |                             |                       
| |                             |                       
| |                             |                       
| |                             |                       
| |                             |                       

F - 44

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 14 
Supplementary Financial Statement Information (contd)

| | H. | Selling
and marketing expenses:
| | -- | -------------------------------

| |                                | Year ended December 31
| | ------------------------------ | ----------------------
|
|
|
|
|
| | Salaries and employee benefits |                       
| | Agents' commissions            |                       
| | Advertising and exhibitions    |                       
| | Domestic and foreign travel    |                       
| | Share-based compensation       |                       
| | Other expenses                 |                       
| |                                |                       
| |                                |                       
| |                                |                       
| |                                |                       
| |                                |                       

| | Advertising
costs are expensed as incurred
| | ------------------------------------------

| | I. | General
and administrative expenses:
| | -- | ------------------------------------

| |                                           | Year ended December 31
| | ----------------------------------------- | ----------------------
|
|
|
|
| | Salaries and employee benefits            |                       
| | Doubtful debt expense (recovery), net     |                       
| | Share-based compensation                  |                       
| | Other administrative and general expenses |                       
| |                                           |                       
| |                                           |                       
| |                                           |                       
| |                                           |                       
| |                                           |                       

| | J. | Financial
income and expenses:
| | -- | ------------------------------

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
| | Financial expenses:                           |                       
| | Interest and bank charges (see also Note 10B) |                       
| | Exchange rate differences (see Note 2(B))     |                       
| |                                               |                       
| |                                               |                       
| |                                               |                       
| |                                               |                       
| | Financial income:                             |                       
| | Interest, mainly on bank deposits and         |                       
| | marketable securities                         |                       
| | Exchange rate differences (see Note 2(B))     |                       
| |                                               |                       
| |                                               |                       
| |                                               |                       
| |                                               |                       
| |                                               |                       

F - 45

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 14 
Supplementary Financial Statement Information (contd)

| | K. | Supplementary
statement of operations information:
| | -- | --------------------------------------------------

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
|
| | Maintenance and repairs                       |                       
| | Depreciation of property, plant and equipment |                       
| | Taxes (other than income taxes)               |                       
| | Rent of premises                              |                       
| | Lease of vehicles                             |                       
| |                                               |                       

F - 46

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ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 15  Balances
in Currencies Other Than the U.S Dollar:

| | A. | Comprised
of:
| | -- | -------------

| |                             | December 31, 2007 | December 31, 2006
| | --------------------------- | ----------------- | -----------------
|
|
|
|
| | Assets                      |                   |                  
| | Trade receivables, net      |                   |                  
| | Other current assets        |                   |                  
| | Long-term other receivables |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| | Liabilities                 |                   |                  
| | Trade payables              |                   |                  
| | Other current liabilities   |                   |                  
| | Long-term liabilities       |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| |                             |                   |                  
| |                             |                   |                  

| | (*) | Linked
to the Israeli CPI.
| | --- | --------------------------

| | B. | Aggregate
exchange rate (losses) gains for the years ended December 31, 2007,                2006
and 2005 are $(293) thousand, $(273) thousand and $123 thousand,
               respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
stated in Note 2(B), exchange gains and losses are included in the same statement of
operationsitems in which the related transactions are included.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 16 
Disclosure Regarding Fair Value of Financial Instruments

| | The
financial instruments of the Company consist mainly of cash and cash equivalents, current
and non-current receivables, short and long-term marketable securities, accounts payable
and accruals, and other long-term liabilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
view of their short term nature, the fair value of the financial instruments included in
working capital of the Company is usually identical or close to their carrying value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of long-term marketable securities also approximate the carrying value since
it bears interest at rates close to the prevailing market rates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Considerable
judgment is required to develop the estimates of fair value, thus, the estimates provided
herein are not necessarily indicative of amounts that could be realized in a current
market exchange.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 17 
Restructuring and Related Impairment Costs

| | In
December 2005, the Company acquired Elron Telesoft Ltd. and Elron Telesoft Export Ltd. As
a result of the acquisition the Company made certain restructuring charges as a result of
redundancies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes the net charges or reversals under the restructuring program:
| | --------------------------------------------------------------------------------------------

| |                                       | December 31
2007 | December 31
2006 | December 31
2005
| | ------------------------------------- | ---------------- | ---------------- | ----------------
|
|
|
|
| | Restructuring costs                   |                  |                  |                 
| | Reversal of prior restructuring costs |                  |                  |                 
| |                                       |                  |                  |                 
| |                                       |                  |                 
| |                                       |                  |                  |                 
| |                                       |                  |                  |                 
| |                                       |                  |                  |                 

# Note 18 
Acquisition-Related Expenses

| | During
2006, the Company carried out a due-diligence process in the framework of an examination
of a potential acquisition opportunity which reached advanced stages in the third quarter
of 2006. Eventually, the Company decided, after evaluating all the relevant parameters,
not to conclude the negotiations, and therefore recorded an amount of $640 thousand as
acquisition-related expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

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---

ECtel Ltd. and Subsidiaries

|                                              
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              

# Note 19 
Subsequent Events

| | (1) | In
April 2008, the Company purchased substantially all the assets of Compwise Ltd. (Compwise), an
          Israeli based company, for $1.3 million dollars, pursuant to an asset purchase
          agreement. Compwise is a provider of business analytic solutions for
          telecommunication operators.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Registration
Rights Agreement with members of the IDB Group In April 2008, the           Company
entered into a Registration Rights Agreement with its two largest           shareholders:
(a) Koor Industries Ltd. and (b) Clal Electronics Industries Ltd.,           a
wholly-owned subsidiary of Clal Industries and Investments Ltd., both of which
          are members of the IDB Group, and their affiliates IDB Development Corporation
          Ltd. and Badal Securities Ltd. Koor Industries Ltd.; Clal Electronics
Industries           Ltd.; IDB Development Corporation Ltd. and Badal Securities Ltd.
will be jointly           referred to herein as Holders. Pursuant to this
Registration Rights           Agreement, the Company granted to the Holders rights in
connection with sales,           from time to time, of the Companys ordinary shares
held by such Holders.           As required by the Israeli Companies Law, this agreement
was approved by the           Companys audit committee, board of directors and a
special majority of the           Companys shareholders. Under this agreement, the
Holders are entitled to           demand and piggyback registration rights. The first of
such demand registrations           must be for an offering to be made on a delayed or
continuous basis pursuant to           Rule 415 of the Securities Act registering
the resale from time to time by           the Holders (commonly known as a shelf registration),
and the second           demand registration may only be effected not less than 2 years
after the           effective date of the shelf registration. In addition, if the Company
proposes           to register for public sale any of its ordinary shares under the
Securities Act,           the Holders would be entitled to request that the Company
include some of their           ordinary shares in such registration (commonly known as
piggyback          registration rights). The Registration Rights Agreement
has a term of five years           provided that it will terminate earlier upon the
percentage holdings of the           Holders falling below a specified threshold.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---