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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 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

xANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2008

# OR

# o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

# 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, Afek
Industrial Park, Rosh Haayin 48902, Israel
(Address of principal executive offices)

Gal Sperber-Kovashi,
Corporate Secretary
Tel: +972-3-900-2120
Facsimile:
+972-3-900-2122
e-mail:
galsp@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,
2008: 16,281,898 Ordinary
Shares, nominal value NIS 0.04 per share



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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

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

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                      | 15
| | C. | Organizational Structure               | 22
| | D. | Property, Plants and Equipment         | 22

|         |                                              |   
|-------- | -------------------------------------------- | --
|Item 4A. | Unresolved Staff Comments                    | 22
|Item 5.  | Operating and Financial Review and Prospects | 22

| | A. | Operating Results                              | 22
| | -- | ---------------------------------------------- | --
| | B. | Liquidity and Capital Resources                | 32
| | C. | Research and Development, Patents and Licenses | 35
| | D. | Trend Information                              | 36
| | E. | Off-Balance Sheet Arrangements                 | 37
| | F. | Tabular Disclosure of Contractual Obligations  | 37

|        |                                            |   
|------- | ------------------------------------------ | --
|Item 6. | Directors, Senior Management and Employees | 37

| | A. | Directors and Senior Management | 37
| | -- | ------------------------------- | --
| | B. | Compensation                    | 39
| | C. | Board Practices                 | 39
| | D. | Employees                       | 42
| | E. | Share Ownership                 | 42

|        |                                                   |   
|------- | ------------------------------------------------- | --
|Item 7. | Major Shareholders and Related Party Transactions | 43

| | A. | Major Shareholders              | 43
| | -- | ------------------------------- | --
| | B. | Related Party Transactions      | 44
| | C. | Interests of Expert and Counsel | 45

|        |                       |   
|------- | --------------------- | --
|Item 8. | Financial Information | 45

| | A. | Consolidated Financial Statements and Other Financial Information | 45
| | -- | ----------------------------------------------------------------- | --
| | B. | Significant Changes                                               | 45

|        |                       |   
|------- | --------------------- | --
|Item 9. | The Offer and Listing | 46

| | A. | Offer and Listing Details | 46
| | -- | ------------------------- | --
| | B. | Plan of Distribution      | 46
| | C. | Markets                   | 46
| | D. | Selling Shareholders      | 46
| | E. | Dilution                  | 46
| | F. | Expenses of the Issue     | 47

|         |                        |   
|-------- | ---------------------- | --
|Item 10. | Additional Information | 47

| | A. | Share Capital                          | 47
| | -- | -------------------------------------- | --
| | B. | Memorandum and Articles of Association | 47
| | C. | Material Contracts                     | 51
| | D. | Exchange Controls                      | 52
| | E. | Taxation                               | 52
| | F. | Dividends and Paying Agents            | 60
| | G. | Statement by Experts                   | 60
| | H. | Documents on Display                   | 60
| | I. | Subsidiary Information                 | 61

|         |                                                            |   
|-------- | ---------------------------------------------------------- | --
|Item 11. | Quantitative and Qualitative Disclosures About Market Risk | 61
|Item 12. | Description of Securities Other than Equity Securities     | 62

|PART II | 63
|------- | --

|          |                                                                              |   
|--------- | ---------------------------------------------------------------------------- | --
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies                              | 63
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 63
|Item 15.  | Controls and Procedures                                                      | 63
|Item 16A. | Audit Committee Financial Expert                                             | 63
|Item 16B. | Code of Ethics                                                               | 63
|Item 16C. | Principal Accountant Fees and Services                                       | 64
|Item 16D. | Exemptions from the Listing Standards for Audit Committees                   | 64
|Item 16E: | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 64
|Item 16G: | Corporate Governance                                                         | 65

|PART III | 65
|-------- | --

|         |                      |   
|-------- | -------------------- | --
|Item 17. | Financial Statements | 65
|Item 18. | Financial Statements | 65
|Item 19. | Exhibits             | 65

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, 2008 and 2007 and the selected
consolidated statements of operations data for each of the years in the three-year period
ended December 31, 2008, 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, 2006, 2005 and 2004 and the
selected consolidated statements of operations data for the years ended December 31, 2005
and 2004 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 our consolidated balance sheets as of December 31, 2008 and 2007, our
consolidated statements of operations for each of the years in the three-year period ended
December 31, 2008, and the related notes thereto and the report of the independent
registered public accounting firm, which refers to the Companys adoption of the
provisions of Statement of Financial Accounting Standards No.157, Fair Value Measurements,
as of January 1, 2008, appearing elsewhere in this document.

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.

In
April 2008, we acquired substantially all of the assets of Compwise Ltd.
(Compwise), an Israel-based company and a provider of business analytic
solutions for telecommunication operators. The effect of this acquisition is reflected in
our consolidated balance sheet as at December 31, 2008.

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, net    |                        
|Other (expenses) income, net                  |                        
|                                              |                        
|                                              |                        
|Loss from continuing operations before taxes  |                        
|on income                                     |                        
|Income tax benefit (expense)                  |                        
|                                              |                        
|                                              |                        
|Net loss from continuing operations           |                        
|Income 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 |                        

|                                   | December 31,
|---------------------------------- | ------------
|
|
|
|
|Balance Sheet Data:                |             
|                                   |             
|Cash and cash equivalents          |             
|Working capital                    |             
|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 2008, 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.

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 69% of our revenues in
2008, with sales to four customers in Eastern Europe accounting for 43% of our revenues,
the top two of which each accounted for more than 10% of our revenues. Sales to our top
ten customers accounted for 51.5% of our revenues in 2007, with sales to three customers
in the Americas accounting for 19.8% of such revenues, none of which individually
accounted for more than 10% of our revenues . We expect to continue to depend on sales to
a small number of customers but 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.

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 in the future our channel partners will
not develop or market products or services that compete with our products. 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.

Volatility experienced by
telecommunications service providers may adversely affect our sales and operating results.
Current weakness in the U.S. and global markets can result in a decline of capital
investment by telecommunications service providers, impact on our sales and may affect the
pricing of our products. It may also affect our ability to keep our operating expenses in
line with any reduction in revenues. This may harm our business, financial condition and
results of operations.

We
are subject to the effects of general global, economic and market conditions. The longer
and deeper impact of the current global macroeconomic crisis is causing uncertainty in
the telecommunications market. This has resulted and might further result in a decline in
capital investment by telecommunications service providers. Such decline in capital
expenditures has had and could further have a negative impact on our business by reducing
the number and the value of new contracts we are able to sign and may harm our revenues
and results of operation.

Furthermore,
since a substantial portion of our operating expenses consist of salaries, we may not be
able to reduce our operating expenses in line with any reduction in revenues or may elect
not to do so for business reasons. We will need to continue to generate increased revenues
and manage our costs to achieve profitability. Industry downturn may increase our
inventories, decrease our revenues, result in additional pressure on the price of our
products and prolong the time until we are paid, all of which would have a material
adverse effect on the results of our operations and on our cash flow from operations.

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
for 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 operating loss or decrease in operating
income in the short term. In an effort to bring fixed costs more in line with our lower
than anticipate revenues, our management adopted at the end of 2008 a series of proactive
efficiency measures including a reduction in management and employee salaries, the
downsizing of our workforce, cost efficiencies in the professional service functions and
cost efficiencies with respect to our other operating expenses. Such measures are expected
to reduce our expenses in 2009. If, however, revenues decrease or do not meet expectations
for a particular period, and we are not able to reduce our expenses in the short term, or
at all, our business, financial condition and results of operations will be adversely
affected.

6

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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. Furthermore, as we consider the U.S. dollar to be our
functional currency, but our revenues are sometimes generated in other currencies,
fluctuations in exchange rates between the U.S. dollar and such other currencies may have
an adverse effect on our results of operations and financial condition.

Although
we have operations throughout the world, the majority of our revenue and approximately
50% of our operating costs in 2008 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, throughout the course of 2008, the
average exchange rate between the U.S. dollar and the NIS reflected devaluation of the
U.S. dollar by almost seven percent, thereby adversely affecting our dollar-measured
results of operations.

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.

An
increasing portion of our revenues is now denominated in other non-U.S. currencies, 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 resulting from
fluctuations in exchange rates between the U.S. dollar and such other currencies.
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.

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

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. In the last few years,
and recently due to impact of the current global macroeconomic crisis, we are receiving an
increased amount of requests from our customers for even longer payment terms and
alternative payment models such as revenue sharing based compensation proposals. Such
payment cycles and alternative payment models may adversely affect the cash resources
available to operate and expand our business.

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 compete with them, as well as 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.

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, 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 customer base, and larger sales, marketing and support
organizations.

We have previously 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 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 among
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;
| | - | ------------------------------------------------------------------------------

7

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| |  | 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 2008 were lower than initially anticipated primarily
due to three factors: (i) the longer and deeper impact of the global macroeconomic crisis
on the Companys activities, which was at least partially reflected in a lengthening
of our sale cycles; (ii) the delay in our recognition of revenues from a major project;
and (iii) the impact of substantial currency exchange rate fluctuations relative to the
U.S. dollar. 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 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 for the repair or replacement of 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.

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 acquired substantially all the assets
of Compwise Ltd., an Israel-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 and 2008, we carried out due diligence processes for
potential acquisition opportunities. Eventually, we decided not to complete these
acquisitions.

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.

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.

8

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---

Due in part to the deepening
global macroeconomic crisis, many of our customers require a lengthy, detailed and
comprehensive sale cycle, which may impact the timing of our revenues and result in us
expending significant resources on sales efforts.

We
derive substantially all of our revenues from the sale of products and related services
for telecommunications service providers. The purchase of our products may represent 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, reflecting in part the burgeoning global macroeconomic crisis, 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. Besides the global macroeconomic climate, which invariably impacts (whether
directly or collaterally) the speed of our customers approval process, the following
specific factors, among others, affect the length of such 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.
| | - | --------------------------------------------------------------------------------------

In
2008, partially due to the emergence of the current global macroeconomic crisis, our
clients approval processes and our sales cycles lengthened further, and our revenues
and overall economic results were adversely affected as a result. 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.

We depend upon our 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, among other regions, through the operations of our
Bulgarian subsidiary. Accordingly, our future success in this region 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, the cost of our
Bulgarian operations increased and it is likely that such cost will increase further over
time, as was the case with companies in other countries joining the European Market.

We depend upon subcontracted
outsourcers for the performance of certain of our European professional services and
operations. The failure of these outsourcers to meet our quality or performance
requirements may have a material adverse effect on our business, results of operations and
financial condition.

Since
November 2008, we have outsourced a portion of our professional services and operations in
Europe to a subcontractor in the Ukraine. We believe that our future success will depend
in part on our ability to continue, expand and manage the use of outsourced subcontracting
resources for various services and operations, even beyond our current utilization. There
are certain risks entailed in these practices, including but not limited to: the continued
availability of these resources is not assured; the potential for migration of some
expertise to a contractor outside of our organization; and our policies relating to
protection of intellectual property rights may be harder or not possible to institute,
manage or enforce vis-à-vis a subcontractor organization.

We depend on single suppliers for
some of our product components, including key product components in our legacy probing
devices. If any of these suppliers experiences delays, disruptions, quality control
problems or a loss in capacity or is unwilling to continue providing these components, it
could adversely affect our business and operating results.

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 or unwilling 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 former major shareholder is the owner of certain intellectual property rights related
to our legacy probing devices. While ECI currently permits our supplier to use its
technology required for production of these components, we cannot assure that such
permission will not be withheld by ECI in the future. To the extent ECI will withhold its
permission, it has an obligation to supply these components to us under a components
supply agreement executed between our Company and ECI in February 2004, which agreement
has an initial period of seven years.

In
addition, in connection with our sale to Verint Systems Limited 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 the supply of such
components, which may not be under our control, that cause us to breach our obligations to
Verint, could expose us to claims by Verint. Such claims could harm our financial
condition.

9

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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.

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

Furthermore,
the market in which we operate is highly competitive and unless we continue to enhance the
functionality of our products and add additional features, our competitiveness may be
harmed.

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 may be 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
may be subject to telecommunications industry regulations published in territories in
which we are selling our hardware products, requiring the use of environmentally-friendly
materials in telecommunications equipment. For example, European telecommunications
industry regulations require telecom equipment suppliers 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.

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. However, Verint
may not have the ability to satisfy our claims.

# 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
and Hamas, and significant hostilities along Israels border with the Gaza Strip. 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.

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.

11

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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.

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.

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 in Israel.

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.

12

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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.

# Risks Related to the
Market for Our Ordinary Shares

Our ordinary shares may be
delisted from the Nasdaq Global Market, and as a result the liquidity and price of our
ordinary shares would likely decline.

Our
ordinary shares are currently listed on the Nasdaq Global Market. One of Nasdaqs
continued listing requirements is that the minimum bid price of a listed security must be
at least $1.00. Nasdaq has temporarily suspended this requirement through July 19, 2009.
Our ordinary shares have traded below $1.00 per share since November 2008. If Nasdaq
reinstates the minimum bid price rule and we fail to meet the minimum bid price
requirement at that time, Nasdaq could delist our ordinary shares from the Nasdaq Global
Market. Such delisting would likely have an adverse impact on the liquidity of our
ordinary shares and, as a result, the market price for our ordinary shares would likely
become more volatile and decline significantly.

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 District Court of Maryland held its hearing on preliminary approval of
stipulation of settlement and granted preliminary approval.  The hearing on the final
approval of stipulation of settlement has been scheduled for July 27, 2009.

13

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Our share price has decreased
significantly during 2008 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 during 2008.
Numerous factors, some 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;
| | - | ----------------------------------------------------------------

| |  | 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.

U.S.
          holders of our ordinary shares may suffer adverse tax consequences if we are
          classified as a passive foreign investment company for U.S. federal income tax
          purposes.

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 our U.S. holders of our ordinary shares and could cause a reduction in
the value of our ordinary shares. We will be classified as a PFIC for any taxable year if
(after taking into account certain look-through rules with respect to the income and
assets of our corporate subsidiaries) 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 a
taxable year (determined on a quarterly basis) produce or are held for the production of
passive income.  For this purpose, cash is considered to be a passive asset, which
produces passive income. The market capitalization approach has generally been used to
determine the fair market value of the assets of a publicly traded corporation, though
other valuations methods may available for these purposes. If we are a PFIC for U.S.
federal income tax purposes, highly complex rules will apply to U.S. holders of our
ordinary shares.  Accordingly, U.S. holders are urged to consult their tax advisors
regarding the application of the PFIC rules. U.S. holders 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 (including the PFIC rules)
related to owning and disposing of our ordinary shares.

# 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 many of their
revenue assurance needs.

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

# Principal Capital
Expenditures

Our
principal capital expenditures in the past three years (aside from the acquisitions of
Telesoft and Compwise) have been the purchase of equipment and other fixed assets used in
our business (mainly in Israel). On April 30, 2008, we acquired substantially all of the
assets of Compwise for approximately $1.5 million in cash.

Capital
equipment purchases totaled approximately $0.7 million in 2008, $0.4 million in 2007 and
$0.6 million in 2006. Our capital expenditures in 2008 were primarily for the procurement
of test and production equipment computers and for the implementation of a new ERP system.
We have used our working capital to finance these capital expenditures.

14

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| | 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).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 regulatorsserve 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 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 and acquisition transactions with other suppliers. We
consider acquisition of companies that provide us with additional products, with
complementary sales channels and customers, and that contribute to 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# 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 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
subscribers by reviewing information obtained from various sources, which was consolidated
and analyzed by the FraudView® system.

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.

Billing
Verification

Our
billing verification solution, BillView, is targeted at the financial aspect of the
complex telecom operation. It provides operators and service providers with tools to
increase control and reduce financial exposure. An off-the-shelf automated solution,
BillView offers comprehensive rating and billing audit of all revenue-bearing events,
reducing revenue leakage and financial exposure. BillView facilitates independent charging
and billing verification of large usage samples of all existing and future service types:
voice, data, content, 3G, 3.5G, and more. Addressing both invoice-level and call-level
charges, the application can protect revenues amounting to millions of dollars annually,
demonstrating clear benefits and rapid ROI.

Business
Intelligence

Our
Business Intelligence solution helps telecom operators to fight churn while managing price
plans costs and revenues and the customers lifecycle. BusinessView enables
telecom operators to structure themselves towards focusing on building and successfully
implementing pricing plans. This approach reduces churn by better managing customer
retention and accurately targeting marketing campaigns, which leads to higher revenues and
profitability. BusinessView meets the challenges of todays highly competitive
markets by focusing on three integrated areas: business and marketing analysis, cost
management, and customer retention.

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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, 2009 our direct sales force and marketing staff consisted of 25 employees
worldwide. We market our IRM framework to service providers worldwide, through a direct
sales force, as well as indirect sales channels. Our sales staff operates out of our
offices in Israel, UK, Singapore 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.

Sales
of our 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 six 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 our sales force as well
as 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.

The
recent events in the financial market may have an impact on our business. In particular,
many enterprises, telecommunications carriers and service providers may reduce their
capital investments. Such decline in capital expenditures could have a negative impact on
our business by reducing the number and the value of new contracts we are able to sign and
may harm our revenues and results of operation. Furthermore, recently we have received an
increased amount of requests from our customers for longer payment terms and alternative
payment models such as revenue sharing based compensation proposals.

# 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:
Digicel, Telecom Sprska, China Mobile, Cellcom Israel and Zon.

In
2008, our top ten customers accounted for 69% of our revenues, with sales to four
customers in Eastern Europe accounting for 43% of our revenues, two of which each
accounted for more than 10% of our revenues. In 2007, our top ten customers accounted for
51.5% of our revenues, with sales to three customers in the Americas accounting for 19.8%
of our revenues, none of which accounted for more than 10% of our revenues individually.

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The
following table shows a breakdown of our revenues by geographical region during 2008, 2007
and 2006 (in thousands of U.S. dollars):

|                        | 2008 | 2007 | 2006
|----------------------- | ---- | ---- | ----
|
|
|
|
|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. In addition, since
November 2008, we have outsourced a portion of our technical services and activities in
Europe to a subcontractor in Ukraine.

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 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.

# 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 former major
shareholder is the owner of certain intellectual property rights related to our legacy
probing devices. ECI currently permits our supplier to use its technology required for
production of these components. To the extent ECI will withhold its permission, it will
have to supply these components to us under a components supply agreement executed between
our Company and ECI in February 2004. The supply has an initial period of seven years.

We
maintain an organization-wide quality assurance system, based upon ISO9000:2000. This
system helps us to coordinate and continuously improve our business processes in our
R&D, manufacturing, delivery, sales and services 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, 2009, 27 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 repaid 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.

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# Competition

The
telecommunications industry is characterized by intense competition. Some of the companies
that compete with us 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.

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.

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.

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.

# Seasonality

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

# 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, patents, 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 nineissued patents, of which three were issued in
2008, and five pending patent applications. Various trademarks of ours have already been
registered in certain countries.  Our registered trademarks include among others
QUALIVIEW, NGN FRAUDVIEW, I-PROBE, SIGVIEW, X-ELLENCE, QUALIVOIP, QUALIMOBILE, PRE-VIEW,
VALUEROUTE, BILLGUARD, FLOWGUARD, SERVGUARD and IRM.

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.

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.

# 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
Israel and other countries in which we operate, 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.

21

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

As
of March 31, 2009, IDB Holding Corporation Ltd. and its affiliates Koor Industries Ltd.,
Clal Electronics Industries Ltd. and others (IDB) beneficially held 38.6% 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 (in the process
of voluntary liquidation), a German company; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Telrad
Hawk Net - I Ltd. (in the process of 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. 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.

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, 2010.

ECtel
(2000) U.K. Ltd, our UK subsidiary, leases approximately 100 square feet of office space
in London which is used mainly for sales and marketing activities. The term of the London
lease is through October 12, 2009.

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.

22

---

---

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 acquired substantially all of the assets of Compwise Ltd., an Israel-based
company, a provider of business analytic solutions for telecommunication operators, for
$1.5 million, pursuant to an asset purchase agreement, which is described below under
Item 10CMaterial Contracts. The goal of this acquisition was 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 significantly
affected by the acquisition of Compwises assets.

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. This acquisition enhanced our ability to provide
communications services providers with a comprehensive Integrated Revenue Management
solution.

Our
revenues increased in 2008 compared to 2007 by 20% reaching $25.0 million, compared to
$20.9 million in 2007. 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 and RAP solutions. We increased our maintenance and support
revenues largely through renewals and extensions from our installed customer base. We also
believe that the additions to our installed customer base resulting from the acquisition
of Compwise may further increase our revenues from maintenance and support and allow for
cross-sales opportunities.

Our
operating loss for 2008 increased compared to 2007. The increase was mainly due to the
following factors: (a) in 2008, we recorded a provision for bad debt in the amount of $0.4
million, compared to a recovery of bad debt provision in the amount of $0.1 million in
2007, (b) acquisition-related expenses in connection with a potential acquisition that was
not completed in the amount of $0.1 million, (c) the contribution of two lower-margin, yet
strategic projects with major telecom groups, and (d) the ongoing weakening of the US
dollar contributed to an increase in our NIS-denominated expenses.

Our
net loss for 2008 decreased compared to 2007. This was mainly due to recovery of certain
Auction Rate Securities (ARS), as described below under Item 5AOperating
ResultsComparison of 2008, 2007 and 2006Impairment of ARS.

The
recession in the U.S. and global markets is affecting the global economy, causing
uncertainty in the telecommunications market, and may result in further decreases in
capital investments by telecommunication service providers. The decline in capital
expenditures has had, and may in the future have, a negative impact on our sales and may
adversely affect the pricing of our products. Furthermore, we may need to adjust our
business and financial models to the possible lower levels of capital expenditures of our
customers, which may have negative affect on our revenues. Nevertheless, despite market
expectations for a decrease in capital investments by telecommunication service providers,
in the first quarter of 2009 we experienced growing demand for our products, which we
believe is a result of our customers urgent need to preserve revenues.

23

---

---

Recently
we have received an increased amount of requests from our customers for longer payment
terms than those which we currently offer and for alternative payment models, such as
revenue sharing based compensation proposals. These payment cycles and alternative payment
models may adversely affect the cash resources available to operate and expand our
business. Furthermore, the global recession has impacted a number of our customers
resulting in payment collection issues with respect to some customers in the first quarter
of 2009. While we believe that payment will be received from these customers during this
year, and are working closely with our customers to help them navigate their liquidity
issues, we cannot provide assurance that these payments will be made.

Our
revenues for the first quarter of 2009 were lower than we expected, at $3.4 million, as
they were impacted by the longer product implementation cycles with our customers.

As
the global markets continue to be in turmoil, we adopted, in the fourth quarter of 2008, a
series of proactive efficiency measures including a reduction in management and employee
salaries, downsizing our workforce and cost efficiencies in the professional service (PSO)
functions as well as in our other operating expenses. Our planned operating expenses for
the year 2009, including their scope and structure, were planned based upon our estimation
as to the level of our revenues in 2009 in an aim to reduce our losses. It is our goal for
2009 to preserve cash, without compromising either our development or growth prospects.

# Acquisitions and
Dispositions

Our
business and financial position during the three years ended December 31, 2008 were
influenced by acquisitions. The acquisitions were accounted for under the purchase method
of accounting, 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:

| |  | In
April 2008, we acquired substantially all the assets of Compwise Ltd., an Israel-based
company, a provider of business analytic solutions for telecommunication operators, for
$1.5 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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., 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Share Repurchase Plans

In
July 2008 we announced a plan to repurchase our ordinary shares on the open market in an
amount in cash of up to $4 million. Since we adopted the plan, we repurchased an amount of
404,503 of our ordinary shares for total consideration of $0.5 million. 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. Under this plan, we repurchased an amount of 2,304,794 of our
ordinary shares for total consideration of $11.5 million. That plan expired in April 2007.
As of December 31, 2008, our total cash and investments were approximately $17.6 million.
See also Liquidity and Capital Resources in connection with our cash position.

# 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                   |                        
|Acquisition-related expenses                          |                        
|Amortization of acquisition-related intangible assets |                        
|                                                      |                        
|                                                      |                        
|Total operating expenses                              |                        
|                                                      |                        
|                                                      |                        
|Operating loss                                        |                        
|Financial income, net                                 |                        
|Other income (expenses), net                          |                        
|                                                      |                        
|                                                      |                        
|Loss before taxes on income                           |                        
|Income tax (expense) benefit                          |                        
|                                                      |                        
|                                                      |                        
|Net loss                                              |                        
|                                                      |                        

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

24

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# Comparison of 2008, 2007
and 2006

Revenues

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

2008
vs. 2007

Total
revenues increased by 20% from $20.9 million in 2007 to $25.0 million in 2008 for the
reasons discussed above in the Overview of this section.

2007
vs. 2006

Total
revenues decreased by 27% from $28.8 million in 2006 to $20.9 million in 2007. Our
revenues decreased in 2007 mainly due to the following two reasons: (i) a slower than
anticipated purchasing cycle of a few of our customers, causing our revenues for the first
quarter of 2007 to be below expected levels, and as a result of the fact that these orders
continued to occupy some of our sales personnel during the second quarter, causing lower
than expected revenues during the balance of 2007; and (ii) a delay in obtaining
acceptance by certain customers of certain projects which were part of our backlog at the
end of 2006 which caused delayed recognition of the revenues from those projects and
occupied our operational resources involved in those projects for longer than anticipated
periods, thus delaying generation of revenues from other customer projects.

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.

2008
vs. 2007

Cost
of revenues increased from $10.2 million in 2007 to $13.7 million in 2008 primarily due to
the increase in our revenues. Our gross profit increased primarily because our revenues
increased. Our gross profit margin decreased from 51% in 2007 to 45% in 2008 mainly due to
the contribution of two lower-margin, yet strategic projects with major telecom groups,
the ongoing weakening of the US dollar against the Israeli shekel and the foreign exchange
fluctuation between the US dollar and other currencies, which weakening and fluctuations
had the effect of increasing our non-dollar expenses.

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 for 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.

25

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Operating Expenses

|(in millions of U.S. dollars, except for percentages) | Year ended December 31, | % Change 2008
vs. 2007 | % Change 2007
vs. 2006
|----------------------------------------------------- | ----------------------- | ---------------------- | ----------------------
|
|
|
|
|Research and development costs, net                   |                         |                        |                       
|Selling and marketing expenses                        |                         |                        |                       
|General and administrative expenses                   |                         |                        |                       
|Amortization of acquisition-related intangible assets |                         |                        |                       
|Acquisition-related expenses                          |                         |                        |                       
|Total operating expenses                              |                         |                        |                       
|                                                      |                         |                        |                       

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.

2008
vs. 2007

Research
and development costs, net decreased by 6.3% from $4.8 million in 2007 to $4.5 million in
2008. This decrease resulted mainly from the decrease in direct research and
developmentexpenses, partially offset by the ongoing weakening of the US dollar
against the Israeli shekel.

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.

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.

2008
vs. 2007

Selling
and marketing expenses increased by 2.4% from $8.5 million in 2007 to $8.7 million in
2008. The increase was mainly due to higher expense for agents commissions resulting
from the increase in our revenues, and the ongoing weakening of the US dollar against the
Israeli shekel.

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.

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.

2008
vs. 2007

General
and administrative expenses increased by 21.0% from $5.8 million in 2007 to $7.0 million
in 2008. The increase was primarily due to (i) increases in senior management headcount
and compensation levels in transition periods (i.e. turnover of employees), (ii) an
increase in our doubtful debts expense totaled $0.4 million as compared to a recovery in
2007 totaling $0.1 million, and (iii) an increase in legal expenses resulting from the
class action filed against the Company.

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 who resigned from his position with the Company, (ii) increases in senior
management headcount and compensation levels in transition periods (i.e. turnover of
employees), (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.

26

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Amortization of
Acquisition-Related Intangible Assets

2008
vs. 2007

In
2008 we recorded amortization of acquisition-related intangible assets in the amount of
$0.2 million, related to our acquisitions of Telesoft and Compwise. Such amounts consist
of amortization expense related to intangible assets recorded in connection with
acquisitions accounted for by the purchase method of accounting.

2007
vs. 2006

In
2007 and 2006 we recorded amortization of acquisition-related intangible assets in the
amount of $0.1 million and $0.5 million, respectively, related to our acquisition of
Telesoft,.

Acquisition-Related
Expenses

2008
vs. 2007

During
2008, we incurred expenses in the amount of $0.1 million in connection with a due
diligence process and legal work for a potential acquisition. During the second quarter of
2008 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 primarily consisted of third-party legal, accounting and other
professional services fees.

2007
vs. 2006

No
material expenses were recorded in our results of operations in 2007 in respect of
acquisition-related expenses. 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 primarily consisted of
third-party legal, accounting and other professional services fees.

Operating Loss

2008
vs. 2007

Operating
loss increased from $8.5 million in 2007 to $9.1 million in 2008. The increase was mainly
due to the following factors: (a) we recorded a provision for bad debt in the amount of
$0.4 million, compared to a recovery of bad debt provision in the amount of $0.1 million
in 2007 (b) acquisition-related expenses in connection with a potential acquisition that
was not completed in the amount of $0.1 million, (c) the contribution of two lower-margin,
yet strategic projects with major telecom groups, and (d) the ongoing weakening of the US
dollar further increased our operating loss. The effect of these factors was partially
offset by the increase in revenues.

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 while
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 who resigned from his position with the Company, (iii) increases in senior
management headcount and compensation levels in transition periods (i.e. turnover of
employees), (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 operating 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 a potential acquisition.

27

---

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Financial Income, Net

2008
vs. 2007

Financial
income, net decreased by 43.7% from $1.16 million in 2007 to $0.65 million in 2008. This
decrease was primarily due to the following three factors: (i) decrease in the average
cash available for investment during 2008 compared to 2007, due to a share repurchase plan
and use of funds during 2008; (ii) appreciation of the NIS compared to the U.S. dollar;
and (iii) depreciation of the GBP compared to the U.S. dollar.

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 a share repurchase plan and
repayment of grants to the OCS; and (ii) appreciation of the NIS compared to the U.S.
dollar.

Impairment of Auction
Rate Securities (ARS)

As
of December 31, 2008, we had $2.7 million of principal invested in ARS. We have 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. Our ARS were ranked as AAA and AA at the time of
purchase, and there had 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, we recognized an impairment charge with respect to our ARS
portfolio.  As a result, in the year ended 2007, we recorded an impairment charge of
$1.6 million, 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 was considered a temporary impairment.

In
October 2008, several of the ARS held by us that were previously impaired were redeemed at
par-value at the amount of $1.7 million, resulting in a gain of $1.6 million. As of
December 31, 2008, we had $ 2.7 million of principal invested in ARS. As a result of
market conditions and the continuing lack of liquidity, we recorded an impairment charge
of $1.8 million, which is considered other than temporary.

Net Loss

2008
vs. 2007

Net
loss decreased from $8.8 million in 2007 to $8.3 million in 2008. The decrease in our net
loss in 2008 was mostly due to the increase in our gross profit in 2008 compared to 2007
which was partially offset by the increase in our operating expenses and decrease in our
financial income in 2008 compared to 2007, as described above.

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 while 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 who
resigned from his position with the Company, (iii) increases in senior management
headcount and compensation levels in transition periods (i.e. turnover of
employees), (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.

# 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;
| | - | --------------------

| |  | warranty
provision
| | - | ------------------

| |  | trade
accounts receivables and allowance for doubtful accounts;
| | - | ---------------------------------------------------------------

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

| |  | estimations
and assumptions;
| | - | ----------------------------

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| |  | 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)
collectability 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. When implementation
and consulting services are sold, revenues are recognized based on the proportional
performance method subject to the guidance of SAB 104 Revenue Recognition in
Financial Statements.

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, collectability is determined to be not probable, revenue is deferred
until the earlier of when collectability 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.

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 collectability is determined as not being probable, we
recognize revenues from contracts with significant design, development, modification and
customization, using the completed-contract method.

Warranty provision

We
provide warranty on our products sold. Accrued warranty costs are calculated in respect of
such products 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 our
prior experience.

Trade accounts receivable
and allowance for Doubtful Accounts

Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts
collected on trade accounts receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. We do not have any
off-balance-sheet credit exposure related to its customers.

Our
financial statements include an allowance, which we believe reflects adequately the loss
inherent in our accounts receivable portfolio. In establishing the required allowance, our
management bases its determination, among other factors, on information available about
the debtors 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.

29

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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.

We
conduct our annual goodwill impairment test as of June 30 every year. We performed annual
impairment tests during 2008, 2007 and 2006 and did not identify any impairment. At
December 31, 2008, given the adverse change in the general business climate and the recent
decrease in the Companys market capitalization, the Company has performed an
additional goodwill impairment assessment and has determined that no impairment has
occurred as of December 31, 2008.

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.

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. Intangible assets consist mainly of acquired
technology and customer relations and are amortized over three to ten years.

Estimations and
assumptions

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.

Significant
items subject to such estimates and assumptions include the useful lives of fixed assets,
allowances for doubtful accounts goodwill and intangible assets, fixed assets, inventory,
investments and share-based compensation income tax uncertainties and other contingencies.
The current economic environment has increased the degree of uncertainty inherent in those
estimates and assumptions.

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.

30

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Accounting for Income
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.

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 a 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 9F 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. In December 2007, the SEC published Staff
Accounting Bulletin (SAB) No. 110, which amends SAB No. 107 by
extending the usage of the Simplified Method, as discussed in SAB No. 107, in
developing an estimate of expected term of plain vanilla share options in
accordance with SFAS 123R. SAB No. 110 was declared effective on January 1, 2008, and
allows companies, which do not have sufficient historical experience, to provide a
reasonable estimate to continue use of the Simplified Method for estimating the expected
term of plain vanilla share option grants after December 31, 2007.
Accordingly, we will continue to use the Simplified Method until there is sufficient
historical experience to provide a reasonable estimate of expected term.

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.

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The
implementation of SFAS 123R resulted in an increase in our operating expenses during 2008,
2007 and 2006 in the amount of approximately $0.8 million, $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. At the end of 2008, we classify our corporate bonds, ARS and U.S.
government agencies debt 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 ongoing liquidity needs. Fair value is determined based on
observable market value quotes or, if market values are not available, using valuation
models including assessments of counterparty credit worthiness, credit default risk,
underlying security, type of collaterals, risk premium and overall capital market
liquidity conditions. Declines in fair value that are considered other-than-temporary are
charged to earnings and those that are considered temporary are reported, net of tax, as a
component of accumulated other comprehensive income in stockholders equity. The cost
of securities sold is based on the specific identification method.

At
the end of 2007, the Company classified its Corporate Bonds and U.S. Government Agencies
debt securities as held-to-maturity and its Auction Rate Securities as available-for-sale.
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.
During 2008, due to market conditions at the time, we sold some held-to-maturity
securities prior to maturity and must now classify our securities as available-for-sale.

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, 2008, we had $8.5 million in cash and cash equivalents, compared to $5.7
million in cash and cash equivalents as of December 31, 2007. As of December 31, 2008, we
had $1 million in short-term investments and $8.2 million in long-term marketable
securities, compared to $5.7 million in short-term investments and $17.8 million in
long-term marketable securities, as of December 31, 2007.

Generally,
we invest our excess cash in instruments that are liquid and generate yields, with
conservative and low risk. As of December 31, 2008, we had $2.7 million of principal
invested in ARS. We have 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. Our ARS were ranked as
AAA and AA at the time of purchase, and there had 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, we
recognized an impairment charge with respect to our ARS portfolio. As a result, in the
year ended 2007, we recorded, an impairment charge of $1.6 million, 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 was considered
a temporary impairment.

In
October 2008, several of the ARS held by us were redeemed at par-value at the amount of
$1.7 million, resulting in a gain of $1.6 million. As of December 31, 2008, as a result of
the market condition and the lack of liquidity continuation, we recorded an impairment
charge of $1.8 million, which is considered other than temporary.

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 $8.7 million in 2008. Cash use in operations for 2008 was
primarily attributable to (a) longer than expected sale cycles resulting in slower
collection and increase in customer balances; (b) recovery gains in 2008 related to
partial redemption of our ARS portfolio which was impaired in 2007, as described above,
and (c) our net loss as described above under  Item 5AOperating
ResultsComparison of 2008, 2007 and 2006Net loss. Net cash used in our
operations for 2007 was approximately $6.7 million. Cash use in operations for 2007 was
primarily attributable 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
2008, 2007 and 2006Net loss. Net cash used in our operating activities was
approximately $2.1 million in 2006. Cash use in operations for 2006 was primarily
attributable to a longer collection cycle in the fourth quarter of 2006, which was
reflected by a decrease in operating cash flow during the fourth quarter and which
resulted in cash flow used in operating activities for 2006.

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From
time to time, we enter into accounts receivable factoring agreements with unaffiliated
financial institutions. During 2008, 2007 and 2006, we sold no 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 $0.7 million in 2008, $0.4 million in 2007
and $0.6 million in 2006. 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 2008 we invested $1.5 million in the acquisition of
Compwises assets. We expect our capital expenditures to decrease in 2009 due to the
completion of implementation of new enterprise resource software platform during 2008. In
addition, we invest in capital expenditures pursuant to the requirements applicable to us
under our approved enterprise programs. As of December 31, 2008, 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 used in our financing
activities in 2008 was approximately $0.5 million. This was due to the repurchase of
shares. Net cash provided by our financing activities in 2007 was approximately $1 million
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
million. This was due to the repurchase of our shares partially offset by 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, 2008, outstanding bank guarantees totaled approximately $1 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 a 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
are no longer deemed to be related parties. In our ordinary course of business, we have
entered into a few agreements with ECI which are material to our operations:

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.

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. While ECI currently permits our supplier to use
its technology required for production of these components, we cannot assure that such
permission will not be withheld by ECI in the future. To the extent ECI will withhold its
permission, it has an obligation to supply these components to us under a components
supply agreement executed between our Company and ECI in February 2004, which agreement
has an initial period of seven years.

# 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.

33

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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, 2008, our
effective tax rate for 2008 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.

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. Similarly, throughout the course of 2008,
the average exchange rate between the U.S. dollar and the NIS reflected, relative to the
start of 2008, a further devaluation of the U.S. dollar by almost seven percent relative
to the NIS. 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
(appreciation)
Rate | Israel Inflation
Adjusted for
Devaluation
|----------------------- | ---------------------- | --------------------------------------- | -----------------------------------------
|
|
|
|
|2004                    |                        |                                         |                                          
|2005                    |                        |                                         |                                          
|2006                    |                        |                                         |                                          
|2007                    |                        |                                         |                                          
|2008                    |                        |                                         |                                          
|                        |                        |                                         |                                          

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.

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| | 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 $4.5 million in 2008, $4.8 million in 2007 and
$4.3 million in 2006. As of March 31, 2009, 27 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.

We
recorded grant participations from the OCS totaling $0.2 million in 2006. 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, 2008, 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 have fully
repaid 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 9B 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

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
| | -- | -----------------

The
recession in the U.S. and global markets is affecting the global economy, causing
uncertainty in the telecommunications market, and may result in further decreases in
capital investments by telecommunication service providers. The decline in capital
expenditures has had, and may in the future have, a negative impact on our sales and may
adversely affect the pricing of our products. Furthermore, we may need to adjust our
business and financial models to the possible lower levels of capital expenditures of our
customers, which may have negative affect on our revenues.

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 looks stable,
especially in large telecom providers. We expect the demand for revenue assurance and
fraud prevention technologies to remain stable in the near future. In addition, despite
market expectations for a decrease in capital investments by telecommunication service
providers, in the first quarter of 2009 we experienced growing demand for our products,
which we believe is a result of our customers need to preserve revenues. 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 the fourth quarter of 2008, we announced that revenues for the
fourth quarter, and subsequently the full year, were lower than initially anticipated
primarily due to three factors, one of which was the longer and deeper impact of the
global macroeconomic crisis on the Companys activities reflected in a lengthening in
sale cycles.

Recently
we have received an increased amount of requests from our customers for longer payment
terms than those which we currently offer and for alternative payment models, such as
revenue sharing based compensation proposals. These payment cycles and alternative payment
models may adversely affect the cash resources available to operate and expand our
business. Furthermore, the global recession has impacted a number of our customers
resulting in payment collection issues with respect to some customers in the first quarter
of 2009. While we believe that payment will be received from these customers during this
year, and are working closely with our customers to help them navigate their liquidity
issues, we cannot provide assurance that these payments will be made.

The
exchange rate between the U.S. dollar and the NIS fluctuated significantly in 2008,
resulting in a significant increase in the U.S. dollar cost of our operating expenses. The
fluctuation of the exchange rate between the U.S. dollar and the NIS has continued in
2009, with a slightly stronger dollar in the beginning of 2009, compared to 2008. Although
we have operations throughout the world, the majority of our revenue and operating
expenses 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.

36

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

In
the ordinary course of business, we have various commercial commitments that amounted, at
December 31, 2008, in the aggregate to approximately $1 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, 2008, 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                            |                                                      
|                                 |                                                      

# 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        | 50  | President and Chief Executive Officer                  
|Michael Neumann        | 45  | Senior Vice President and Chief Financial Officer      
|Benny Yehezkel         | 42  | Executive Vice President, Worldwide Marketing and Sales
|Gonen Roditti          | 50  | Vice President, Professional Services and Operations   
|Michael Bar Joseph     | 51  | Vice President, Research and Development               
|Liat Inbar-Arad        | 43  | Vice President, Human Resources                        
|                      
|Yair Cohen (1)         | 54  | Chairman of the Board                                  
|Ra'anan Cohen          | 41  | Director                                               
|Sami Totah (1) (2) (3) | 51  | Director                                               
|Rami Entin (2) (3)     | 57  | Director                                               
|Mali Baron (1) (2) (3) | 61  | 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
Servicesand Product Management at VocalTec Ltd., a VoIP company, since the year
2000. Prior to that, Mr. Weinstein served as Engineering Site Manager at NetManage Ltd., a
major ISP in Israel, since 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., a major
telecommunications company in Israel, 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., a manufacturer of fiber optic
communication networks, 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.

37

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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., and
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.

Gonen
Rodittiwas appointed as our Vice President Global Professional Services in March
2009. Prior to joining ECtel, Mr. Roditti worked at Migdal Capital Markets where he served
as CIO. Prior to that Mr. Roditti worked for 15 years at Amdocs where he served in various
executive positions, including Vice President Delivery, responsible for delivery aspects
of customer care and billing software systems to global telecommunications accounts in
Europe. Mr. Roditti has a B.A in Political Science from the University of Tel Aviv.

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, a 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 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.

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 Ltd., an optical
inspection systems manufacturer. 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.

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 Investment 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. degree 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 external directors since September 2006. Mr. Totah has
served as chairman of the board of directors of several Israeli start-up companies since
2003, including 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 MBA in
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.

38

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

The
aggregate direct remuneration paid during 2008 to executive officers and directors as a
group (15 persons), as well as remuneration paid to former executives in connection with
their services during 2008 and payments made in connection with their termination, was
approximately $2.5 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 $0.6 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 410,000 ordinary shares, at an exercise price of $2.59 per share, during
2008. 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 April 2008 and ending February 2012, unless terminated sooner, in
accordance with their terms. All of the options that were granted expire after the lapse
of six or ten years from the date of grant, unless terminated sooner in accordance with
their terms.

| | 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 2009 annual general meeting. The terms of office of our outside 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.

39

---

---

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.

# 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, thereby constituting both a
majority of our entire board and the entire composition of our audit committee.

# 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.

40

---

---

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.

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 Board 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. Our board of directors has determined that each of Mr. Totah and Ms. Baron is
independent, as defined under the Nasdaq Marketplace Rules. 
While Mr. Cohen is not  " independent  under the
Nasdaq Marketplace Rules,  we  have elected to follow home
country practice in lieu of  compliance with the NASDAQ requirement for an
entirely independent compensation committee, and Mr. Cohen can therefore serve
on our compensation committee notwithstanding this NASDAQ requirement.

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. Moshe Cohen, of Chaikin, Cohen, Rubin & Gilboa, an Israeli auditing
firm.

41

---

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

The
following table describes the number of our employees and subcontractors as of March 31,
2009 and December 31 of each of the indicated years:

|                                                          | March 31, 2009 | December 31,
2008 | December 31,
2007 | December 31,
2006
|--------------------------------------------------------- | -------------- | ----------------- | ----------------- | -----------------
|
|
|
|
|Approximate numbers of employees by geographic location:  |                |                   |                   |                  
|                                                          |                |                  
|Israel                                                    |                |                   |                   | 102              
|United States                                             |                |                   |                   | 12               
|Europe and elsewhere                                      |                |                   |                   | 47               
|                                                          |                |                   |                   |                  
|                                                          |                |                  
|Total workforce                                           |                |                   |                   | 161              
|                                                          |                |                  
|Approximate numbers of employees by category of activity: |                |                  
|                                                          |                |                  
|Management and administration                             |                |                   |                   | 26               
|Research and development                                  |                |                   |                   | 27               
|Professional services and operations                      |                |                   |                   | 83               
|Sales and marketing                                       |                |                   |                   | 25               
|                                                          |                |                   |                   |                  
|                                                          |                |                  
|Total workforce                                           |                |                   |                   | 161              
|                                                          |                |                   |                   |                  

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, 2009, 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, have been granted options to acquire our ordinary shares. As
of March 31, 2009, they held, as a group, 36,387 of our ordinary shares and options to
purchase an additional 1,670,434 ordinary shares. The following table sets forth detailed
information about the options granted to our executive officers and directors, 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      |                    |                             
|2008       |                |                | $                | 2.59           |                    |                             
|           |                |                |                  |                |                    |                             
|           |                |               
|Total      |                |                |                  |                |                    |                             
|           |                |                |                  |                |                    |                             

All of the above listed options
expire after the lapse of periods of six or ten years from the date of grant, unless
terminated sooner in accordance with their terms.

42

---

---

# 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, were determined by our board of directors.

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 decrease 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, 2009, options to purchase a total of 2,150,605 of our ordinary shares were
outstanding. During 2008, no options to purchase ordinary shares granted under the plans
had been exercised and 410,000 options had been granted at an exercise price of $2.59 per
share.

# 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 March 31, 2009 to beneficially own 5% or more of our
outstanding ordinary shares. As of that date, 16,281,898 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 both (i) the shares underlying any other options or warrants held by such
person and (ii) shares underlying any options or warrants held by any other person (even
if exercisable by such other persons within 60 days). 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)                                     |                          
|Skiritai Capital 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 April 7, 2009 and March 3, 2009, 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); 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.

43

---

---

Approximately 62.66% of Koors
ordinary shares are held by Discount Investment Corporation Ltd. (DIC), and
approximately 13.35% 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 controlled 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 55.26% 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 13.43% 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 13.42% of the outstanding shares of
IDBH.

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 6, 2009. 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, a
          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 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 and Diker Management and in that capacity
          direct their operations. Therefore, Charles M. Diker and Mark N. Diker may be
          deemed the beneficial owners of shares beneficially owned by Diker GP and Diker
          Management.

(3)
          Based upon a Schedule 13G filed with the SEC on January 13, 2009. Following are
          the entities on behalf of which the aforementioned Schedule 13G was filed: The
          Leonidas Opportunity Fund L.P. and Leonidas Opportunity Offshore Fund Ltd., both
          formed to engage in the business of acquiring, holding and disposing of
          investments in various companies. The present principal business of SKIRITAI
          Capital LLC is serving as the General Partner of the Leonidas Opportunity Fund
          L.P. and the Investment Manager of the Leonidas Opportunity Offshore Fund Ltd.
          Russell R. Silvestri and Lyron L. Bentovim are Managing Directors of SKIRITAI
          Capital LLC.

Pursuant
to a Schedule 13G filed with the SEC on March 2, 2009 by Potomac Capital Management LLC
(Potomac), the number of shares beneficially owned by Potomac as of March 2,
2009 is 310,032. As a result, Potomac is no longer considered a major shareholder of
ECtel.

Record Holders

As
of March 31, 2009, there were 305 holders of record of our ordinary shares. 227 record
holders, holding 6,688,161 shares, or approximately 24.91%, 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.

We
are unaware of any arrangements, the operation of which may at a subsequent date result in
a change of control of the Company.

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

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 are referred to as Holders in this
section. 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 registration 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 United States 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 unless terminated earlier upon the percentage holdings of the Holders
falling below a specified threshold.

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

44

---

---

| | 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 District Court of Maryland held its hearing on preliminary approval of
stipulation of settlement and granted preliminary approval.  The hearing on the final
approval of stipulation of settlement has been scheduled for July 27, 2009.

# Dividend Policy

We
did not pay any cash dividends during 2008, 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
| | -- | -------------------

Revenue
for the first quarter of 2009 totaled $3.4 million, compared to $6.5 million in the first
quarter of 2008. Operating loss for the first quarter of 2009 totaled $1.8 million,
compared to operating losses of $2 million in the first quarter of 2008 and $3.2 million
in the fourth quarter of 2008.

Net
loss for the first quarter of 2009 totaled $1.6 million or 10 cents per share compared to
$1.3 million dollar or 8 cents per share in the first quarter of 2008. Net loss for the
fourth quarter of 2008 totaled $3.4 million or 21 cents per share.

Cash,
cash equivalents and marketable bonds and securities as of March 31, 2009 were $14.8
million compared to $17.6 million as of December 31, 2008.

For
additional information regarding significant change in our financial position since
December 31, 2008 see Item 5AOperating
ResultsOverview.

Since
the date of our consolidated financial statements included in this annual report, there
has not been a significant change in our Company other than as described in this Item 8B.

45

---

---

# 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:    |      |    
|2004              |      |    
|2005              |      |    
|2006              |      |    
|2007              |      |    
|2008              |      |    
|                  |      |    
|Calendar Quarter: |      |    
|                  |      |    
|2007:             |      |    
|First Quarter     |      |    
|Second Quarter    |      |    
|Third Quarter     |      |    
|Fourth Quarter    |      |    
|                  |      |    
|2008:             |      |    
|First Quarter     |      |    
|Second Quarter    |      |    
|Third Quarter     |      |    
|Fourth Quarter    |      |    
|                  |      |    
|2009:             |      |    
|First Quarter     |      |    
|                  |      |    
|Calendar Month    |      |    
|                  |      |    
|November 2008     |      |    
|December 2008     |      |    
|January 2009      |      |    
|February 2009     |      |    
|March 2009        |      |    
|April 2009        |      |    
|                  |      |    

| | 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.

46

---

---

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

Not
Applicable.

# 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.

47

---

---

# 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.

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
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

---

| |  | 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.
| | - | -----------------------------------------------------------------------------------------------

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.

49

---

---

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
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

50

---

---

| |  | 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.

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
| | -- | ------------------

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 acquired substantially all the assets of Compwise for
approximately $1.5 million in cash. The transferred assets included mainly intellectual
property and goodwill associated therewith, contracts with customers, accounts
receivable, 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 five
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 towards ECtel.

Registration Rights
Agreement

Our
former shareholder, ECI Telecom Ltd. (ECI), had registration rights pursuant
to an agreement entered into in 2002 for our ordinary shares 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. Jointly
referred to herein as Holders will be Koor Industries Ltd.; Clal Electronics
Industries Ltd.; IDB Development Corporation Ltd. and Badal Securities Ltd. 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 United States 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 unless terminated 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.

51

---

---

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.

| | 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 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 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,
| | - | -------------------------------------------------

52

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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.

U.S.
          holders of our ordinary shares are urged to consult their own tax advisors with
          respect to the specific tax consequences 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 to their particular circumstances.

Taxation of Dividends
Paid on Ordinary Shares if we are not a Passive Foreign Investment Company

If
we are not classified as a passive foreign investment company, or PFIC, (see discussion
below regarding our PFIC status) 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. Distributions of our current or accumulated earnings and
profits           will generally be foreign source passive income for U.S. foreign tax
credit           purposes.

53

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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.

If
we are classified as a PFIC, the rules described above would generally only apply to
distributions that were not excess distributions received by a U.S. holder who
does not make a QEF or mark-to market election (both described below).

Taxation of the Disposition of
Ordinary Shares if we are not a Passive Foreign Investment Company

If
we are not classified as a PFIC, (see discussion below regarding our PFIC status 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. 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) may have foreign exchange
gain or loss based on any appreciation or depreciation in the value of the foreign
currency against the dollar, which may 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 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 could cause a reduction in the value of our ordinary
shares.

For
U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year if
(after taking into account certain look-through rules with respect to the income and
assets of our corporate subsidiaries) either (i) 75% or more of our gross income in a
taxable year is passive income, or (ii) at least 50% of the average value of all of our
assets for a taxable year (determined on a quarterly basis) 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. The Code does not specify how a corporation must determine the fair market
value of its assets for this purpose and the issue has not been definitively determined by
the United States Internal Revenue Service (IRS) or the courts.  The
market capitalization approach has generally been used to determine the fair market value
of the assets of a publicly traded corporation, though other valuations methods may be
available for these purposes.

If
we are a PFIC, each U.S. holder will (unless it made one of the elections discussed below
on a timely basis) be taxable on gain recognized from the disposition of our ordinary
shares (including gain deemed recognized if the ordinary shares are used as security for a
loan) and upon receipt of certain excess distributions with respect to our
ordinary shares as if such income had been recognized ratably over the U.S. holders
holding period for the ordinary shares. The U.S. holders income for the current
taxable year would include (as ordinary income) amounts allocated to the current taxable
year and to any taxable period prior to the first day of the first taxable year for which
we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in
effect for each other taxable period to which income is allocated, and an interest charge
on the tax as so computed would also apply. Additionally, if we were a PFIC, U.S. holders
who acquire our ordinary shares from a decedent (other than certain nonresident aliens)
would be denied the normally-available step-up in basis for such shares to fair market
value on the date of death and, instead, would generally have a tax basis in such ordinary
shares equal to the lower of the decedents basis or the fair market value of such
shares on the date of the decedents death. We will generally be treated as a PFIC
with respect to any U.S. holder if we are a classified as a PFIC for any taxable year
during the U.S. holders holding period for our ordinary shares. However, if we cease
to satisfy the requirements for PFIC classification in any taxable year, a U.S. holder may
avoid the consequences of our PFIC classification for subsequent taxable years by making a
purging election to recognize gain based on the U.S. holders unrealized
appreciation in our ordinary shares through the close of the last taxable year in which we
are a PFIC. Any gain recognized would be subject to the excess distribution rules
described immediately above.

54

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As
an alternative to the tax treatment described above, a U.S. holder could elect to treat us
as a qualified electing fund (QEF); provided that we supply
certain information to the U.S. holder. If a U.S. holder makes a QEF election, the U.S.
holder would be required to include in income, for each taxable year that we are a PFIC,
its pro rata share of our ordinary earning as ordinary income and its pro rata share of
our net capital gain as long-term capital gain, subject to a separate election to defer
payment of taxes, which deferral is subject to an interest charge. Any income inclusion
will be required whether or not such U.S. holder owns our ordinary shares for an entire
taxable year or at the end of our taxable year. The amount so includable will be
determined without regard to our prior year losses or the amount of cash distributions, if
any, received from us. Special rules and elections (e.g., purging election)
may apply if a U.S. holder makes a QEF election after the first taxable year in its
holding period in which we are a PFIC. A U.S. holder may not make a QEF election with
respect to warrants. A U.S. holders basis in its ordinary shares will increase by
any amount included in income and decrease by any amounts not included in income when
distributed because such amounts were previously taxed under the QEF rules. So long as a
U.S. holders QEF election is in effect beginning with the first taxable year in
which we are a PFIC during the U.S. holders holding period for its ordinary shares,
any gain or loss realized by such holder on the disposition of its ordinary shares held as
a capital asset ordinarily would be a capital gain or loss. Such capital gain or loss
ordinarily would be long-term if such U.S. holder had held such ordinary shares for more
than one year at the time of the disposition. The QEF election must be made on or before
the due date of the U.S holders federal tax return for the taxable year for which
the election is made. The QEF election is made on a shareholder-by-shareholder basis,
applies to all ordinary shares held or subsequently acquired by an electing U.S. holder
and can be revoked only with the consent of the IRS.

Although
a U.S. holder normally is not permitted to make a retroactive QEF election for a foreign
corporation, a retroactive election may generally be made for a taxable year of the U.S.
holder (the retroactive election year) if the U.S. holder (i) reasonably
believed that, as of the date the QEF election was due, the foreign corporation was not a
PFIC for its taxable year that ended during the retroactive election year and (ii) filed a
protective statement with respect to the foreign corporation with its tax return for the
retroactive election year, in which the U.S. holder described the basis for its reasonable
belief and extended the period of limitation on the assessment of taxes determined under
Sections 1291 through 1298 of the Code with respect to the foreign corporation (PFIC
related taxes) for all taxable years of the U.S. holder to which the protective statement
applies. Certain qualified shareholders may be exempt from satisfying the
reasonable belief requirement or filing a protective statement in certain circumstances.

As
an alternative to making a QEF election, a U.S. holder of PFIC stock which is
marketable stock (e.g., regularly traded on the NASDAQ Global
Market) may in certain circumstances avoid certain of the tax consequences generally
applicable to holders of stock in a PFIC by electing to mark the stock to market as of the
beginning of such U.S. holders holding period for the ordinary shares. Special rules
will apply if a U.S. holder makes the mark-to-market election after the first taxable year
in a U.S. holders holding period in which we are a PFIC. In addition, under current
law, a mark-to-market election cannot be made for warrants. As a result of such election,
in any taxable year that we are a PFIC, a U.S. holder would generally be required to
report gain or loss to the extent of the difference between the fair market value of the
ordinary shares at the end of the taxable year and such U.S. holders tax basis in
its ordinary shares at that time. Any gain under this computation, and any gain on an
actual disposition of the ordinary shares, in a taxable year in which we are a PFIC, would
be treated as ordinary income. Any loss under this computation, and any loss on an actual
disposition of the ordinary shares, in a taxable year in which we are a PFIC, generally
would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain
previously included. Any remaining loss from marking ordinary shares to market will not be
allowed, and any remaining loss from an actual disposition of ordinary shares generally
would be capital loss. A U.S. holders tax basis in its ordinary shares is adjusted
annually for any gain or loss recognized under the mark-to-market election. There can be
no assurances that there will be sufficient trading volume with respect to the ordinary
shares for the ordinary shares to be considered regularly traded or that our
ordinary shares will continue to trade on the NASDAQ Global Market. Accordingly, there are
no assurances that the ordinary shares will be marketable stock for these purposes. As
with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder
basis, applies to all ordinary shares held or subsequently acquired by an electing U.S.
Holder and can only be revoked with consent of the IRS (except to the extent the ordinary
shares no longer constitute marketable stock).

The
tests for determining PFIC status are applied annually and it is difficult to make
accurate predictions of future income and assets, and the future price of our ordinary
shares, which are all relevant to the determination of whether we are classified as a PFIC
for a taxable year. Accordingly, there can be no assurances that we will not be classified
as a PFIC in 2009 or in subsequent taxable years.

An
entity in which we own or acquire an interest (directly or indirectly) that is classified
as a corporation for U.S. federal income tax purposes may be a treated as a PFIC. A U.S.
holder may be able to make separate QEF elections for such entities, provided that such
entities provide certain information to the U.S. holder. If a QEF election is not made
with respect to such entities that are PFICs, then the general PFIC rules described above
will apply to direct and indirect dispositions of (including a U.S. holders
disposition of our ordinary shares), and excess distributions by, such entities. In
addition, a mark-to-market election made with respect to us would generally not be
applicable to subsidiaries or other entities which we own or acquire (directly or
indirectly) that are PFICs.

All
U.S. Holders are urged to consult their own tax advisers about the PFIC rules and
specifically about the advisability, procedures and timing of 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:

| |  | 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
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

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| |  | 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 as further described below. The Amendment will apply
to approved enterprise programs in which the year of election under the Investments Law is
2004 or later, unless such programs received approval from the Investment Center on or
prior to December 31, 2004, in which case the Amendment provides that terms and benefits
included in any certificate of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval.

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 throughout the duration as stipulated in the
Investment Law. 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.

57

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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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 certain market does not exceed 75%           of
its total revenues in such year;
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | (iii) | 25%
or more of its revenues are derived from a certain 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 NIS 140 million      | 12%                      | Up to NIS 16.8 million    
|From NIS 140 - 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.

58

---

---

# 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 carry forwards 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. Finally, due to the
Companys adoption of US dollar regulations in 2008 , the Inflationary Adjustments
Law will no longer be applicable.

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

Commencing
in taxable year 2007, the Company has elected to measure its taxable income and file its
tax return under the Israeli Income Tax Regulations (Principles Regarding the Management
of Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Such an elective obligates the Company for
three years. Accordingly, commencing taxable year 2007, results for tax purposes are
measured in terms of earnings in U.S. dollars.

# Capital Gains Tax

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares in Israeli companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a tax treaty between Israel and
the shareholders country of residence provides otherwise. The law distinguishes
between real gain and inflationary surplus. The inflationary surplus is a portion of the
total capital gain which is equivalent to the increase of the relevant assets
purchase price which is attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate, between the date of
purchase and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus.

Generally,
until the 2006 tax year, capital gains tax was imposed on Israeli resident individuals at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale of shares
in, among others, Israeli companies publicly traded on NASDAQ or on a recognized stock
exchange or regulated market in a country that has a treaty for the prevention of double
taxation with Israel. This tax rate was contingent upon the shareholder not claiming a
deduction for financing expenses in connection with such shares (in which case the gain
was generally be taxed at a rate of 25%), and did not apply to: (i) the sale of shares to
a relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by
dealers in securities; (iii) the sale of shares by shareholders that report in accordance
with the Inflationary Adjustments Law (that were taxed at corporate tax rates for
corporations and at marginal tax rates for individuals); or (iv)the sale of shares by
shareholders who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement).

As
of January 1, 2006, the tax rate applicable to capital gains derived from the sale of
shares, whether or not listed on a stock market, is 20% for Israeli individuals, unless
such shareholder claims a deduction for financing expenses in connection with such shares,
in which case the gain will generally be taxed at a rate of 25%. Additionally, if such
shareholder is considered a material shareholder at any time during the
twelve-month period preceding such sale, that is, such shareholder holds directly or
indirectly, including with others, at least 10% of any means of control in the company,
the tax rate shall be 25%. Israeli companies are subject to the corporate tax rate on
capital gains derived from the sale of shares, unless such companies were not subject to
the Inflationary Adjustments Law (or certain regulations) at the time of publication of
the aforementioned amendment to the Tax Ordinance that came into effect on January 1,
2006, in which case the applicable tax rate is 25%. However, the foregoing tax rates do
not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares
prior to an initial public offering (that may be subject to a different tax arrangement).

59

---

---

The
tax basis of shares acquired prior to January 1, 2003 will be determined in accordance
with the average closing share price in the three trading days preceding January 1, 2003.
However, a request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange or regulated
market outside of Israel, provided, however, that such capital gains are not derived from
a permanent establishment in Israel, such shareholders are not subject to the Inflationary
Adjustments Law, and such shareholders did not acquire their shares prior to an initial
public offering. However, non-Israeli corporations will not be entitled to such exemption
if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary 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 to 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 Convention Between the government of the United States of America and the
government of Israel with Respect to Taxes on Income, as amended, generally referred to as
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by a
person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident
of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is
entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty,
generally, will not be subject to the Israeli capital gains tax. Such exemption will not
apply if (a) such Treaty U.S. Resident holds, directly or indirectly, shares representing
10% or more of our voting power during any part of the twelve-month period preceding such
sale, exchange or disposition, subject to certain conditions, or (b) the capital gains
from such sale, exchange or disposition can be allocated to a permanent establishment in
Israel. In such case, the sale, exchange or disposition of ordinary shares would be
subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes
against the U.S. federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.
The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.

# 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.

60

---

---

| | 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, 2008, we had $2.7 million of principal
invested in ARS. We have 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. Our ARS were ranked as
AAA and AA at the time of purchase, and there had 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, we
recognized an impairment charge with respect to our ARS portfolio. As a result, in the
year ended 2007, we recorded, an impairment charge of $1.6 million, which is considered
other than temporary, and an unrealized loss of $178 thousand and
recorded in other comprehensive loss as a reduction of shareholders equity, which
was considered a temporary impairment.  In October 2008, several of the
ARS held by us, and previously impaired, were redeemed at par-value at the amount of $1.7
million, resulting in a gain of $1.6 million. As of December 31, 2008, as a result of the
market condition and the lack of liquidity continuation, we recorded an impairment charge
of $1.8 million, which is considered other than temporary.

# Presentation of interest
rate risk (position as of December 31, 2008)

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
value
as of
|------------------------------ | ----------- | --------------- | ----------------
|
|
|
|
|Assets that incur interest     |             |                 |                 
|A. Cash and cash equivalents   |             |                
|U.S. dollars                   |             |                 |                 
|Weighted-average interest rate |             |                 |                 
|NIS                            |             |                 |                 
|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, 2008, the Company had nine open currency forward contracts. The gain
related thereto in the amount of $55 thousand is included in the statements of operations
as of December 31, 2008.

61

---

---

Presentation of foreign
currency-denominated assets and liabilities (position as of December 31, 2008)

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
value
as 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.

62

---

---

# 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

There
are no material modifications to, or qualifications of, the rights of security holders
that are required to be disclosed.

# Item 15T. 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, 2008. 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, 2008, 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(f) and Rule 15d-15(f) of the Exchange Act.
Our internal control system is 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 management, with the participation of our Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008. 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, 2008, 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 Marketplace Rule 4200(a)(15).

# 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 (including our principal executive officer,
principal financial officer and principal accounting officer). 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.

63

---

---

# Item 16C. Principal
Accountant Fees and Services

At
our annual meeting held on September 25, 2008, our shareholders re-appointed Somekh
Chaikin, a member firm of KPMG International, to serve as our independent auditors for
fiscal year 2009.

The
following table presents fees for professional services rendered by Somekh Chaikin for the
audit of the Companys annual financial statements for 2008 and 2007 and for certain
taxation and other 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 pre-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
July 2008 we announced a plan to repurchase our ordinary shares on the open market in an
amount in cash of up to $4 million. Under the plan, share purchases may be made from time
to time depending on market conditions, share price, trading volume and other factors. The
plan is for one year and may be suspended from time to time or discontinued. Since we
adopted the plan, we have repurchased an amount of 404,503 of our ordinary shares for
total consideration of $0.57 million. The plan is currently suspended. 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. From the time that we adopted the plan until its expiration in April
2007, 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 (All Purchased as
Part of Publicly Announced
Plans) | Average Price
Paid per Share | Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plan
|-------------- | ------------------------------------------------------------------------------------ | ---------------------------- | ---------------------------------------------------------------------------
|
|
|
|
|September 2006 |                                                                                      |                              |                                                                            
|October 2006   |                                                                                      |                              |                                                                            
|November 2006  |                                                                                      |                              |                                                                            
|September 2008 |                                                                                      |                              |                                                                            
|October 2008   |                                                                                      |                              |                                                                            
|               |                                                                                      |                             
|Total          |                                                                                      |                              |                                                                            
|               |                                                                                      |                              |                                                                            

64

---

---

# Item 16G. Corporate
Governance.

Pursuant
to the Israel 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 the Nasdaq Marketplace Rules for domestic U.S. listed companies.

The
members of our compensation committee are Messrs. Yair Cohen and Sami Totah and Ms. Mali
Baron. Our board of directors has determined that each of Mr. Totah and Ms. Baron is
independent, as defined under the Nasdaq Marketplace Rules. 
While Mr. Cohen is not independent under the Nasdaq Marketplace
Rules, we have elected to follow home country practice in lieu
of compliance with the NASDAQ requirement for an entirely independent
compensation committee and we have provided notice to that effect, and Mr. Cohen can
therefore serve on our compensation committee notwithstanding this NASDAQ
requirement.

# 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- 41, 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, of 2008, by and among certain investors and the Registrant (previously
filed as Exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31,
2007, filed June 18, 2008 and incorporated herein by reference).
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.(b)2* |  | Asset
 Purchase  Agreement,  dated  March  24,  2008,  by and  between  Compwise  Ltd.  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
|---- |  | --------------------

65

---

---

|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 17 CFR 240.13a-14(b) and 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 17 CFR 240.13a-14(b) and 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.

# 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 Weinstein President and Chief Executive OfficerDate: May 12, 2009
| |  | ---------------------------------------------------------------------------------------------------------------------------------------

66

---

---

# ECtel Ltd. and
Subsidiaries

# Consolidated Financial
Statements as
at and for the year ended December 31, 2008



---

---

|ECtel Ltd. and Subsidiaries                                                     
|--------------------------------------------------------------------------------
|                                                                                
|Consolidated Financial Statements as at and for the year ended December 31, 2008
|                                                                                

# Contents

|                                                                               | Page 
|------------------------------------------------------------------------------ | -----
|
|
|
|
|Report of Independent Registered Public Accounting Firm                        | F - 2
|                                                                              
|Consolidated Balance Sheets as at                                             
|December 31, 2008 and 2007                                                     | F - 3
|                                                                              
|Consolidated Statements of Operations for the                                 
|years ended December 31, 2008, 2007 and 2006                                   | F - 5
|                                                                              
|Consolidated Statements of Shareholders' Equity and Comprehensive Loss for the
|years ended December 31, 2008, 2007 and 2006                                   | F - 6
|                                                                              
|Consolidated Statements of Cash Flows for the                                 
|years ended December 31, 2008, 2007 and 2006                                   | F - 7
|                                                                              
|Notes to the Consolidated Financial Statements                                 | F - 9



---

---



| |                                 |           |                 
| | ------------------------------- | --------- | ----------------
| | 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           |           |                 

# Report of Independent
Registered Public Accounting FirmTo the Board of Directors and ShareholdersECtel
Ltd.:

We have audited the accompanying
consolidated balance sheets of ECtel Ltd. and its subsidiaries (the Company),
as at December 31, 2008 and 2007 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, 2008. 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, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the three-year period ended
December 31, 2008 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2V to the
consolidated financial statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No.157, Fair Value Measurements, as of January 1,
2008, for fair value measurements of all financial assets and financial liabilities and
for fair value measurements of nonfinancial items that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis.

Somekh Chaikin
Certified Public
Accountants (Israel)Member Firm of KPMG International

Tel Aviv, IsraelMarch
22, 2009

F - 2

---

---

ECtel Ltd. and Subsidiaries

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

|                                              |  | 2008 | 2007
|--------------------------------------------- |  | ---- | ----
|
|
|
|
|Assets                                        |  |      |     
|                                              |  |     
|Current assets                                |  |     
|Cash and cash equivalents                     |  |      |     
|Short-term investments                        |  |      |     
|Receivables:                                  |  |     
|Trade, net of allowance for doubtful accounts |  |      |     
|Other                                         |  |      |     
|Related parties                               |  |      |     
|Deferred expenses                             |  |      |     
|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

|
|
|
|

|                                                          |  | 2008 | 2007
|--------------------------------------------------------- |  | ---- | ----
|
|
|
|
|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 16,281,898     |  |     
|shares as at December 31, 2008 and 16,686,401 shares      |  |     
|as at December 31, 2007                                   |  |      |     
|Treasury shares at cost - 2,709,297 ordinary shares as at |  |     
|December 31, 2008 and 2,304,794 ordinary shares as at     |  |     
|December 31, 2007                                         |  |      |     
|Additional paid-in capital                                |  |      |     
|Accumulated other comprehensive gain (loss)               |  |      |     
|Accumulated 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
|                                                                     

|                                        |  | 2008 | 2007 | 2006   
|--------------------------------------- |  | ---- | ---- | -------
|
|
|
|
|Revenues                                |  |      |      | 13D    
|Cost of revenues                        |  |      |      | 9B, 12 
|                                        |  |      |      |        
|                                        |  |     
|Gross profit                            |  |      |      |        
|Research and development costs, net     |  |      |      |        
|Selling and marketing expenses          |  |      |      | 12     
|General and administrative expenses     |  |      |      | 12     
|Acquisition-related expenses            |  |      |      | 13G    
|Amortization of acquisition-related     |  |     
|intangible assets                       |  |      |      | 8      
|                                        |  |      |      |        
|                                        |  |     
|Operating loss                          |  |      |      |        
|Financial expenses                      |  |      |      | 13E    
|Financial income                        |  |      |      | 12, 13E
|Other income (loss),net                 |  |      |      | 4, 13H 
|                                        |  |      |      |        
|                                        |  |     
|Loss before taxes on income             |  |      |      |        
|                                        |  |     
|Income tax benefit (expense)            |  |      |      | 11     
|                                        |  |      |      |        
|                                        |  |     
|Net loss                                |  |      |      |        
|                                        |  |      |      |        
|                                        |  |     
|Loss per ordinary share                 |  |     
|Net basic and diluted loss per ordinary |  |     
|share:                                  |  |      |      |        
|                                        |  |      |      |        
|                                        |  |     
|Weighted average number of ordinary     |  |     
|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, 2008, 2007 and 2006
|                                                                                                                           

|                                                 | Ordinary
shares | Share
capital | Treasury
shares | Capital
surplus | Accumulated
loss | Accumulated
other
comprehensive
gain (loss) | Comprehensive
loss | Total
shareholders'
equity
|------------------------------------------------ | --------------- | ------------- | --------------- | --------------- | ---------------- | ------------------------------------------- | ------------------ | --------------------------
|
|
|
|
|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                |                           
|                                                 |                 |              
|Share-based compensation                         |                 |               |                 | -               |                  |                                             | -                  |                           
|Repurchase of shares                             |                 |               |                 | (404,503        | )                |                                             | -                  |                           
|Comprehensive loss:                              |                 |              
|Net loss                                         |                 |               |                 | -               |                  |                                             | -                  |                           
|Reclassified adjustment for other than temporary |                 |              
|impairment reported in net loss                  |                 |               |                 | -               |                  |                                             | -                  |                           
|Unrealized gain on marketable securities         |                 |               |                 | -               |                  |                                             | -                  |                           
|                                                 |                 |               |                 |                 |                  |                                             |                    |                           
|                                                 |                 |              
|Comprehensive loss                               |                 |               |                 |                 |                  |                                             |                    |                           
|                                                 |                 |               |                 |                 |                  |                                             |                    |                           
|                                                 |                 |              
|Balance at December 31, 2008                     |                 |               |                 | 16,281,898      |                  |                                             | 221                |                           
|                                                 |                 |               |                 |                 |                  |                                             |                    |                           

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
|                                                                     

|                                                              | 2008 | 2007 | 2006
|------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Cash flows from operating activities                          |      |      |     
|Net loss                                                      |      |      |     
|                                                              |      |     
|Adjustments to reconcile net loss to                          |      |     
|cash used in operating activities:                            |      |     
|                                                              |      |     
|Depreciation and amortization                                 |      |      |     
|Impairment of Auction Rate Securities                         |      |      |     
|Gain from the sale of Auction Rate Securities                 |      |      |     
|Loss on sale of long-term marketable securities               |      |      |     
|Loss (gain) on disposal of property, plant and equipment      |      |      |     
|Premium (discount) amortization of long-term marketable       |      |     
|securities                                                    |      |      |     
|Share-based compensation expenses                             |      |      |     
|                                                              |      |     
|Changes in operating assets and liabilities:                  |      |     
|Decrease (increase) in trade receivables, net                 |      |      |     
|Decrease (increase) in other receivables                      |      |      |     
|Decrease in inventories                                       |      |      |     
|Decrease (increase) in deferred expenses                      |      |      |     
|Increase (decrease) in trade payables                         |      |      |     
|Increase (decrease) in advances from customers                |      |      |     
|Changes in related parties, net                               |      |      |     
|Increase (decrease) in other payables and accrued liabilities |      |      |     
|Increase (decrease) in liability for employee                 |      |     
|severance benefits, net                                       |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|Net cash used in 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)
|                                                                              

|                                                          | 2008 | 2007 | 2006
|--------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Cash flows from investing activities                      |      |      |     
|Changes in short-term investments, net                    |      |      |     
|Capital expenditure on property, plant and equipment      |      |      |     
|Payments in consideration of acquisition of Compwise's    |      |     
|assets                                                    |      |      |     
|Payments in consideration of acquisition of               |      |     
|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 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 increase (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                                         |      |      |     
|                                                          |      |      |     

# A.     Non-cash transactions

|                                          | 2008 | 2007 | 2006
|----------------------------------------- | ---- | ---- | ----
|
|
|
|
|Purchase of property, plant and equipment |      |      |     
|not yet paid                              |      |      |     
|                                          |      |      |     

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

F - 8

---

---

ECtel Ltd. and Subsidiaries

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

# Note 1  General

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

| | On
December 29, 2005, the Company acquired all of the outstanding shares of Elron Telesoft
Ltd. and Elron Telesoft Export Ltd., two companies held by Elron Electronic Industries
Ltd. On April 30, 2008, the Company acquired substantially all the assets of Compwise
Ltd., an Israeli company, for a total consideration of $1.5 million. (See Note 7).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company wholly holds eight subsidiaries: ECtel Inc., ECtel (2000) UK Limited, ECtel B.V,
ECtel GmbH (in voluntary liquidation), 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. | Financial
statements in U.S. dollars
| | -- | ------------------------------------

| | The
majority of ECtels revenues are made outside of Israel (see Note 13D regarding
geographical distribution) and are generated or linked to the U.S. dollars (dollar).
In addition, a majority portion of ECtels costs are incurred or determined in
dollars. In view of the foregoing, management believes that the dollar is the currency of
the primary environment in which ECtel operates, and thus the dollar has been determined
to be ECtel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 rates gains and losses
resulting from remeasurement of 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 - 9

---

---

ECtel Ltd. and Subsidiaries

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

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

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

| | ECtel
considers all highly liquid investments with original maturity of three months or less at
date of purchase, 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. Short-term investments of available-for-sale and
held-to-maturity securities are accounted for the same as long-term marketable securities
(see also Note 2G).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Trade
accounts receivables and allowance for doubtful accounts receivable
| | -- | -------------------------------------------------------------------------

| | Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts
collected on trade accounts receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. ECtel does not have any
off-balance-sheet credit exposure related to its customers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel
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 13A).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. At the end of 2007, the Company classified its
Corporate Bonds and U.S. Government Agencies debt securities as held-to-maturity and its
Auction Rate Securities as available-for-sale. During 2008, due to market conditions at
the time, the Company sold some held-to-maturity securities prior to maturity and must
now classify its securities as available-for-sale. At the end of 2008, the Company
classifies its Corporate Bonds, U.S. Government Agencies debt securities and Auction Rate
Securities as available-for-sale.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Fair
value is determined based on observable market value quotes or, if market values are not
available, using valuation models including assessments of counterparty credit
worthiness, credit default risk, underlying security type of collaterals risk premium and
overall capital market liquidity conditions. Declines in fair value that are considered
other-than-temporary are charged to earnings and those that are considered temporary are
reported, net of tax, as a component of accumulated other comprehensive income in
stockholders equity. The cost of securities sold is based on the specific
identification method. (See also Note 2V).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

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        | 
| | Office furniture and equipment | 

| | Major
renewals and improvements are capitalized, while repairs and maintenance are expensed as incurred.
Leasehold improvements are amortized by the straight-line method over the shorter of
their useful lives or the terms of the leases.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company conducts its annual goodwill impairment test as of June 30 every year. During
2008, 2007, and 2006, the Company performed its annual impairment review of goodwill and
concluded that there was no impairment in those years. At December 31, 2008, given the
adverse change in the general business climate and the recent decrease in the Companys
market capitalization, the Company has performed an additional goodwill impairment
assessment and has determined that no impairment has occurred as of December 31, 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Intangible assets consist mainly of
acquired technology and customer relations and are amortized over three to ten years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

ECtel Ltd. and Subsidiaries

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

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

| | K. | 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel
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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel
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 (VSOE),
of the fair value exists for all undelivered elements. VSOE 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 when all other criteria in SOP
97-2 have been met. If sufficient VSOE does not exist for one or more undelivered
elements, the revenue is deferred for the entire arrangement 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. When
implementation and consulting services are sold, revenues are recognized based on the
proportional performance method subject to the guidance of SAB 104 Revenue
Recognition in Financial Statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If,
at the outset of an arrangement, the 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
          ECtels maintenance agreements provide technical support as well as
          unspecified software product upgrades and releases when and if made available
by           ECtel 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

ECtel Ltd. and Subsidiaries

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

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

| | K. | Revenue
recognition (contd)
| | -- | ----------------------------

| | If
collectibility is determined as not being probable, ECtel recognizes revenues from
contracts with significant design, development, modification and customization of the
software, using the completed-contract method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. ECtel has historically presented such taxes on a net basis.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | 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 ECtels prior experience.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
activity in accrued warranty costs is as follows:
| | -----------------------------------------------------

| |                                                 | December 31
| | ----------------------------------------------- | -----------
|
|
|
|
| | Balance outstanding at beginning of the year    |            
| | Warranty expenses                               |            
| | Warranties for products sold                    |            
| | Lapsed warranties                               |            
| | Addition related to the acquisition of Compwise |            
| |                                                 |            
| |                                                 |            
| | Balance outstanding at end of the year          |            
| |                                                 |            

| | Warranty
expenses are reported under cost of revenues.
| | ------------------------------------------------------

| | M. | 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

ECtel Ltd. and Subsidiaries

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

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

| | N. | Liability
for employee severance benefits
| | -- | -----------------------------------------

| | ECtels
liability for severance pay for its Israeli employees is generally calculated pursuant to
Israeli severance pay law and labor agreements 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, 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. 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 thereof.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtels
liability for all of its Israeli employees is partly provided for by monthly deposits in
insurance policies and by an accrual. 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. The value of these policies
is recorded as an asset in the Companys balance sheet. Withdrawals from the funds
may be made only for the purpose of disbursement of severance pay. The Deposits in
respect of employee severance obligations as stated on the consolidated balance sheets as
of December 31, 2008 and 2007 represent contributions to pension funds and are stated at
their current redemption value
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses
recorded in respect of severance and pension pay for the years ended December 31, 2008,
2007 and 2006 are $1,070 thousand, $718 thousand and $133 thousand, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel
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 at which this occurs matches the employees contribution
up to 5% of the employees earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Matching
contributions with respect to this plan were $38 thousand, $41 thousand and $36 thousand
in 2008, 2007 and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | O. | Income
taxes
| | -- | ------------

| | ECtel
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. ECtel 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)

| | O. | Income
taxes (contd)
| | -- | ---------------------

| | ECtel
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 ECtels financial condition, results of operations
or cash flows.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ECtel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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Share
incentive plans
| | -- | ---------------------

| | Effective
January 1, 2006, ECtel 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). In December 2007, the SEC
published Staff Accounting Bulletin (SAB) No. 110, which amends SAB No. 107
by extending the usage of the Simplified Method, as discussed in SAB No. 107, in
developing an estimate of expected term of plain vanilla share options in
accordance with SFAS No. 123 (revised 2004), Share-Based Payment. SAB
No. 110 was declared effective on January 1, 2008, and allows companies, which do not
have sufficient historical experience, to provide a reasonable estimate to continue use
of the Simplified Method for estimating the expected term of plain vanilla share
option grants after December 31, 2007. Accordingly, the Company will continue to use the
Simplified Method until there is sufficient historical experience to provide a reasonable
estimate of expected term. SAB No. 110 was effective for the Company on January 1, 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2008 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

ECtel Ltd. and Subsidiaries

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

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

| | Q. | 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 counterparties to derivative financial instruments, and
does not expect counter parties to fail to meet their obligations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
outstanding stock options and warrants have been excluded from the calculation of the
diluted net loss per ordinary share because the securities are anti-dilutive for all
periods presented.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
items subject to such estimates and assumptions include the useful lives of fixed assets,
allowances for doubtful accounts, goodwill and intangible assets, fixed assets,
inventory, investments and share-based compensation income tax uncertainties and other
contingencies. The current economic environment has increased the degree of uncertainty
inherent in those estimates and assumptions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Accumulated
other comprehensive gain (loss)
| | -- | -------------------------------------------

| | Accumulated
other comprehensive loss, presented in shareholders equity, includes unrealized
gains and losses on marketable securities that are classified as available for sale.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

ECtel Ltd. and Subsidiaries

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

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

| | U. | Concentrations
of credit risks
| | -- | ------------------------------

| | Financial
instruments, which potentially subject ECtel to significant concentrations of credit
risk, consist principally of cash and cash equivalents, investments and trade accounts
receivable. ECtel 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 ECtels policy is designed to limit exposure to any one institution.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
respect to trade accounts receivable, ECtel 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | V. | Fair
value of financial instruments
| | -- | -----------------------------------

| | Effective
January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair
Value Measurements, (SFAS 157), for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS 157 also establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FASB Staff Position FAS 157-2, Effective
Date of FASB Statement No. 157, delays the effective date of SFAS 157 until fiscal
years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial statements on
a nonrecurring basis.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2009, the Company will be required to apply the provisions of SFAS 157 to fair
value measurements of nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring
basis. The Company is in the process of evaluating the impact, if any, of applying these
provisions on its financial position and results of operations. In October 2008, the FASB
issued FASB Staff Position FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active, which was effective
immediately. FSP FAS 157-3 clarifies the application of SFAS 157 in cases where the
market for a financial instrument is not active and provides an example to illustrate key
considerations in determining fair value in those circumstances. The Company has
considered the guidance provided by FSP FAS 157-3 in its determination of estimated fair
values during 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability. As a
basis for considering such assumptions, SFAS 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 1
 Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets. Level 2  Include other inputs that are directly
or indirectly observable in the marketplace. Level 3  Unobservable inputs
which are supported by little or no market activity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2008, in accordance with SFAS 157, the Companys cash and cash
equivalents, short-term investments and long-term marketable securities are classified
within Level 1, as they are valued upon quoted market prices. Auction rate securities are
classified within Level 3 because the inputs to this valuation are unobservable in the
market and are significant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

ECtel Ltd. and Subsidiaries

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

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

| | V. | Fair
value of financial instruments (contd)
| | -- | --------------------------------------------

| | Assets
and liabilities measured at fair value are summarized below:
| | -------------------------------------------------------------------

| |                                  |  | Fair value measurement at reporting date using
| | -------------------------------- |  | ----------------------------------------------
|
|
|
|
| | Assets                           |  |                                               
| | Cash and cash equivalents        |  |                                               
| | Short-term investments and long- |  |                                               
| | term marketable securities       |  |                                               
| |                                  |  |                                               
| |                                  |  |                                               
| | Total Assets                     |  |                                               
| |                                  |  |                                               

| | The
financial instruments of ECtel consist mainly of cash and cash equivalents, current
receivables, prepaid expenses and other assets, 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 cash and cash equivalents, current
receivables, prepaid expenses and other assets, and accounts payable and accruals are
usually identical or close to their carrying value. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | Recently
issued accounting standards not yet adopted
| | -- | ----------------------------------------------------

| | 1. | In
March 2008, the FASB issued SFAS No. 161, Disclosures about
                    Derivative Instruments and Hedging Activities, an amendment of FASB
Statement                     No. 133 (SFAS 161). SFAS 161
applies to all                     derivative instruments and related hedged items
accounted for under SFAS                     No. 133, Accounting for
Derivative Instruments and Hedging                     Activities (SFAS 133).
SFAS 161 requires entities to                     provide greater transparency about
how and why an entity uses derivative                     instruments, how derivative
instruments and related hedged items are accounted                     for under SFAS 133
and its related interpretations, and how derivative                     instruments and
related hedged items affect an entitys financial position,
                    results of operations and cash flows. SFAS 161 is effective for
financial                     statements issued for fiscal years and interim periods
beginning after                     November 15, 2008. ECtel does not expect the
adoption of SFAS 161 to                     have a material effect on the
consolidated results of operations and financial                     condition.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
April 2008, the FASB issued FASB Staff Position FAS 142-3,                     Determination
of the Useful Life of Intangible Assets. FSP FAS 142-3                     amends
the factors that should be considered in developing renewal or extension
                    assumptions used to determine the useful life of a recognized
intangible asset                     under Statement 142. FSP FAS 142-3 is effective
for fiscal years beginning                     after December 15, 2008. The Company
is currently evaluating the impact, if                     any, of adopting FSP FAS 142-3
on its financial position and results of                     operations.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

ECtel Ltd. and Subsidiaries

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

# Note 3  Inventories

| | Inventories
consist of the following:
| | -------------------------------------

| |                              | December 31
| | ---------------------------- | -----------
|
|
|
|
| | Raw materials and components |            
| | Work in process              |            
| |                              |            
| |                              |            
| |                              |            
| |                              |            

# 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, 2008 and 2007 (regarding assumptions used for
estimated           fair value, see Note 2V):
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                 | December 31, 2008
| | ------------------------------- | -----------------
|
|
|
|
| | Available-for-sale securities   |                  
| | Corporate bonds                 |                  
| |                                 |                  
| | Short-term investments          |                  
| |                                 |                  
| | Available-for-sale securities   |                  
| | US Government agencies          |                  
| | Auction Rate Securities, net of |                  
| | impairments (see (3) below)     |                  
| |                                 |                  
| |                                 |                  
| | Long-term marketable securities |                  
| |                                 |                  

| | The
long-term marketable securities maturity dates range from 2011 through 2045.
| | --------------------------------------------------------------------------------

F - 19

---

---

ECtel Ltd. and Subsidiaries

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

# Note 4  Investment
in Marketable Securities and Deposits (contd)

| |                                 | 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 (3) below)     |                  
| |                                 |                  
| |                                 |                  
| | Long-term marketable securities |                  
| |                                 |                  

| | (2) | 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, 2008:
| | ------------------------

| |                 | Less than 12 months | 12 months or Greater |  |      
| | --------------- | ------------------- | -------------------- |  | -----
|
|
|
|
| | Auction Rate    |                     |                      |  |      
| | Securities      |                     |                      |  | 905  
| | US Government   |                     |                     
| | Agencies        |                     |                      |  | 7,267
| | Corporate bonds |                     |                      |  | 1,011
| |                 |                     |                      |  |      
| |                 |                     |                     
| | Total           |                     |                      |  | 9,183
| |                 |                     |                      |  |      

| | (3) | 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, in the year ended 2007, 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 was considered a temporary impairment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

ECtel Ltd. and Subsidiaries

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

# Note 4  Investment
in Marketable Securities and Deposits (contd)

| | In
October 2008, several of the ARS held by the Company, previously impaired, were redeemed
at par-value at the amount of $1,725, resulting in a gain of $1,560 thousand. As of
December 31, 2008, the Company had $ 2,700 thousand of principal invested in ARS. As a
result of the market condition and the lack of liquidity continuation, the Company
recorded an impairment charge of $1,795 thousand, which is considered other than
temporary. As such, the Company recorded a net loss related to its investments in
ARS in the amount of $235 thousand in the year ended December 31, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | During
2008 the Company has decided to sell certain securities previously           classified
as held-to-maturity. As a result, all securities classified as           held-to-maturity
were reclassified as available-for-sale as the Company was no           longer able to
demonstrate its intent to hold these securities to maturity. The           principal of
the securities reclassified amounted to $17,517 thousand and the           unrealized
gain at the time of reclassification amounted to $33 thousand.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 5  Long-Term
Other Assets

| |                                             | December 31
| | ------------------------------------------- | -----------
|
|
|
|
| | Assets held for employee severance benefits |            
| | Long-term deposits                          |            
| |                                             |            
| |                                             |            
| |                                             |            
| |                                             |            

F - 21

---

---

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, 2008         |                        |                         |                                | 2    
| | Additions                          |                        |                         |                                | 4    
| | Disposals                          |                        |                         |                                | -    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Balance at December 31, 2008       |                        |                         |                                | 6    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Accumulated depreciation           |                        |                        
| | Balance at January 1, 2008         |                        |                         |                                | -    
| | Depreciation                       |                        |                         |                                | 1    
| | Disposals                          |                        |                         |                                | -    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Balance at December 31, 2008       |                        |                         |                                | 1    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Property, plant and equipment, net |                        |                        
| |                                    |                        |                        
| | Balance at December 31, 2008       |                        |                         |                                | 5    
| |                                    |                        |                         |                                |      
| |                                    |                        |                        
| | Property, plant and equipment, net |                        |                        
| |                                    |                        |                        
| | Balance at December 31, 2007       |                        |                         |                                | 2    
| |                                    |                        |                         |                                |      

# Note 7  Goodwill

| | Changes
in net carrying amount of goodwill were as follows:
| | -----------------------------------------------------------

| |                                            | Year ended December 31
| | ------------------------------------------ | ----------------------
|
|
|
|
| | Opening balance                            |                       
| | Additions relating to Compwise 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 $3,179 thousand is recorded in the Companys
books.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 30, 2008, the Company acquired substantially all the assets of Compwise Ltd. (Compwise),
an Israeli-based company and a provider of business analytic solutions for
telecommunication operators. The acquisition is expected to expand and strengthen the
Companys IRM solutions, as well as expand its customer base.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

ECtel Ltd. and Subsidiaries

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

# Note 7  Goodwill
(contd)

| | The
acquisition was accounted for as a business combination under the guidance of SFAS. No.
141,Business Combinations, and as a result the Company recorded the
fair value of the identified intangible assets in the amount of $684 thousand and
liabilities, net, in the amount of $654 thousand. The excess of the purchase price over
the fair value of the assets and liabilities acquired has been recorded as goodwill.
Please refer also to Notes 2I and 8.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company conducts its annual goodwill impairment test as of June 30 every year. The
Company performed annual impairment tests during 2008, 2007 and 2006 and did not identify
any further impairment losses. As described in Note 2I, the company has performed an
additional assessment at year end and has determined that no impairment has occurred as
of December 31, 2008. The current economic environment has increased the degree of
uncertainty inherent in the underlying assumptions used in the impairment assessment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 8  Other
Intangible Assets, Net

| |                                                     | December 31
| | --------------------------------------------------- | -----------
|
|
|
|
| | Telesoft and Compwise acquisitions - original cost: |            
| | Third party relations - Telesoft                    |            
| | Core technology - Telesoft                          |            
| | Customer contracts - Telesoft                       |            
| | Contractual customer relations - Telesoft           |            
| | Core technology - Compwise                          |            
| |                                                     |            
| |                                                     |            
| |                                                     |            
| |                                                     |            
| | Less - accumulated amortization                     |            
| |                                                     |            
| |                                                     |            
| |                                                     |            
| |                                                     |            

| | The
amortization expenses were $164 thousand, $94 thousand and $466 thousand for each of the
years ended December 31, 2008, 2007 and 2006, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
estimated amortization expenses:
| | ---------------------------------------

| |                     | Year ended
December 31,
2008
| | ------------------- | ----------------------------
|
|
|
|
| | 2009                |                             
| | 2010                |                             
| | 2011 and thereafter |                             
| |                     |                             
| |                     |                             
| | Total               |                             
| |                     |                             

F - 23

---

---

ECtel Ltd. and Subsidiaries

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

# Note 9 
Commitments and Contingencies

| | A. | Lease
commitments
| | -- | -----------------

| | ECtel
has entered into operating leases (in respect of premises and motor vehicles) in Israel
and abroad. The agreements expire on various dates from 2010 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 ECtel is committed to pay under the above leases, at
rates in effect at December 31, 2008, are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31: | $ in thousands
| | ------------------------ | --------------
|
|
|
|
| | 2009                     |               
| | 2010                     |               
| | 2011                     |               
| | 2012                     |               

| | As
to rent expense in connection with ECtels leased premises and vehicles, see Note
13F.
| | -----------------------------------------------------------------------------------------

| | B. | Royalty
commitments
| | -- | -------------------

| | The
Company is committed to pay royalties for several approved programs to the 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The repayment
was made in five installments during 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at December 31, 2008, the balance of the grants received for remaining programs totaled
$432 thousand of which $90 thousand has been repaid as royalties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Guarantees
| | -- | ----------

| | At
December 31, 2008, the Company has granted guarantees to third parties in the sum of $1
million mainly as guarantees of the Companys performance, and that can be demanded
in case of material breach of contracts. The expiration dates of the guarantees are from
January 2009 through December 2009.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

ECtel Ltd. and Subsidiaries

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

# Note 9 
Commitments and Contingencies (contd)

| | D. | Financial
instruments
| | -- | ---------------------

| | 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, 2008, the Company had nine open currency forward contracts. A gain in the
amount of $55 thousand is included in the statements of operations as of December 31,
2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | 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, 2008 are approximately $0.8
million (out of total guarantees granted of $1 million) for guarantees issued by the Bank
in favor of third parties, at the request of the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | 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. Currently the district
court is scheduled to hear Plaintiffs unopposed motion for preliminary
approval of settlement on April 6, 2009.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

ECtel Ltd. and Subsidiaries

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

# Note 10 
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 Share Option 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 the 2003 Share
Option Plan (hereinafter  2003 Equity Incentive Plan).
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | The
2003 Equity Incentive Plan: (i) increased the number of shares reserved for issuance 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
generally vest over a period of up to four years with an expiration term of six to ten
years.
| | -----------------------------------------------------------------------------------------------------

F - 26

---

---

ECtel Ltd. and Subsidiaries

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

# Note 10 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)           (contd)
| | -- | -------------------------------------------------------------------------------

| | 3. | Following
is a summary of options activity under the Companys stock-based           incentive
compensation plans during the years ended December 31, 2008, 2007 and           2006:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | Number of
shares | Weighted
average
exercise price | Weighted
average
remaining
contractual term | Aggregate
intrinsic value
| | -------------------------- | ---------------- | ------------------------------- | ------------------------------------------- | -------------------------
|
|
|
|
| | Balance at January 1, 2006 |                  |                                 |                                             | 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                
| |                            |                  |                                
| | Granted                    |                  |                                 |                                             | 410,000                  
| | Exercised                  |                  |                                 |                                             | -                        
| | Forfeited and expired      |                  |                                 |                                             | (174,100                 
| |                            |                  |                                 |                                             |                          
| |                            |                  |                                
| | Balance at                 |                  |                                
| | December 31, 2008          |                  |                                 |                                             | 2,326,899                
| |                            |                  |                                 |                                             |                          
| |                            |                  |                                
| | Exercisable at             |                  |                                
| | December 31, 2008          |                  |                                 |                                             | 1,632,934                
| |                            |                  |                                 |                                             |                          

F - 27

---

---

ECtel Ltd. and Subsidiaries

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

# Note 10 
Shareholders Equity (contd)

| | A. | Share
incentive (stock options and restricted shares plans)           (contd)
| | -- | -------------------------------------------------------------------------------

| | During
2008, 2007, and 2006, the Company recorded share-based compensation expense in the amount
of $757 thousand, $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 the above
mentioned options that vested prior to December 31, 2005 was zero.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total intrinsic value of options exercised during the years ended December 31, 2008, 2007
and 2006, was $0 thousand, $49 thousand and $42 thousand, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, there was $970 thousand of total unrecognized compensation cost
related to non-vested share-based compensation arrangements under the 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, 2008 was $935 thousand.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Fair
value method
| | -- | -----------------

| | The
Company has determined the weighted average fair value per option of stock-based
arrangements granted during 2008, 2007 and 2006 to be $0.85, $1.39, and $2.29,
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
$
| | ------------- | ----------------------- | -------------------- | ------------------- | ----------------------- | ------------
|
|
|
|
| | 2006          |                         |                      |                     | -                       |             
| | 2007          |                         |                      |                     | -                       |             
| | 2008          |                         |                      |                     | -                       |             
| |               |                         |                      |                     |                         |             

| | 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 2008, 2007 and 2006, is calculated based on the Simplified Method as
allowed under SAB 107, and as extended by SAB 110, giving consideration to the
contractual term of the options and their vesting schedules.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | TheCompany
estimates its expected stock volatility based on its own historical stock volatility.
| | ------------------------------------------------------------------------------------------------

F - 28

---

---

ECtel Ltd. and Subsidiaries

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

# Note 10 
Shareholders Equity (contd)

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2008, the Companys Board of Directors authorized a plan for the repurchase of
the Companys ordinary shares in the open market, in an amount in cash of up to $4
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 is for one year and may be suspended from time to time or discontinued.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2008, the Company repurchased 404,503 shares of its common stock for total consideration
of $507 thousand, at an average purchase price of $1.25 per share.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
share repurchases were funded from available working capital.
| | -----------------------------------------------------------------

# Note 11  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 - 29

---

---

ECtel Ltd. and Subsidiaries

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

# Note 11  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, 2008, approximately 97% of the cost of ECtel Ltd.s
production facilities represented Approved Enterprise facilities (2007  97%; 2006
 97%).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 - 30

---

---

ECtel Ltd. and Subsidiaries

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

# Note 11  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 be applicable 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, 2008, 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. 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 11A(5) 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | 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%.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Non-Israeli
subsidiaries
| | -- | ------------------------

| | The
non-Israeli subsidiaries are taxed based upon the respective tax laws in their countries
of domicile.
| | ---------------------------------------------------------------------------------------------------------

F - 31

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---

ECtel Ltd. and Subsidiaries

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

# Note 11  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 - 32

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---

ECtel Ltd. and Subsidiaries

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

# Note 11  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                            |                       
| | Non-deductible expenses                                  |                       
| | Other                                                    |                       
| |                                                          |                       
| |                                                          |                       
| | Actual income tax expense (benefit)                      |                       
| |                                                          |                       

| | The
2007 comparative amounts differ slightly from those originally reported by the Company,
as they have been modified to correct immaterial errors.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

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---

ECtel Ltd. and Subsidiaries

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

# Note 11  Income
Taxes (contd)

| | F. | Components
of deferred income tax
| | -- | ---------------------------------

| | The
tax effects of significant items comprising ECtels deferred tax assets are as
follows:
| | -------------------------------------------------------------------------------------------

| |                                           | December 31
| | ----------------------------------------- | -----------
|
|
|
|
| | Current deferred tax assets:              |            
| |                                           |            
| | Accrued expenses                          |            
| | Vacation pay accruals                     |            
| | Operating loss carryforwards              |            
| | 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 |            
| | Intangible assets, net                    |            
| | Impairment of ARS                         |            
| | 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                    |            
| |                                           |            

| | ECtel
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, 2008 it is more likely than not that such assets will not be realized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequent
recognition of tax benefits related to the valuation allowance for deferred tax assets
will be recorded in the consolidated statements of operations under SFAS 141R.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

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---

ECtel Ltd. and Subsidiaries

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

# Note 11  Income
Taxes (contd)

| | 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 $115 million, which can be
carried forward indefinitely.
| | ---------------------------------------------------------------------------------------------------------------------------

| | The
U.S. subsidiary has a tax loss carryforward of approximately $6 million, which will
expire between 2023 and 2024.
| | ---------------------------------------------------------------------------------------------------------------------

| | H. | Accounting
for uncertainty in income taxes
| | -- | ------------------------------------------

| | At
January 1, 2007 and December 31, 2007, the total unrecognized tax benefit was $1,099
thousand and $1,208 thousand respectively, and the change during 2007 was a result of
exchange rate differences. The total unrecognized tax benefit increased from $1,208 at
January 1, 2008 to $1,222 at December 31, 2008, as a result of exchange rate differences.
As of December 31, 2007 and 2008, the total liability for unrecognized tax benefit was
recorded as a component of current liabilities on the consolidated balance sheets. In
addition, interest relating to the unrecognized tax benefit has been included as a
component of current liabilities on the consolidated balance sheets as of December 31,
2008 in the amount of $197 thousand.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total unrecognized tax benefit as of December 31, 2008 that, if recognized, would affect
the Companys effective tax rate was $1,222 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 12  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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

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---

ECtel Ltd. and Subsidiaries

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

# Note 12  Related
Party Transactions (contd)

| | B. | Balances
due to or from related parties:
| | -- | ----------------------------------------

| |                 | December 31
| | --------------- | -----------
|
|
|
|
| | Assets:         |            
| | Related parties |            
| |                 |            
| | Liabilities:    |            
| | Related parties |            

| | C. | Income
from and expenses to related parties:
| | -- | --------------------------------------------

| |                                     | Year ended December 31
| | ----------------------------------- | ----------------------
|
|
|
|
| | Sales                               |                       
| | Purchase from related parties       |                       
| | Selling and marketing expenses      |                       
| | General and administrative expenses |                       
| | Financial (income) expenses         |                       

| | D. | 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. Jointly referred to herein as Holders will be Koor Industries
Ltd., Clal Electronics Industries Ltd., IDB Development Corporation Ltd. and Badal
Securities Ltd. 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 United States 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 unless terminated earlier upon the
percentage holdings of the Holders falling below a specified threshold.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

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---

ECtel Ltd. and Subsidiaries

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

# Note 13 
Supplementary Financial Statement Information

| | Balance
sheet:
| | --------------

| | A. | Trade
Receivables
| | -- | -----------------

| | Net
of provision for doubtful accounts of $13,556 thousand as at December 31, 2008 (December
31, 2007 - $13,253 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                     |            
| |                                            |            

| | B. | Other
Receivables
| | -- | -----------------

| |                  | December 31
| | ---------------- | -----------
|
|
|
|
| | Prepaid expenses |            
| | Other            |            
| |                  |            
| |                  |            
| |                  |            
| |                  |            

| | C. | Other
Payables and Accrued Liabilities
| | -- | --------------------------------------

| |                                          | December 31
| | ---------------------------------------- | -----------
|
|
|
|
| | Employees and social benefits            |            
| | Income tax payable                       |            
| | Chief Scientist (see also Note 9B)       |            
| | Commissions payable                      |            
| | Product warranty liability (see Note 2L) |            
| | Other payables                           |            
| |                                          |            
| |                                          |            
| |                                          |            
| |                                          |            

F - 37

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---

ECtel Ltd. and Subsidiaries

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

# Note 13 
Supplementary Financial Statement Information (contd)

| | D. | 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 |                       
| |                        |                       
| |                        |                       
| |                        |                       
| |                        |                       

| | 2. | Revenues
from single customers exceeding 10% of Revenues:
| | -- | ---------------------------------------------------------

| |            | Year ended December 31
| | ---------- | ----------------------
|
|
|
|
| | Customer A |                       
| | Customer B |                       
| | Customer C |                       
| |            |                       
| |            |                       
| |            |                       
| |            |                       

| | 3. | Long-lived
assets on a geographical basis:
| | -- | ------------------------------------------

| |                   | Israel | Europe & US | Total
| | ----------------- | ------ | ----------- | -----
|
|
|
|
| | December 31, 2008 |        |             |      
| | December 31, 2007 |        |             |      
| | December 31, 2006 |        |             |      

F - 38

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---

ECtel Ltd. and Subsidiaries

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

# Note 13 
Supplementary Financial Statement Information (contd)

| | E. | Financial
income and expenses:
| | -- | ------------------------------

| |                                              | Year ended December 31
| | -------------------------------------------- | ----------------------
|
|
|
|
| | Financial expenses:                          |                       
| | Interest and bank charges (see also Note 9B) |                       
| | 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. | Supplementary
statement of operations information:
| | -- | --------------------------------------------------

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
| | Maintenance and repairs                       |                       
| | Depreciation of property, plant and equipment |                       
| | Advertising and exhibitions                   |                       
| | Taxes (other than income taxes)               |                       
| | Rent of premises                              |                       
| | Lease of vehicles                             |                       

| | Advertising
costs are expensed as incurred
| | ------------------------------------------

| | G. | Acquisition-Related
Expenses
| | -- | ----------------------------

| | During
2008, 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 second
quarter of 2008. Eventually, the Company decided, after evaluating all the relevant
parameters, not to conclude the negotiations, and therefore recorded an amount of $118
thousand as 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 - 39

---

---

ECtel Ltd. and Subsidiaries

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

# Note 13 
Supplementary Financial Statement Information (contd)

| | H. | Other
income (expenses), net
| | -- | ----------------------------

| |                                                    | Year ended December 31
| | -------------------------------------------------- | ----------------------
|
|
|
|
| | Impairment of ARS (Note 4)                         |                       
| | Gain from sale of ARS previously impaired (Note 4) |                       
| | Patent sale (*)                                    |                       
| |                                                    |                       
| |                                                    |                       
| |                                                    |                       
| |                                                    |                       

| | (*) | In
the first quarter of 2008 the Company sold a patent. The gain from the sale           of
the patent amounted to $430 thousand.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

ECtel Ltd. and Subsidiaries

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

# Note 14  Balances
in Currencies Other Than the U.S Dollar:

| | Comprised of:
| | -------------

| |                             | December 31, 2008 | December 31, 2007
| | --------------------------- | ----------------- | -----------------
|
|
|
|
| | 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.
| | --- | --------------------------

F - 41

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---