---

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# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 20-F

o   REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x          ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF           1934

# For the fiscal year
ended December 31, 2006.

OR

o   TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from ___ to ____

OR

o SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report.............................

# Commission file
number: 0-29360



RiT TECHNOLOGIES LTD.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

24 Raoul Wallenberg
Street, Tel Aviv, Israel(Address of principal executive offices)

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

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

|                                             |                                            
|-------------------------------------------- | -------------------------------------------
|
|
|
|
|Ordinary Shares, par value NIS 0.1 per share | NASDAQ Capital Market                      
|(Title of class)                             | (Name of each exchange on which registered)

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

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report:

As of December 31, 2006, the
issuer had 14,641,573 ordinary shares outstanding (excluding 17,000 ordinary sharesheld
as treasury shares).

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.

Yes  x  No o



---

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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
financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

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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Part I

|        |                                                         |   
|------- | ------------------------------------------------------- | --
|
|
|
|
|Item 1  | Identity of Directors, Senior Management and Advisors   | 6 
|       
|Item 2  | Offer Statistics and Expected Timetable                 | 6 
|       
|Item 3  | Key Information                                         | 6 
|A       | Selected Financial Data                                 | 6 
|B       | Capitalization and Indebtedness                         | 8 
|C       | Reasons for the Offer and Use of Proceeds               | 8 
|D       | Risk Factors                                            | 8 
|       
|Item 4  | Information on the Company                              | 17
|A       | History and Development of the Company                  | 17
|B       | Business Overview                                       | 17
|C       | Organizational Structure                                | 25
|D       | Property, Plants and Equipment                          | 25
|       
|Item 4A | Unresolved Staff Comments                               | 25
|       
|Item 5  | Operating and Financial Review and Prospects            | 26
|A       | Operating Results                                       | 26
|B       | Liquidity and Capital Resources                         | 34
|C       | Research and Development, Patents and Licenses          | 35
|D       | Trend Information                                       | 36
|E       | Off-Balance Sheet Arrangements                          | 36
|F       | Tabular Disclosure of Contractual Obligations           | 36
|       
|Item 6  | Directors, Senior Management and Employees              | 37
|A       | Directors and Senior Management                         | 37
|B       | Compensation                                            | 39
|C       | Board Practices                                         | 40
|D       | Employees                                               | 43
|E       | Share Ownership                                         | 43
|       
|Item 7  | Major Shareholders and Related Party Transactions       | 45
|A       | Major Shareholders                                      | 45
|B       | Related Party Transactions                              | 46
|C       | Interests of Experts and Counsel                        | 47
|       
|Item 8  | Financial Information                                   | 47
|A       | Consolidated Statements and Other Financial Information | 47
|B       | Significant Changes                                     | 47
|       
|Item 9  | The Offer and Listing                                   | 48
|A       | Offer and Listing details                               | 48
|B       | Plan of Distribution                                    | 48
|C       | Markets                                                 | 48
|D       | Selling Shareholders                                    | 48
|E       | Dilution                                                | 48
|F       | Expenses of the Issue                                   | 48

3

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|Item 10  | Additional Information                                                       | 48
|-------- | ---------------------------------------------------------------------------- | --
|A        | Share Capital                                                                | 48
|B        | Memorandum and Articles of Association                                       | 50
|C        | Material Contracts                                                           | 53
|D        | Exchange Controls                                                            | 54
|E        | Taxation                                                                     | 54
|F        | Dividends and Paying Agents                                                  | 61
|G        | Statements by Experts                                                        | 62
|H        | Documents on Display                                                         | 62
|I        | Subsidiary Information                                                       | 62
|        
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 62
|        
|Item 12  | Description of Securities Other Than Equity Securities                       | 63
|        
|Part II 
|        
|Item 13  | Defaults, Dividend Averages 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                                             | 64
|        
|Item 16B | Code of Ethics                                                               | 64
|        
|Item 16C | Principal Accounting Fees and Services                                       | 64
|        
|Item 16D | Exemptions from Listing Requirements and Standards for Audit Committee       | 64
|        
|Item 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 64
|        
|Part III
|        
|Item 17  | Financial Statements                                                         | 64
|        
|Item 18  | Financial Statements                                                         | 65
|        
|Item 19  | Exhibits                                                                     | 66

4

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# INTRODUCTION

Unless the context otherwise
requires, all references in this annual report to we, us,
our, RiT, the Registrant or the Company
refer to RiT Technologies Ltd. and its wholly- owned subsidiaries. References to
dollars or $ are to United States Dollars. References to NIS are
to New Israeli Shekels, the currency of the State of Israel. References to the
Companies Law or the Israeli Companies Law are to the Israeli
Companies Law, 5759-1999.References to the SEC are to the United States
Securities and Exchange Commission. References to enterprise and
carrier relate to the sectors we formerly identified as
datacom and telecom.

Trademarks

Unless indicated otherwise by the
context, trade names, trademarks and/or service marks appearing throughout this annual
report are trademarks of RiT, its subsidiaries and/or its affiliates and may be registered
in certain jurisdictions.

Cautionary Statement
Concerning Forward-Looking Statements

Statements in this annual report that
are not statements of historical or current fact constitute forward-looking
statements within the meaning of the United States Private Securities Litigation
Reform Act of 1995. We have based these forward-looking statements on our current
expectations and projections about future events. These statements include but are not
limited to:

| | expectations
as to the timing of profitability, and the adequacy of our cash balances and cash flow
fromoperations to support our operations for specified periods of time;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | expectations
as to the timing of raising additional financing;
|- | --------------------------------------------------------------

| | statements
 as  to  expected  sales,  operating  results  and  certain  expenses,   including
 research  and      development and sales and marketing expenses;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | expectations
 as to the  development of our products and  technology,  and the timing of enhancements
to our      products and new product launches;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | expectations
 that  we  will  not  lose  a  significant   customer  or  customers  or  experience
 increased      fluctuations of demand or rescheduling of purchase orders;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | estimates
of the impact of changes in currency exchange rates on our operating results;
|- | ---------------------------------------------------------------------------------------

| | expectations
as to the adequacy of our inventory of critical components and finished products;
|- | ----------------------------------------------------------------------------------------------

| | expectations
that our markets will grow;
|- | ----------------------------------------

| | expectations
 that our  products  will  remain  accepted  within  their  respective  markets and will
not be      replaced by new technology;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | expectations
that competitive conditions within our markets will not change materially or adversely;
|- | ----------------------------------------------------------------------------------------------------

| | expectations
that we will retain key technical and management personnel;
|- | ------------------------------------------------------------------------

| | expectations
that our forecasts will accurately anticipate market demand;
|- | -------------------------------------------------------------------------

| | expectations
as to the adequacy of our manufacturing facilities and the timing of any expansion; and
|- | ----------------------------------------------------------------------------------------------------

| | statements
as to our expected  treatment under Israeli and U.S.  federal tax legislation and the
impact that      new Israeli tax and corporate legislation may have on our operations.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, statements that use
the terms believe, expect, plan, intend,
estimate, anticipate and similar expressions are intended to
identify forward-looking statements. We desire to take advantage of the safe harbor
provisions of the United States Private Securities Litigation Reform Act of 1995 and we
are including this cautionary statement in connection with this safe harbor legislation.
All forward-looking statements in this Form 20-F and any other written or oral statements
made by us or on our behalf reflect our current views about future events and are based on
assumptions and are subject to risks and uncertainties, including, but not limited to, the
risks and uncertainties described in Item 3.D.  Risk Factors, that could
cause our actual results to differ materially from future results expressed or implied by
the forward-looking statements. Many of these factors are beyond our ability to control or
predict. You should not put undue reliance on any forward-looking statements. Unless we
are required to do so under U.S. federal securities laws or other applicable laws, we do
not intend to update or revise any forward-looking statements.

5

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# PART I

|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|------- |  | -----------------------------------------------------

Not applicable.

|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not applicable.

|ITEM 3. |  | KEY INFORMATION
|------- |  | ---------------

|3.A. | Selected
Financial Data
|---- | -----------------------

We have derived the following selected consolidated balance sheet data as of December 31,
2005 and 2006, and the selected consolidated operating data for the years ended December
31, 2004, 2005, and 2006 from our audited consolidated financial statements and notes
included elsewhere in this annual report, which have been prepared in accordance with
generally accepted accounting principles in the United States, or U.S. GAAP. We have
derived the selected consolidated balance sheet data as of December 31, 2002, 2003, and
2004 and the selected consolidated operating data for the years ended December 31, 2002
and 2003 from our audited consolidated financial statements not included in this annual
report, which have been prepared in accordance with U.S. GAAP. Beginning with the year
2006, our financial results have been reported in accordance with Financial Accounting
Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation.
The total compensation expense recorded in accordance with SFAS 123R was approximately
$500,000. See Note 6B4 to our Consolidated Financial Statements included elsewhere in this
annual report.

You should read the following
selected consolidated financial data together with Item 5.  Operating and
Financial Review and Prospects and our consolidated financial statements and notes
thereto and the other financial information appearing elsewhere in this annual report.

6

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# Operating Data

|                                     | Year Ended December 31,
|------------------------------------ | -----------------------
|
|
|
|
|Sales                                |                        
|                                     |                        
|Cost of sales                        |                        
|                                     |                        
|                                     |                        
|Gross profit                         |                        
|                                     |                        
|Operating cost and expenses:         |                        
|Research and development, gross      |                        
|Less - royalty-bearing participation |                        
|                                     |                        
|Research and development, net        |                        
|Sales and marketing                  |                        
|General and administrative           |                        
|                                     |                        
|Total operating expenses             |                        
|                                     |                        
|                                     |                        
|Operating income (loss)              |                        
|                                     |                        
|Financial income, net                |                        
|                                     |                        
|Net income (loss) for the year       |                        
|                                     |                        
|                                     |                        
|Net Income (Loss) Per Share          |                        
|                                     |                        
|Basic net income (loss) per          |                        
|ordinary share                       |                        
|                                     |                        
|Diluted net income (loss) per        |                        
|ordinary share                       |                        
|                                     |                        
|                                     |                        
|Weighted average number of           |                        
|ordinary shares used to compute      |                        
|basic net income (loss) per          |                        
|ordinary share                       |                        
|                                     |                        
|                                     |                        
|Weighted average number of           |                        
|ordinary shares used to compute      |                        
|diluted net income (loss) per        |                        
|ordinary share                       |                        
|                                     |                        

7

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# Balance Sheet Data

|                                             | December 31,
|-------------------------------------------- | ------------
|
|
|
|
|Working capital                              |             
|Total assets                                 |             
|Share capital and additional paid-in capital |             
|Shareholders' equity                         |             

|3.B. | Capitalization
and Indebtedness
|---- | -------------------------------

Not applicable.

|3.C. | Reasons
for the Offer and Use of Proceeds
|---- | -----------------------------------------

Not applicable.

|3.D. | Risk
Factors
|---- | ------------

Investing in our ordinary shares
involves a high degree of risk and uncertainty. You should carefully consider the risks
and uncertainties described below before investing in our ordinary shares. If any of the
following risks actually occurs, our business, prospects, financial condition and results
of operations could be harmed. In that case, the value of our ordinary shares could
decline, and you could lose all or part of your investment.

Risks Related to Our
Business

We have a history of operating and
net losses. We may not achieve or sustain profitability in the future.

Although we reported a profit in
2005, we incurred operating and net losses from fiscal year 2002 through 2004 and in 2006,
and we may incur losses in the future. We reported operating losses of approximately $7
million for 2002, $6.9 million for 2003, $3 million for 2004 and $1.9 million for 2006. As
of December 31, 2006, our accumulated deficit was $21.3 million.

We will need to generate revenues as
well as manage our costs to obtain profitability. Our revenues may not grow or continue at
their current level. In addition, in order to meet expanding sales and operations
requirements, our expenses may increase. As a result, net cash outflows may continue for
the near term, and we may again incur net operating losses. If our revenues do not
increase, or if our expenses increase at a greater pace than our revenues, profitability
may not be achieved or sustained. We may not be able to sustain or increase profitability
on a quarterly or annual basis. Even if we maintain profitability, we cannot assure that
future net income will offset our cumulative losses.

We may need to raise additional
financing in the future. If adequate funds are not available on terms favorable to us, our
operations and growth strategy will be materially adversely affected.

On December 31, 2006, we had
cash and cash equivalents of approximately $6.5 million. In 2006, we used approximately
$0.7 million in cash, mainly for operational activities. We will need to generate
increased revenues as well as manage our costs in order to maintain and/or increase our
cash. We cannot assure you that we will be able to maintain and/or increase our cash and,
as a result, we may need to raise additional financing to support our operations and our
growth strategy.

In January 2007, we arranged for a
line of credit from Bank Hapoalim in the amount of $1 million, which will expire on
January 31, 2008, unless extended with the consent of the bank. The interest rate for the
use of such line of credit will be determined by the bank when we make a withdrawal. As of
March 15, 2007, we did not have any outstanding amount under this line of credit. The
availability of the line of credit is conditioned upon our compliance with the following
financial requirements during the term of the line of credit: (1) a floating charge on all
assets; (2) total shareholders equity will not be less than $3 million and not less
than 35% of our total balance sheet assets; and (3) total working capital, calculated as
trade receivables and inventory less accounts payable, will not be less than $3 million.
Although we currently are in compliance, if we do not satisfy these conditions in full,
Bank Hapoalim may refuse to grant us loans under the credit line or demand payment of any
outstanding amount of the line of credit.

8

---

---



If we are unable to raise additional
financing when needed on terms favorable to us, our operations and growth strategy will be
materially adversely affected. If additional funds are raised through the issuance of
equity securities, the percentage ownership of then current shareholders would be diluted.

We have experienced in the past,
and may experience in the future, a decrease in our sales.

The sales of our enterprise sales
solutions increased in 2006 by more than 29% compared with 2005. Although the 2006 results
reflect continually increasing sales of our enterprise solutions in the past years, there
is no assurance that this growth will continue in the future.

The sales of our carrier business
solutions decreased by more than 82% compared with 2005 primarily due to a few exceptional
large carrier deals delivered during 2005 and to the delay from 2006 of high-probability
deals well beyond their original forecast. Although the carrier sales improved in 2004 and
2005, there is no assurance that we will be able to return and achieve the same levels of
sales in the future.

We may experience significant
fluctuations in our quarterly financial performance.

Our quarterly results of operations
may be subject to significant fluctuations due to several factors, including the size,
timing and shipment of orders; customer budget cycles and budgetary freezes; the timing of
introductions of new products or product upgrades by us and our competitors; customer
order deferrals in anticipation of new products or product upgrades; the mix of product
sales; software and hardware development problems; product quality problems; product
pricing; our effective provision of customer support; the relatively low level of general
business activity during the summer months in the European market; and other factors.

Moreover, because end-users of our
enterprise solutions typically request delivery within two weeks of placement of their
orders (which generally follows extensive sales efforts over an extended period of time),
a majority of our sales in each quarter have resulted from orders placed in that quarter.
The deferral of any large order from one quarter to another could materially adversely
affect our results of operations for the previous quarter.

Similarly, carrier sales are
relatively large orders, and their postponement from one quarter to another could
materially adversely affect our results of operations for the previous quarter.

For the foregoing reasons, we believe
that quarter-to-quarter comparisons of our results of operations are not necessarily
meaningful and that our results of operations in any particular quarter should not be
relied upon as indications of future performance. Furthermore, fluctuations in our
operating results may cause volatility in the price of our ordinary shares.

We have a very limited order
backlog. As a result, if revenue levels for any quarter fall below our expectations, our
earnings will decrease.

We have a very limited order backlog,
which makes revenues in any quarter dependent primarily on orders received and delivered
in that quarter. A delay in the recognition of revenue, even from one customer, may have a
significant negative impact on our results of operations for a given period. We base our
decisions regarding our operating expenses on anticipated revenue trends, and our expense
levels are relatively fixed, or require some time for adjustment. Because only a small
portion of our expenses varies with our revenues, if revenue levels fall below our
expectations, our earnings will decrease.

We depend upon independent
distributors, representatives and strategic alliance partners to sell our products to
customers. If our distributors, representatives and strategic alliance partners do not
sell our products, our revenues will suffer.

Our sales strategy includes direct
sales to end-users as well as sales through independent distributors, for resale to
integrators or through strategic alliance partnerships with original equipment
manufacturers, commonly referred to as OEM. We are highly dependent upon acceptance of our
products and solutions by such distributors, strategic alliance partners and integrators
and their active marketing and sales efforts relating to our products and solutions.
Moreover, a substantial majority of our distributors are neither obligated to deal with us
exclusively nor contractually subject to minimum purchase requirements with respect to our
products and solutions. Increasing competition among providers of products or solutions
competitive with ours has strengthened the position of our distributors and other
customers to negotiate favorable terms of sale. Under such conditions, our operating
results could be materially adversely affected.

9

---

---



Certain of our distributors are
permitted to sell competing products or solutions, and there can be no assurance that any
of them will continue, or prioritize, marketing and supporting our products or solutions.
Certain of our distributors are the only entities engaged in the distribution of our
products or solutions in their respective geographical areas. In addition to the
independent distributors mentioned above, we also have strategic alliances with four major
cabling companies: Panduit, Brand-Rex (acquired by The Gores Group LLC), Belden/CDT
(previously known as Nordx) and ADC (previously known as Krone). We are highly dependent
upon their acceptance of, and active marketing and sales efforts relating to, our products
and solutions.

Our results of operations could be
materially adversely affected by changes in the financial condition of a distributor,
representative or strategic alliance partner, which could occur rapidly, or by changes in
the business or marketing strategies of the distributor, representative or strategic
alliance partner. There can be no assurance that we will retain our current distributors,
representatives or strategic alliance partners, or that, if we terminate or lose any of
such distributors, representatives or strategic alliance partners, we will be successful
in replacing them on a timely basis or at all with another suitable distributor,
representative or strategic alliance partner. Any such changes in our distribution
channels, and particularly the loss of a major distributor, representative or strategic
alliance partner, could materially adversely affect our business, financial condition and
operating results.

We depend on two major customers
for a significant portion of our revenues.

In 2006, approximately 27.6% of our revenues
were generated from orders placed by two major customers. In 2005 and 2004, 19 % and 13.2%
respectively of our revenues were generated from orders placed by another major customer.
If our largest customers do not continue to purchase similar quantities in the future and
we are not able to replace these revenues with sales to other customers, our revenues and
profitability will decline.

Our carrier products generally
have long sales cycles, which increase our costs in obtaining orders and reduce the
predictability of our earnings.

The market for our carrier solutions
consists of telephone companies, commonly referred to as telcos. Because of the large size
and institutional nature of most telcos and the degree of governmental regulation to which
they are often subject, companies (such as ourselves) which seek to market their products
and services to telcos must often engage in sales efforts over an extended period of time,
sometimes years, and provide a significant level of education to prospective telco
customers regarding the use and benefits of such products or services. As a result, sales
of carrier solutions to telcos require a lengthy sales cycle from the commencement of
marketing efforts to the consummation of an actual transaction and may involve significant
expenditures which may not be offset (on a timely basis or at any time) by revenues.
Delays in the sales cycle of our products could also result in significant fluctuations in
our quarterly operating results and reduce the predictability of our earnings.

We must develop new products and
enhancements to existing products on a timely and cost-effective basis to remain
competitive.

The markets for our products are
characterized by rapidly changing technology, changing customer requirements, relatively
short product lifecycles, evolving industry standards and frequent new product
introductions. Changes in technologies, customer requirements and industry standards and
new product introductions by our existing competitors or by new market entrants could
reduce the markets for our products or require us to develop new products. In addition,
new or enhanced products developed by other companies could be incompatible with our
products. Therefore, our timely access to information concerning, and our ability to
anticipate, changes in technology and customer requirements and the emergence of new
industry standards, as well as our ability to develop, manufacture and market new and
enhanced products successfully and on a timely basis, will be significant factors in our
ability to remain competitive. We are currently evaluating a number of potential products,
some of which will endeavor to address emerging technologies. There can be no assurance
that we will be successful in identifying new technologies, that our potential products
will be successful or profitable, or that we will not encounter technical or other
difficulties that could delay the introduction of these or other new or enhanced products
in the future.

10

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As a result of the need to develop
new and enhanced products, we expect to continue making substantial investments in
research and development. Some of our research and development activities may relate to
long-term projects, and revenues from products resulting from these activities may not be
received for a substantial time, or at all. Products as complex as certain of our products
sometimes contain undetected errors or bugs, which can cause delays in product
introductions or require design modifications. In addition, it often takes several months
before the manufacturing costs of new products stabilize, which may adversely affect
operating results during such period. If we are unable to introduce new or enhanced
products on a timely and cost-effective basis and to gain market acceptance for such
products, our business, financial condition and results of operations may be materially
adversely affected.

If new products we recently
introduced or expect to introduce in the near future fail to generate the level of demand
we originally anticipated, we will realize a lower than expected return from our
investment in research and development with respect to those products, and our results of
operations may suffer.

Our success is dependent, in part, on
the willingness of our customers to transition or migrate to new products, such as our
expected future products. We are involved in a continuous process of evaluating changing
market demands and customer requirements in order to develop and introduce new products,
features and applications to meet changing demands and requirements. We need to be able to
interpret market trends and the advancement of technology in order to successfully develop
and introduce new products, features and applications. If potential customers defer
transition or migration to new products, our return on our investment in research and
development with respect to products recently introduced or expected to be introduced in
the near future will be lower than we originally anticipated and our results of our
operations may suffer.

Some of our competitors have
greater resources than us, which may limit our ability to effectively compete with them.

The markets for our products and
solutions are very competitive and we expect that competition will increase in the future.
Increased direct and indirect competition could adversely affect our revenues and
profitability through pricing pressure, loss of market share and other factors. Many of
our competitors are far larger, have substantially greater resources (including financial,
technological, manufacturing and marketing and distribution capabilities) and are much
more widely recognized than we are. These characteristics may provide a substantial
advantage to our competitors in the eyes of end-users of enterprise and carrier solutions,
who typically rely upon such products and solutions to perform or support critical
functions. There can be no assurance that we will be able to compete successfully against
existing or new competitors as the market for our products and solutions evolves and the
level of competition increases. Moreover, there can be no assurance that we will be able
to differentiate our products and solutions from the products and solutions of our
competitors or to develop or introduce successfully new products and solutions that are
less costly or offer better performance than those of our competitors. In addition, our
existing and prospective competitors may have established, or may establish in the future,
relationships with our existing and potential customers including our OEM customers, which
could have a material adverse effect on our ability to compete.

Our failure to manage our
expansion or contraction effectively could impair our business.

From 1989 to 2000, we expanded in
both the scope and the magnitude of our operations. However, from 2001 until 2004, we
instituted work force reductions and cost cutting measures following decreased sales. In
2005 and 2006, we increased our operational expenses as a result of a significant increase
in our revenues compared with 2004. This growth placed a significant strain on our
management, operational, financial and other resources. Any future growth or contraction
may increase this strain. Furthermore, all or a portion of the expenses associated with
any expansion of our operations may be incurred prior to the generation of any associated
revenues, and the savings associated with cutbacks may not be realized prior to the
decrease in associated revenues. If there is a substantial increase in demand in, or
orders for, our products, we may not have the capacity to increase production using our
existing reduced staff and may be unable to timely hire and train new employees. As a
result, we could lose business to competitors with greater capacity and flexibility. If we
are unable to manage our corporate expansion or contraction, there could be a material
adverse effect on our business, financial condition, and results of operations.

If our suppliers and
subcontractors are not able to provide us with adequate supplies of certain components
used in our products, we may not be able to deliver sufficient quantities of our products
to satisfy demand.

Certain components used in our
products and solutions are presently available from, or supplied by, only one source and
certain other components are only available from limited sources. Although we do not have
long-term supply contracts with most of our existing suppliers, we have generally been
able to obtain supplies of components in a timely manner and upon acceptable terms. There
can be no assurance that delays in key component or product deliveries will not occur in
the future due to shortages resulting from the limited number of suppliers or the
financial condition or other difficulties of such suppliers. Any inability to obtain
sufficient key components or to develop alternative sources for such components, if and as
required in the future, could result in delays, interruptions or reductions in product
shipments, which could have a material adverse effect on our customer relationships and,
in turn, on our business and results of operations.

11

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Our success depends on our ability
to attract, train and retain highly qualified sales, technical and customer support
personnel.

To manage future growth effectively,
we must expand our operational, management and financial functions; train, motivate,
manage and retain our employees; and hire additional personnel. In Israel, where our
manufacturing, research and development, marketing and sales facilities are located, there
continues to be demand for qualified hardware and software engineers and sales personnel
with specific fields of expertise, and the competition to attract and retain such
engineers and personnel is strong.

There can be no assurance that we
will be successful in attracting, training, assimilating or retaining, on a timely basis
and at a reasonable cost, all the personnel that we may require, or that we will not
encounter difficulties as we integrate new personnel into our operations. Our inability to
integrate such personnel into our operations or to manage our growth effectively could
have a material adverse effect on our business, financial condition and results of
operations.

Our profitability could suffer if
third parties infringe upon our proprietary technology or if our products infringe on the
intellectual property rights of others.

Our success is highly dependent upon
our proprietary technology. We rely upon a combination of patents, patent applications,
contractual rights, trade secrets, copyrights, non-disclosure agreements and technical
measures to establish and protect our proprietary rights in our products, systems and
technologies. We hold patents on our PatchView and PairView technologies and some of our
cabling products. These patents expire in 2012, 2015 and 2020, respectively. We also have
several patents and design patents pending on our new products. In addition, we enter into
nondisclosure and confidentiality agreements with our employees and with certain suppliers
and customers with access to sensitive information.

There can be no assurance that the
steps we have taken to protect our proprietary rights will be adequate to prevent
misappropriation of our technology or independent development or sale by others of our
technology or of products or solutions with features based upon, or otherwise similar to,
our own. In addition, although we believe that our technology has been independently
developed and that none of our technology or intellectual property infringes on the rights
of others, there can be no assurance that we do not and will not so infringe or that third
parties will not assert infringement claims against us in the future. In the case of
infringement, we would, under certain circumstances, be required to modify our products or
intellectual property or obtain a license to permit their continued use. There can be no
assurance that we would be able to do either in a timely manner or upon acceptable terms
and conditions, and any failure to do so could have a material adverse effect on our
business, financial condition, and results of operations. In addition, if future
litigation were to become necessary to protect trade secrets, know-how or other
proprietary rights owned by us, to defend ourselves against claimed infringement of the
rights of others, or to determine the scope and validity of our proprietary rights or
those of others, such litigation could result in substantial cost to us and diversion of
our managements attention. Adverse determinations in any such litigation or
proceedings also could subject us to significant liabilities to third parties and could
prevent us from manufacturing, selling or using certain of our products, any of which
could have a material adverse effect on us. There can be no assurance that we will have
the resources to defend or prosecute a proprietary rights infringement action.

In addition, the laws of foreign
jurisdictions where we sell and seek to sell our products may afford little or no
protection of our intellectual property rights. We cannot assure you that the protection
provided to our intellectual property rights by the laws and courts of foreign nations
will be substantially similar to the remedies available under U.S. law. We also cannot
assure you that third parties will not assert infringement claims against us based on
foreign intellectual property rights and laws that are different from those established in
the United States.

The conditions in the many
countries in which we sell our products could affect our ability to deliver our products
or collect payment.

We currently market our products and
solutions in numerous countries and are subject to many risks associated with
international sales, including limitations and disruptions resulting from the imposition
of government controls, national standardization and certification requirements, export
license requirements, economic or political instability, trade restrictions, changes in
tariffs, currency fluctuations and difficulties in managing international operations. Any
of these risks could have a material adverse effect on our ability to deliver our
products, solutions and services on a competitive and timely basis, or to collect payments
from customers in these countries and on our results of operations. Although we have not
yet encountered significant difficulties in connection with the sale of our products and
solutions in international markets, there is no assurance that we will not encounter such
difficulties in the future or that one or more of these factors will not have a material
adverse effect on our business, financial condition and results of operations.

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We are subject to European
regulations that require us to use components based on environmentally friendly materials
and we may become subject to other environmental laws and regulations.

We are subject to regulations
requiring the use of environmentally friendly materials in equipment,
including the 2006 European Community directive, under which producers of electrical and
electronic equipment may not place new equipment containing lead, mercury and certain
other materials deemed to be hazardous, in amounts exceeding any relevant set maximum
concentration values, on the market in the European Union. We are dependent on our
suppliers for components and sub-system modules to comply with these requirements.

Specifically, our inability or
failure to comply with these regulations may restrict us from conducting certain business
in the European Union and could have a material adverse affect on our results of
operations. To our knowledge, compliance with environmental laws and regulations has had
no material effect on our operations to date. However, we could incur substantial costs,
including cleanup costs, fines and civil or criminal sanctions, third-party damage or
personal injury claims, if we were to breach environmental laws, if our products were
found not to comply with environmental laws or if we become subject to newly enacted
environmental laws and regulations in the markets in which we operate.

# We may be subject to
possible warranty claims from our customers.

Our product warranties permit
customers to return for repair any products deemed to be defective. It is our policy to
grant a warranty to the hardware parts of our products for periods ranging from 12 to 36
months. This policy does not apply to the SMART Cabling System, SMART GIGA Cabling System
and CLASSix Cabling Systems, which when installed by a certified cabling installer, and
registered by us, are granted 15-year and 20-year system warranties, respectively. These
warranty periods are customary in the structured cabling industry, but significantly
longer than product warranties generally offered in other industries. Although no material
warranty claims have been asserted against us in the past with respect to our structured
cabling products, we cannot assure you that such claims will not be asserted in the
future. If asserted, such claims may have a material adverse effect on our business,
financial condition and results of operation.

We have not yet evaluated our
internal control over financial reporting in compliance with Section 404 of the
Sarbanes-Oxley Act.

We are considered a
non-accelerated filer under applicable SEC rules. As such, we are required to
comply with the internal control evaluation and certification requirements of Section 404
of the Sarbanes-Oxley Act of 2002 in the following manner: (1) reporting by management
under Section 404(a) of the Sarbanes-Oxley Act will be required for the fiscal year ending
on December 31, 2007 and (2) attestation by our independent auditors under Section 404(b)
of the Sarbanes-Oxley Act will be required for the fiscal year ending December 31, 2008.
Accordingly, we are in the process of determining whether our existing internal control
over financial reporting systems is compliant with Section 404. This process may divert
internal resources and will take a significant amount of time and effort to complete. If
it is determined that we are not in compliance with Section 404, we may be required to
implement new internal control procedures and reevaluate our financial reporting. We may
experience higher than anticipated operating expenses as well as higher independent
auditor fees during the implementation of these changes and thereafter. Further, we may
need to hire additional qualified personnel in order for us to be compliant with Section
404. If we are unable to implement these changes effectively or efficiently, it could harm
our operations, financial reporting or financial results.

Changes in exchange rates between
currencies may negatively impact our costs.

Most of our revenues are denominated in
U.S. dollars or are dollar-linked. We collect a portion of our revenues in Europe in Euros
while most purchases of materials and components, and most marketing costs, are
denominated in dollars or dollar-linked. We incur a material portion of our expenses,
principally salaries and related personnel expenses, in Israel, in NIS. As a result, we
are exposed to several risks, including that either the NIS or the Euro may increase in
value relative to the dollar. If either of such events occurs, the dollar cost of our
operations in Israel or Europe will increase and our dollar-measured results of operations
will be adversely affected. In 2006, there was a decrease in value of the dollar in
relation to the NIS of approximately 8% and there was a decrease in the value of the
dollar in relation to the Euro of approximately 11%. Although these trends did not
materially affect us, we cannot assure you that we will not be materially adversely
affected in the future from currency exchange rate fluctuations or the rate of inflation
in Israel. If the value of the NIS or the Euro rises in value relative to the dollar, our
business and financial condition could be negatively impacted.

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We may be affected by transactions
with related parties from the RAD-BYNET Group.

We are engaged and may in the future
engage in transactions with affiliates of the RAD-BYNET Group, companies controlled
by Yehuda Zisapel and Zohar Zisapel, individuals who own more than 31% of our
outstanding ordinary shares. We believe that such transactions are beneficial to us and
are, or will be, conducted upon terms, which are no less favorable to us than would be
available to us from unaffiliated third parties. However, you should be aware that Yehuda
and Zohar Zisapel could, subject to compliance with provisions of Israeli law concerning
related-party transactions, exercise their influence over our affairs in their own
interest. See Item 7.B. Related Party Transactions.

Risks Related to Our
Ordinary Shares

Our share price has decreased
significantly and could continue to fluctuate significantly.

The market price for our ordinary
shares has been volatile. The market price for our ordinary shares had a historical
downward trend from 2000 until 2003. Although prices were relatively more stable from 2003
to 2006, there can be no assurance that we will not return to our previous volatility and
downward trend. If revenues or earnings in any quarter fail to meet the investment
communitys expectations, there could be an immediate impact on our share price. Our
share price may also be affected by broader market trends or the economic and political
situation in the Middle East and worldwide. A substantial decrease in market price of our
ordinary shares could frustrate our efforts to raise funds through both debt and equity,
discourage potential customers and partners from doing business with us, and could result
in a material adverse effect on our business, financial condition, and results of
operations.

We may not satisfy the NASDAQ
Capital Markets requirements for continued listing. If we cannot satisfy these
requirements, NASDAQ could delist our ordinary shares.

Our ordinary shares are listed on the
NASDAQ Capital Market under the symbol RITT. To continue to be listed on the NASDAQ
Capital Market, we will need to satisfy a number of conditions, including a minimum bid
price of at least $1.00 per share, a market value of our publicly held shares, or MVPHS,
of at least $1 million and stockholders equity of at least $2.5 million. We cannot
assure you that we will continue to satisfy the minimum bid, MVPHS, stockholders
equity or other continued listing requirements of the NASDAQ Capital Market in the future.
If we are delisted from the NASDAQ Capital Market, trading in our ordinary shares may be
conducted in, if available, the OTC Bulletin Board Service or, if available,
another medium. In the event of such delisting, an investor would likely find it
significantly more difficult to dispose of, or to obtain accurate quotations as to the
value of our ordinary shares, and our ability to raise future capital through the sale of
our ordinary shares could be severely limited.

In addition, if our ordinary shares
were delisted from the NASDAQ Capital Market, our ordinary shares could be considered a
penny stock under the U.S. federal securities laws. Additional regulatory
requirements apply to trading by broker-dealers of penny stocks that could result in the
loss of an effective trading market for our ordinary shares.

The sale of a substantial number
of our ordinary shares in the public market, or the expectation thereof, could materially
adversely affect the market price of our ordinary shares and our ability to raise capital
through an offering of securities.

In connection with the private
placement transaction we completed on July 26, 2004, we issued 5,064,129 of our ordinary
shares and warrants to purchase an additional 1,266,032 ordinary shares. We registered the
resale of the ordinary shares, and the resale of the shares issuable upon the exercise of
the warrants, and are required to keep the registration statement effective through July
26, 2009. As of December 31, 2006, 150,001 of these warrants had been exercised. In
addition, as of December 31, 2006, options to purchase a total of 1,630,933 ordinary
shares were outstanding, and an additional 1,396,792 ordinary shares were reserved for
issuance pursuant to options which may be granted under our stock option plans. All shares
issued upon the exercise of these options will be immediately available for sale in the
public market, subject to Rule 144 limitations applicable to our affiliates. Sales of the
ordinary shares issued in the private placement, sales of the ordinary shares issuable
upon exercise of the warrants or options, or even the prospect of such sales, could
materially adversely affect the market price of our ordinary shares and our ability to
raise capital through our offering of securities at acceptable prices. A substantial
decrease in the market price of our ordinary shares could also discourage potential
customers and partners from doing business with us, and could result in a material adverse
effect on our business, financial condition, and results of operations.

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Yehuda and Zohar Zisapel
beneficially own approximately 31% of our ordinary shares and may therefore be able to
influence the outcome of matters requiring shareholder approval.

As of March 1, 2007, Yehuda and Zohar
Zisapel (who are brothers) beneficially owned, in the aggregate, approximately 31.4% of
our outstanding ordinary shares. Such shareholders may be in a position to influence
corporate governance and policy, including the election of our directors and the approval
of change in control transactions. This influence may have the effect of delaying or
preventing changes in control or changes in management, or limiting the ability of our
other shareholders to approve transactions that they may deem to be in their best
interest. This concentration of ownership may also adversely affect our share price.

# We do not intend to pay
dividends.

We have never declared or paid any
cash dividends on our ordinary shares. We currently intend to retain any future earnings
to finance operations and to expand our business and, therefore, do not expect to pay any
cash dividends in the foreseeable future.

Risks Related to
Operating In Israel

Conditions in Israel affect our
operations and may limit our ability to produce and sell our products.

We are organized under the laws of the
State of Israel and a substantial portion of our assets and our principal operations, are
located in Israel. Consequently, our operations, financial condition and results of
operations are directly influenced by economic, political and military conditions in and
affecting Israel. We could be adversely affected if major hostilities involving Israel
should occur, or if trade between Israel and its present trading partners is curtailed.

Since the establishment of the State
of Israel in 1948, a number of armed conflicts have taken place between Israel and the
Arab countries in the region. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Since October 2000, there has been a
high level of violence between Israel and the Palestinians which has strained
Israels relationship with its Arab citizens, Arab countries and, to some extent,
with other countries around the world. The establishment in early 2006 of a government in
the Palestinian Authority by representatives of the Hamas militant group has created
additional unrest and uncertainty in the region. In July 2006, an armed conflict has taken
place between Israel and Hezbollah, an Islamic movement based in Lebanon, which included
the firing of multiple rockets by Hezbollah throughout northern Israel as well as
retaliatory attacks by Israel throughout Lebanon. Any future armed conflicts or political
instability in the region, including acts of terrorism or any other hostilities involving
or threatening Israel, would likely negatively affect business conditions and harm our
results of operations. In addition, several countries restrict business with Israel and
Israeli companies and additional countries may restrict doing business with Israel and
Israeli companies as a result of the increase in hostilities. These restrictive laws and
policies may harm the expansion of our business. We cannot predict whether or not a full
resolution of these problems will be achieved, the nature of any such resolution, or any
consequences that any of these factors may have on the Israeli economy or us.

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

Some of our executive officers and
employees in Israel are obligated to perform military reserve duty annually. In addition,
they may also be further subject to being called to active duty at any time under
emergency circumstances and could be required to serve in the military for extended
periods of time. This could disrupt our operations and harm our business. Prolonged loss
of the services of our key personnel due to army service could result in a material
adverse effect on our business, financial condition and results of operations.

Reduction or termination of our
tax and other benefits from government programs resulting from our failure to meet certain
conditions or otherwise could have a material adverse effect on our business, financial
condition and results of operations.

We are entitled to receive tax
benefits under Israeli Law for the Encouragement of Capital Investments, 1959 (the
Investments Law) for investment programs in our production facilities that are
designated as Approved Enterprises. To maintain our eligibility for these tax
benefits, we must continue to meet several conditions. If we fail to comply with these
conditions in the future, the tax benefits received could be cancelled. The termination or
reduction of the tax benefits could have a material adverse effect on our business,
financial condition, and results of operations. To date, we have not utilized such
benefits. For more information about Approved Enterprises, see Item 10.E.
Israeli Tax Considerations  Law for the Encouragement of Capital Investments,
1959 below and Note 7(B) to the Consolidated Financial Statements included elsewhere
in this annual report.

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Because we have received grants
from the Office of the Chief Scientist, we are subject to on-going restrictions.

We have received grants from the
Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, known
as the Chief Scientist, for research and development programs and we may apply for further
grants in the future. In order to maintain our eligibility for these grants, we must meet
specified conditions, including paying royalties with respect to grants received. If we
fail to comply with these conditions in the future, sanctions might be imposed on us, such
as the grants could be cancelled and we could be required to refund any payments
previously received under these programs. Any products developed with these grants are
required to be manufactured in Israel, unless we obtain prior approval of a governmental
committee and pay increased royalties. In addition, the terms of the Chief
Scientists grants limit our ability to transfer know-how developed under an approved
research and development program outside of Israel The Government of Israel has reduced
the grants available under the Chief Scientists program in recent years, and this
program may be discontinued or curtailed in the future. If we do not receive these grants
in the future, we will have to allocate other funds to product development at the expense
of other operational costs. For more information about grants from the Chief Scientist,
see Item 5.C.  Research and Development, Patents and Licenses below.

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

We are incorporated under the laws of
the State of Israel. Service of process upon us, our Israeli subsidiaries and our
directors and officers, substantially all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, because the majority of our
assets and investments, 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.

We have been informed by our legal
counsel in Israel, Goldfarb, Levy, Eran, Meiri & Co., that it may be difficult to
assert U.S. securities law claims in original actions instituted in Israel. Israeli
courts may refuse to hear a claim based on a violation of U.S. securities laws
because Israel is not the most appropriate forum to bring such a claim. In addition, even
if an Israeli court agrees to hear a claim, it may determine that Israeli law and not
U.S. law is applicable to the claim. If U.S. law is found to be applicable, the
content of applicable U.S. law must be proved as a fact, which can be a
time-consuming and costly process. Certain matters of procedure will also be governed by
Israeli law. There is little binding case law in Israel addressing these matters.

Subject to specified time limitations
and legal procedures, under the rules of private international law currently prevailing in
Israel, Israeli courts may enforce a U.S. final judgment in a civil matter, including
judgments based upon the civil liability provisions of the U.S. securities laws and
including a monetary or compensatory judgment in a non-civil matter, provided that:

| | the
judgment is enforceable in the state in which it was given;
|- | ---------------------------------------------------------------

| | adequate
 service of process  has been  effected  and the  defendant  has had a  reasonable
 opportunity  to        present his arguments and evidence;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

Provisions of Israeli law and our
Articles of Association may delay, prevent or make difficult a change of control and
therefore depress the price of our stock.

Provisions of Israeli corporate and
tax law may have the effect of delaying, preventing or making an acquisition of our
company more difficult. For example, under the Companies Law, upon the request of a
creditor of either party to a 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. These provisions could cause our ordinary shares to trade at prices below the
price for which third parties might be willing to pay to gain control of us. Third parties
who are otherwise willing to pay a premium over prevailing market prices to gain control
of us may be unable or unwilling to do so because of these provisions of Israeli law. See
Item 10B. Additional Information  Memorandum and Articles of Association
 Anti-Takeover Provisions; Mergers and Acquisitions.

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|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

|4.A. | History
and Development of the Company
|---- | --------------------------------------

RiT Technologies Ltd. was
incorporated in Israel and commenced operations in 1989. We are a company limited by
shares and operate under Israeli law. The principal legislation under which we operate is
the Companies Law, which replaced most of the provisions of the Companies Ordinance
effective as of February 1, 2000.

Our main offices are located at 24
Raoul Wallenberg Street, Tel Aviv 69719, Israel, telephone number +972-3-645-5151. Our
agent in the United States is RiT Technologies, Inc., which was incorporated in 1993 under
the laws of the State of New Jersey and is located at 900 Corporate Drive, Mahwah, New
Jersey 07430, telephone number +1-201-512-1970. Our U.S. subsidiary is primarily engaged
in the selling and marketing of our products in the Unites States.

We became a publicly-traded company
on the NASDAQ Global Market (formerly known as the NASDAQ National Market), traded under
the symbol RITT upon our initial public offering on July 22, 1997. The listing of our
shares was transferred to the NASDAQ Capital Market (formerly knows as the NASDAQ SmallCap
Market) on January 12, 2004, and we are still traded under the symbol RITT.

In 2004, we completed a private
placement transaction in which we issued 5,064,129 of our ordinary shares at $1.40 per
share, for aggregate proceeds (before expenses) of approximately $7.1 million. In
connection with this transaction, we also issued warrants to purchase up to 1,266,032 of
our ordinary shares. The warrants are exercisable through July 26, 2009, at an exercise
price of $1.75 per ordinary share. As of December 31, 2006, warrants to purchase 150,001
ordinary shares were exercised. We have registered the resale of the ordinary shares (and
the ordinary shares issuable upon exercise of the warrants) issued in the private
placement pursuant to a registration statement on Form F-3, which was declared effective
on November 22, 2004. Please see Item 10.C. for more information about this transaction.

During 2006, our capital expenditures
totaled approximately $0.48 million (compared to $0.37 million during 2005 and $0.24
million during 2004), all of which was used for machinery, computers and research and
development equipment purchases. Other than future capital expenditures of the types and
consistent with the amounts described above, we have no significant capital expenditures
in progress. All of the above expenditures were paid from internally generated funds.
During 2006, 2005 and 2004, we did not make any significant divestitures nor are any such
divestitures in progress.

|4.B. | Business
Overview
|---- | -----------------

# Operations and Principal
Activities

Enterprise Solutions

More than a decade ago, we introduced
the concept of Intelligent Physical Layer Management Solutions (IPLMS) which consists of
our smart cabling system integrated with our real time management application, and today
we are the leading player in the Intelligent Infrastructure market which expands the IPLMS
concept to additional infrastructure elements such as datacenter cabinets, power
infrastructure and others. Our advanced products are designed to maximize the value of
infrastructure and network investments through tools that enable effective planning and
deployment, optimized daily operation and comprehensive visibility and control. The
Companys solutions also enhance network continuity and reduce network cost of
ownership.

The increasing demand for network
bandwidth and a variety of additional services in local area networks, or LANs, has led to
a continuing evolution in requirements and standards for business continuity, high
performance and maximal asset utilization.

Upon our inception, we responded to
this need by developing structured cabling products, specifically our SMART Cabling
SystemTM, an end-to-end network infrastructure solution which provides the
required end-to-end connectivity solutions for both copper and fiber. In 1999, we
introduced our Category 6 cabling product line, CLASSix, which supports cutting edge data
communication protocols such as Gigabit Ethernet. It enables builders of new
infrastructure to prepare for the increasing bandwidth requirements.

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Building upon our foundation in
structured cabling products, we developed and introduced PatchView, our intelligent
infrastructure management solution. PatchView provides real-time connectivity
information with respect to the data networks connectivity infrastructure and
significantly enhances the control, maintainability and visibility of the network, as well
as reducing the total cost of ownership. In 1999, we introduced our PatchView for the
Enterprise software (PV4E). PV4E leverages our unique ability to
identify infrastructure connections in real-time and extends the capability to all network
resources, from physical connectivity components to switches, servers, PCs and other hard
and soft, active and passive, network components. In 2004 we launched PVMax, a new
hardware platform for PatchView. During the course of 2005, we introduced the Category 7
STP cabling solution, Versions 4 and 4.1 of the PV4E network management software and also
a RiT private label version of a midspan Power over Ethernet solution. In 2006, we
introduced our SMARTen 10GB cabling solution, our PV360 Management Dashboard application
and additional features to the core PV4E product such as automated provisioning. In March
2007, we launched PV4E version 5.0, the 5th generation of PV4E. With Version 5.0 of the
PV4E, we gave extended PV4Es technology with additional features in the areas of
automated provisioning and implementation, PDA-based field implementation support,
physical layer security and integration. These features were designed to meet the evolving
technology needs of customers as they cope with todays most difficult IT challenges
 particularly the mobile workforce, rapidly growing datacenters, distributed
infrastructures and a provisioning workload.

Carrier Solutions

In the carrier field, our solutions
enable reliable mass verification and qualification by telcos to reduce operational costs,
increase customer satisfaction and increase revenues in order to compete with other access
providers of infrastructure and databases, such as wireless providers. In 1996, we
introduced PairViewTM, a comprehensive outside plant management and
qualification system. The PairViewTM system enables the telcos to achieve
greater operational efficiencies by identifying, recording and testing of the connectivity
routing of local loop pairs  the telephone lines, and updating the telcos
database, leading to significant savings and better control over their wire line
infrastructure.

In 2003, we introduced PairQ,
which addressed the requirements of the market of digital subscriber line, or DSL
services, by enabling the transfer of high bandwidth communication on plain old telephony
lines. Since not every telephone line can support these advanced services, telcos need to
pre-qualify the line. The PairQ system enables accurate, easy, and fast mass DSL
pre-qualification, which is an important component in large-scale DSL deployment. The
system can also determine the possible supported bit rate packages for the telco to
provide varying levels of service.

During 2004, we introduced
PairView Pro, the first Local Loop Mass Verification system that can identify and
map all the digital services (xDSL, ISDN, etc.) carried on a line Based on the
PairView system, the PairView Pro, like its predecessor, the PairView,
gathers information about the lines telephone number, type, connectivity status,
electrical characteristics, and routing, unintrusively from active and inactive pairs. The
result is a reliable database, which becomes a platform for more accurate billing,
efficient maintenance, and effective network management. In addition, PairViewPro provides
a 30% increase (over its predecessors) in the scanning speed and an improved Graphical
User Interface  all of which combine to provide carriers with higher technician
efficiency and an even faster return on their investment.

In 2006, we introduced the PairView
Sharp, the fourth-generation of our PairView product, which enables a single
technician to test and map a full 1,200 line cabinet in less than one hour  five
times faster than the previous generation and it is the only tool available that works
without interfering with active POTS or digital services, non-intrusively performing ANI
tests on POTS and ADSL-over-POTS lines while identifying and mapping a broad variety of
digital services (such as ISDN, ADLS, HDSL and PCM).

In addition, in 2006 we introduced
the NGPair that was designed for next generation street cabinet migration and
automatic Main Distribution Frame and Automatic Distribution Frame (MDF and ADF,
respectively) installation. It operates only at the street cabinet and it enables an
automatic and fast mapping of all lines in the street cabinet in less than 1 hour and
without interfering with the service. The same activity when being performed manually
typically takes 2 people to complete in one to two days. Using the NGPair, the cabinet
migration process and the ADF installation process are performed fast, efficiently and
without interfering and misconnecting customers. Furthermore, the NGPair system is
modular and can be upgraded to perform all of the advanced and enhanced PairView
verification capabilities.

18

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Our Strategy

Our strategy is to utilize our
expertise, innovative products and continued research and development activities to
strengthen our position as innovators of intelligent infrastructure solutions for improved
control, utilization and maintenance of networks. We will seek to expand our markets and
product lines by enhancing existing products, introducing new products and expanding into
new markets to capitalize on our expertise in intelligent infrastructure network
solutions.

We market our products in numerous
countries, including through our wholly-owned subsidiary in the United States, RiT
Technologies, Inc., our representative offices in Russia and China, our local
representatives in the United Kingdom, Italy, Germany and the Czech Republic, our
strategic alliance partners (OEM) worldwide and other channels of distribution, as more
fully described under Marketing Channels below.

# Principal Markets

Enterprise Solutions:
Intelligent Infrastructure Management and Structured Cabling Solutions

The rapid growth in computer
networking has resulted from the sharp rise in number of computing devices and networks in
use within enterprises, decreasing hardware costs and the rapidly increasing number of
network-related services. These services include Internet connectivity, internal
connectivity through an Intranet, mass data storage and manipulation and other
data intensive networking activities. An enterprises Local Area Network, or LAN, and
Wide Area Network, or WAN, connect computers, servers and active network equipment to each
other and to the outside world. The networking resources of the enterprise are connected
by an infrastructure of cables, patch panels and cords and outlets and the network devices
are hosted within racks and cabinets located in communication rooms and data centers.

These vast and complex networks must
be supported by proper documentation of resources and assets. Busy organizations
perpetually Move, Add and Change, or MAC, people and equipment. Such MACs are
implemented using a process that involves multiple teams performing a variety of tasks.
Over time, the datacenter or the communications center becomes characterized by a chaos of
patch cords, servers, switches and other devices that have been added, moved or modified
over time. Such chaos makes it difficult to manage and control the network, resulting in
unnecessary waste of resources and assets, increased network downtime, as well as a waste
of staff time. When changes become necessary, the network administrator must verify
current status, plan the additions or modifications required and generate work orders. The
engineer must then execute work order instructions and report details of all changes to
the network administrator. Due to the manual record-keeping of MACs, network
administrators are regularly confronted with inaccurate records and the challenge of
effectively maintaining network connections. This is even more acute in case of a network
fault, where locating and fixing the problem quickly is crucial, and failure to fix the
problem may result in heavy losses to the enterprise. Furthermore, current network
management software associated with active equipment focuses on managing the logical level
(protocols and network traffic), rather than the physical one. PatchView is our
intelligent infrastructure network management system for the enterprise. It provides
real-time information on the status of the network and all related devices, automatically
reports changes to the Network Management System (NMS) running our PV4E software, guides
the system administrator in planning and implementing MACs and assist him/her in managing
the infrastructure. Together with our PVMax Scanners and SMART Patch Panel technology,
PV4E monitors the infrastructure and related assets. The latest versions of PV4E have made
a wealth of information about the network available to other management software solutions
such as the Computer Associates Unicenter and the HP OpenView products. The precise
physical location information of end devices as well as the information about assets and
infrastructure, their status and utilization is also useful for other software products,
such as intrusion detection systems, asset management or help desk software. We also
provide two complementary products: the first, SitePro, a hand-held application for the
implementation engineer that works together with PV4E to allow online communication
between the engineer and the main server while implementation is done; and the second,
PV360 Dashboard, an online management tool enabling each user to track personalized Key
Performance Indicators, alerts and trends and perform proactive management.

Our principal structured cabling
product is our SMART Cabling System, a high-performance, structured cabling system for
commercial buildings. It is comprised of a comprehensive collection of patch panels,
communications outlets, cables, patch cords and complementary products to provide the
required end to end connectivity solutions for both copper and fiber.

The end-users of our enterprise
solutions are typically medium to large-size enterprises. These organizations, in sectors
such as finance, government, health, airports, media and telecommunications, ordinarily
make their purchasing decisions based on the recommendations of consultants. Many of the
recent purchases of the solution have also been for corporate data centers designed to
ensure maximal infrastructure and asset utilization, complete redundancy and security of
information.

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Carrier Solutions

The increased need for high bandwidth
data services together with the appearance of new access technologies and providers, such
as cable and wireless, have intensified competition in the telecommunications industry. In
order to remain competitive, the telcos must differentiate themselves by offering
additional services, such as triple play service (voice, video and data) and better
customer value and satisfaction while continuously improving their operational efficiency
and reducing cost of ownership. This has led the telcos to significantly invest in the
network and migrating it to support NGN and triple play services, and to focus on
increasing revenues through mass deployment of high-bandwidth services (DSL) and reducing
Total Cost of Ownership (TCO) through improved maintenance efficiency plans.

In this competitive industry, one of
the telcos most valuable assets is their access infrastructure, or more precisely
their copper infrastructure in the local loop  the telephone lines. The local loop
is the network of physical transmission links that connect telephone subscribers to a
local telco exchange or street cabinet. Like all networks, but on a much greater scale,
the local loop is comprised of a huge number of wires (copper pairs), the location,
identity, quality and functionality of which must be monitored and documented by the
telcos. Typically, it contains hundreds of thousands of copper pairs spread across a large
area through a number of MDFs and hundreds to thousands of street cabinets. Some copper
pairs are active telephone or data lines, while others are inactive pairs reserved for
future growth. Information with respect to the local loop is maintained by the telcos in
large databases. This information relates to cable distribution, pair ranges on
cross-connect frames, pair routings, line type (voice, data or other), assigned service,
assigned phone number and electrical characteristics of the copper pair, all of which are
of vital importance to the telcos in servicing and planning.

The record-keeping processes of
telcos are based mainly upon field service technician reports, which are subject to human
error. Such errors accumulate over decades of use of the local loop, resulting in
inaccurate databases with significant discrepancies from the actual infrastructure. These
inaccuracies may result in labor inefficiencies, due to repeated maintenance activities
caused by incorrect records and asset losses associated with available, but undetected and
unused phone lines. Furthermore, due to the current massive investments in the access
network to reduce the loop length to the subscribers in order to support NGN and triple
play services, the impact and inefficiencies resulting from the inaccuracies are even more
acute and create significant time loss and resource inefficiency, as well as service
failure to migrated subscribers. In addition, telcos further suffer from non-optimal,
long-term planning of infrastructure investments in new copper pairs based on their flawed
record-keeping systems, lost revenues that could have been generated by undetected pairs
and, in certain cases, dissatisfied customers. This is even more acute in the DSL
deployment arena where the provision process is heavily dependent on accurate database
records.

In view of the growing competition,
telcos are seeking aid in utilizing their existing copper infrastructure more efficiently,
reducing the cost of installations of new services and minimizing the costs associated
with maintaining their infrastructure. We believe that existing systems which provide
local loop connectivity management are limited in capacity, provide only a partial
solution and suffer from technical and operational limitations.

Our PairView product connects to the
copper infrastructure, at various points within the local loop, and performs three tasks:

| | First,
it identifies and records the specific services provisioned on each line and the specific
phone number on active lines. In addition, it tests the inactive pairs electrically for
basic line qualification.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Second,
it identifies and records the connectivity routing of active and inactive pairs in the
local loop. For each pair, PairView generates an end-to-end connectivity map, from the
MDF through the various street cabinets, mapping the overall network assets and their
capabilities.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Third,
after performing the mapping and testing functions, the system imports the data from the
telcos database, compares it with the systems findings and updates the
database automatically or manually.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PairQ is our DSL mass loop
qualification product line which mass-qualifies existing copper infrastructure for the
provision of DSL services. PairQ performs real wideband tests and measurements to
pre-qualify hundreds of lines at a time. In addition, PairQ uses highly sophisticated,
proprietary algorithms to predict the potential data rate package to be supported by each
specific phone line. This data enables the telco to identify the phone lines to be used
for DSL services and to guarantee a specific service level.

NGPair is a product designed
for next generation street cabinet migration and automatic MDF installation. It operates
only at the street cabinet and it enables an automatic and fast mapping of all lines in
the street cabinet in less than 1 hour and without interfering with the service. The same
activity when being performed manually typically takes 2 people to complete in one to two
days. Using the NGPair, the cabinet migration process and the ADF installation process are
performed fast, efficiently and without interfering and misconnecting customers.
Furthermore, the NGPair system is modular and can be upgraded to perform all of the
advanced and enhanced PairView verification capabilities.

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Sales

The manufacturing processes for our
enterprise and carrier products are nearly identical, with slight adjustments for the
varying nature of the products, and comprise one production line. Accordingly, our
operating expenses are not segmented between the two product lines and we report the
division in revenues between enterprise and carrier solutions only with respect to sales
in geographic regions and major customers. Other financial descriptive information is
reported on a single basis of segmentation.

Our total consolidated sales in 2004,
2005 and 2006, broken down by geographical destination and major product lines, were as
follows:

Classification
of sales by geographical destination:1

| |               | Year Ended December 31,
| | ------------- | -----------------------
|
|
|
|
| | United States |                        
| | Europe        |                        
| | Israel        |                        
| | Rest of world |                        
| |               |                        
| |               |                        
| |               |                        
| |               |                        

| | (1) | Sales
are attributed to geographical areas based on location of customers.
| | --- | --------------------------------------------------------------------------

Sales
by major product lines:

| |                      | Year Ended December 31,
| | -------------------- | -----------------------
|
|
|
|
| | Enterprise Solutions |                        
| | Carrier Solutions    |                        
| |                      |                        
| |                      |                        
| |                      |                        
| |                      |                        

Seasonality

We have experienced seasonality in
the sales of our enterprise products through our direct channels. Typically, the
purchasing patterns of our direct end-customers show a decline in the first and third
quarters. These fluctuations are due to several factors, including the size, timing and
shipment of orders; customer budget cycles; customer order deferrals in anticipation of
new products or product upgrades; the relatively low level of general business activity
during the summer months in the European market; and other factors.

Raw Materials and
Components

In general, we produce our products
through sub-contractors. Our limited manufacturing facilities, which are located in Tel
Aviv, Israel, consist primarily of final assembly, testing and quality control of
materials, subassemblies and systems. The majority of our products are manufactured,
assembled and tested by subcontractors according to our designs and specifications.

Certain components used in our
products and solutions are presently available from, or supplied by, only one source and
certain other components are available from limited sources. Although we generally do not
have long-term supply contracts with our component suppliers, we have generally been able
to obtain supplies of components and products in a timely manner. However, in the event
that certain of our suppliers or contract manufacturers were to experience financial or
other difficulties that result in a reduction or interruption in supply to us, our results
of operations would be adversely affected until such time as we established alternate
sources.

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In addition, the components used in
our products may be subject to significant volatility in prices for raw materials and
components. For example, during 2006 the price of copper required for the manufacture of
some of our components increased significantly. As a result we had to selling price to our
customers for such components. Significant volatility in prices for raw material and
components may result in a required increase in prices that if we are unable or fail to
apply, may adversely affect the results of our operations.

# Marketing Channels

Enterprise Solutions

In some territories, we have made a
strategic decision to encourage sales via OEM partners rather than investing in building
or maintaining a local distribution channel. In others, our enterprise solutions are sold
primarily through distributors, as well as through value added resellers (VARs), systems
integrators and installers.

Our distributors generally sign a
non-exclusive International Distributor Agreement. A small minority of our
distributorships are exclusive and, in some countries, we protect our distributors by not
selling to other distributors in the same area, although we are not required to do so. In
the United States, we sell our products through our wholly-owned subsidiary, RiT
Technologies, Inc. RiT Technologies, Inc. sells our products primarily through independent
manufacturers representatives, distributors and system integrators. A substantial
majority of our distributors are neither obligated to deal with us exclusively nor
contractually subject to minimum purchase requirements with respect to our products or
solutions. We maintain a representative office in Moscow, Russia, which coordinates
marketing activities in the Commonwealth of Independent States and a representative office
in Beijing, China. In addition, we retain local representatives in London, England,
Prague, Czech Republic, Milan, Italy and Mumbai, India. Certain risks are related to
international sales and dependence upon distributors and resellers are described above in
Item 3.D  Risk Factors.

Our distributors serve as an integral
part of our marketing and service network around the world. We spend significant sales and
marketing resources on our distributors, providing them with ongoing training,
communications and support. Our employees regularly visit distributors sites.
Periodic meetings and technical seminars are organized by us to further advance our
relationships with our distributors and to familiarize them with our products.

In addition, we, in conjunction with
our distributors, prepare exhibitions of our products worldwide, place advertisements in
local publications, encourage exposure in the form of editorials in communications
journals and prepare direct mailings (both print and electronic) focusing on our products.
We have published an electronic catalog, which is available both on CD-ROM and on-line
through our Web site. In 2006, our three largest distributors accounted for approximately
14%, 10% and 5%, respectively, of our enterprise solutions sales.

The leading vendors of data
communications network infrastructure equipment have begun adding management capabilities
to their solution portfolios. Recognizing this interest, we have several strategic
alliances for joint marketing and sale of our PatchViewsystem as a means of
expanding our market exposure and our customer base and enhancing our enterprise solutions
sales prospects. Our existing strategic partnerships include Panduit Corporation (selling
PatchViewunder the brand name PanView), Brand-Rex (selling PatchViewunder the brand name SmartPatch), Belden/CDT (previously known as Nordx/CDT)
(selling PatchViewunder the brand name IntellimacPlus) and ADC (previously
known as Krone) (also known as ADC/Krone in Europe) selling under the brand name TrueNet.
In 2006, our strategic partners together accounted for approximately 21% of our enterprise
sales.

Carrier Solutions

We market our carrier solutions
directly to telcos, with the aid of local agents and distributors. In addition to
PairView, we endeavor to enhance our market positioning by providing additional
solutions such as PairQ.

Prior to completing a sale of
products such as the PairView system to telcos, a seller typically undergoes a
lengthy approval processes. The sales cycle usually takes 18 to 36 months. Accordingly, in
marketing our carrier solutions, we are often required to submit successive generations of
existing and new products to our customers for approval. The length of the approval
process is affected by a number of factors, including the complexity of the product
involved, technological priorities and budgets of the telcos and regulatory issues
affecting telcos. After completing technical evaluation in which a new products
function and performance are analyzed, a telco ordinarily will conduct field trials
simulating operations to evaluate performance and to assess ease of installation and
operation.

Commercial deployment of a new
product or system usually involves substantially greater numbers of units and locations
than the marketing trial stage. In the first phase, a telco installs the equipment in
selected locations. This phase is usually followed by general deployment, which involves
greater numbers of units and locations. Telcos typically select several suppliers for
general deployment in order to ensure that their needs can be met. Subsequent orders, if
any, are placed under single or multi-year supply agreements that are not subject to
minimum volume commitments.

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During the process described above,
telcos establish procedures, train employees to install and maintain the new product or
system, and obtain feedback on the product or system from operations personnel. Throughout
the customer approval process, we commit senior technical and marketing personnel to aid
in trials and to actively support the customers evaluation efforts.

# Customer Service and
Support

We believe that providing a high
level of customer service and support to our end-user customers is essential to the
success and acceptance of our products and solutions. We offer a technical support help
desk to our distributors worldwide. We also support our customers via phone, fax, e-mail
or on-site visits. We also publish application and technical notes for distributors,
integrators, manufacturers representatives and end-users to assist in using our
products more efficiently. In certain territories, we maintain local customer support
personnel.

Enterprise Solutions

In addition to our direct service and
support activities, our worldwide OEMs, distributors and representatives provide sales,
service and technical support functions (first and second level support) for our products
and solutions to end-user customers in their respective territories. They offer technical
support in the end-users language, attend to customer needs during local business
hours, translate our product and marketing literature into the local language and conduct
user programs and seminars.

We conduct periodic technical
seminars in Israel and other countries around the world to qualify and further advance the
technical knowledge of our distributors and installers in the use of our products and
solutions. We also conduct technical seminars for staff of our OEM partners in various
parts of the world.

We provide a 12 to 36 month warranty
on our hardware, except for the SMART Cabling System, which, when installed by a Certified
Cabling Installer, and registered by us, is granted a 15 to 25 year warranty for system
performance; and the SMART GIGA Cabling System and CLASSix Cabling Systems, which, when
installed by a Certified Cabling Installer, and registered by us, are granted 20-year
warranties for system performance.

We offer third level maintenance and
support services to our PV4E software to OEMs and distributors and first, second and third
level maintenance and support services to our direct customers.

Carrier Solutions

We provide direct service and support
activities to our end distributors and end customers. We provide a 12 to 36 months
warranty on our carrier products. Upon termination of the warranty period for carrier
solutions, we offer a maintenance and support program to our customers.

# Dependence on Patents,
Licenses and Material Contracts

We rely upon a combination of
patents, patent applications, trademarks, copyrights, trade secret laws, contractual
restrictions and technical measures to establish and protect our proprietary rights in our
products, systems and technologies. We hold patents on our PatchView and PairView
technologies and some of our cabling products. These patents expire in 2012, 2015 and
2020, respectively. We also have several patents and design patents pending on our new
products. In addition, we enter into nondisclosure and confidentiality agreements with our
employees and with certain partners, suppliers and customers with access to sensitive
information. We cannot assure you that the steps we have taken to protect our proprietary
rights will be adequate to prevent misappropriation of our technology or independent
development and sale by others of software products with features based upon, or otherwise
similar to, those of our products and solutions.

Given the rapid pace of technological
development in the communications industries, we cannot assure you that certain aspects of
our products and solutions do not or will not infringe on existing or future proprietary
rights of others. Although we believe our technology has been independently developed and
none of our technology or intellectual property infringes on the rights of others, third
parties could assert infringement claims against us in the future. If such infringement is
found to exist, we may attempt to receive the requisite licenses or rights to use such
technology or intellectual property. However, we cannot assure you that such licenses or
rights can be obtained or obtained on terms favorable to us.

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In addition, the laws of foreign
jurisdictions where we sell and seek to sell our products may afford little or no
protection of our intellectual property rights. We cannot assure you that the protection
provided to our intellectual property rights by the laws and courts of foreign nations
will be substantially similar to the remedies available under U.S. law. We also cannot
assure you that third parties will not assert infringement claims against us based on
foreign intellectual property rights and laws that are different from those established in
the United States.

Thereare no customers who have a
contractual obligation to order products from us. See Item 3.D.  Risk Factors. In
2006, approximately 27.6% of our revenues were generated from orders placed by two major
customers. In 2005,  19% of our revenues were generated
from orders placed by another major customer. See Note 8B.1(d) to our Consolidated
Financial Statements included elsewhere in this annual report.

# Competitive Position

We believe that the principal
competitive factors in our markets are product price-performance ratio, brand name
recognition, technical features, quality, price, and customer service and support. We
believe that we compete favorably with respect to most of these factors. However, we
cannot assure you that we will be able to compete successfully in the future with existing
or anticipated competitors. Many of our existing and potential competitors have or are
likely to have more extensive engineering, manufacturing, marketing and distribution
capabilities (including direct sales forces) and greater financial, technological and
personnel resources than us. Moreover, we cannot assure you that we will be able to
differentiate our products from the products of our competitors or to develop or
successfully introduce new products which are less costly or offer better performance than
those of our competitors. In addition, our existing and prospective competitors may have
established, or may in the future establish, relationships with our existing and potential
customers, which could have a material adverse effect on our ability to compete.

Enterprise Solutions

Competition in the structured cabling
segment of the enterprise solutions market is intense. Many companies, including, among
others, Commscope (SYSTIMAX division), Tyco/AMP, Panduit, Ortronics, and Siemon from the
United States and Canada, and Alcatel, Brand-Rex, Nexans and Siemens from Europe, develop
and sell products which directly or indirectly compete with our structured cabling
infrastructure.

We are aware of 2 products currently
in the market that compete directly with our PatchView solution: the iTRACS Infrastructure
Manager system produced by the iTRACS Corporation and the iPatch System produced by
Systimax Solutions. We cannot assure you that there are currently no, or that in the
future there will not be, other products which directly compete with the PatchView system.
We also have strategic arrangements with Panduit Corporation, Brand-Rex, ADC (previously
known as Krone) and Belden/CDT (previously known as Nordx/CDT) for the sale of our
PatchView system. Although we expect the arrangements with these leading vendors to
contribute to establishing PatchView as a leading technology, these vendors also compete
with us for intelligent infrastructure management customers. Moreover, as the popularity
of the managed infrastructure concept increases, we expect substantial competition from
established and emerging networking and structured cabling companies.

Carrier Solutions

Since Fluke Corporations
acquisition of Harris Corporations test division, we are aware of only one global
competitor to PairView in the market, which is the DaVaR Loop Management System of Fluke .
However, there are several local solutions that compete with PairView, such as Sapla of
Inelcom in Spain and SiVar of OSP in South America, which offer local and less
comprehensive solutions.  In addition, Vierling Mobile Communications has recently
announced the release of a product called Street Cabinet Scanner. The product
competes with our NGPair product, but it seems that it cannot perform the full range of
capabilities currently performed by the PairView product. With respect to PairQ, Fluke
Corporation has recently announced their NetDSL product, which incorporates capabilities
similar to PairQ, as a derivative of PairQs record verification process.  To
our knowledge, this product is limited in its capabilities of testing active lines as a
stand-alone product. Switch based testers, such as those manufactured by Teradyne, Porta
Systems and Spirent, compete indirectly with PairQ. However, we cannot assure you that no
other competitors exist. Moreover, we expect substantial competition from established and
emerging telecommunications companies, with the increased popularity of the concept of
outside plant qualification and management.

Increased competition, direct and
indirect, could have a material adverse effect on our revenues and profitability through
pricing pressure, loss of market share and other factors. We cannot assure you that we
will not be subject in the future to such factors, which could materially adversely affect
our business, financial condition and results of operations.

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# Environmental Regulation

Our European activities require us to
comply with European Union Directives with respect to product quality assurance standards
and environmental standards. Directive 2002/95/ec of the European Parliament on the
Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic
Equipment, also known as the RoHS Directive, which came into effect on July 1, 2006,
provides that producers of electrical and electronic equipment may not place new equipment
containing lead, mercury and certain other materials deemed to be hazardous, in amounts
exceeding the set maximum concentration values, on the market in the European Union.
European Directive 2002/96/EC on waste, electrical and electronic equipment, know as the
WEEE Directive, makes manufacturers of electrical and electronic equipment financially
responsible for specified collection, recycling, treatment and disposal of past and future
covered products.

We are dependent on our suppliers for
components and sub-system modules to comply with these requirements and certain of our
products have been modified to meet this directive. Complying with these directives
imposes some additional costs and administrative burden on us. To our knowledge,
compliance with environmental laws and regulations has had no material effect on our
operations to date. However, we could incur substantial costs, including cleanup costs,
fines and civil or criminal sanctions, third-party damage or personal injury claims, if we
were to breach environmental laws, if our products were found not to comply with
environmental laws or if we become subject to newly enacted environmental laws and
regulations in the markets in which we operate, whether in the European Union or
otherwise.

|4.C. | Organizational
Structure
|---- | ------------------------

Our wholly-owned subsidiary in the
United States, RiT Technologies, Inc., was incorporated in 1993 under the laws of the
State of New Jersey, and is primarily engaged in the selling and marketing in the United
States of our products.

In 1997, we incorporated a
wholly-owned subsidiary in Israel, RiT Tech (1997) Ltd., intended to make various
investments, including in our securities. As of December 31, 2006, RiT Tech (1997) Ltd.
hold 0. 11597% of our outstanding shares.

Yehuda and Zohar Zisapel are our
founders and principal shareholders. Yehuda Zisapel is also a director. One or both of
Yehuda Zisapel and Zohar Zisapel are also founders, directors and principal shareholders
of several other companies that, together with us and their respective subsidiaries and
affiliates, are known as the RAD-BYNET Group. Such other corporations include,
but are not limited to, RAD Data Communications, RADCOM Ltd., RADVision Ltd., SILICOM
Ltd., RADWARE Ltd., RADView Software Ltd, AXERRA Network Inc., CERAGON Networks Ltd.,
BYNET Data Communications Ltd. and its subsidiaries, BYNET ELECTRONICS LTD. and its
subsidiaries, Bynet Semech (Outsourcing) Ltd., Bynet Systems Applications Ltd., Bynet
Software Systems Ltd., AB NET Communications Ltd.  Commex Technologies Ltd., RADLive
Ltd., RADWIN Ltd. Packetlight Networks Ltd., RAD-BYNET Properties and Services (1981)
Ltd., Wisair Inc., Sanrad Inc, and several holdings in real estate, biotech and
pharmaceutical companies. There is no formal legal structure that links the corporations
in the RAD-BYNET Group and each company is a separate legal entity. See Item 6
 Directors, Senior Management and Employees and Item 7  Major
Shareholders and Related Party Transactions.

|4.D. | Property,
Plants and Equipment
|---- | ------------------------------

We do not own any real property. We
lease from an affiliate of our principal shareholders an aggregate of 25,694 square feet
of office and manufacturing premises in Tel Aviv, Israel and we lease 8,676 square feet of
warehousing premises in Rosh Haayin, Israel. Aggregate annual lease payments in 2006
for the Tel Aviv and Rosh Haayin premises were approximately $457,000. We lease
approximately 1,190 square feet of office premises for our representative office in
Beijing, China at an annual rent of approximately $14,000. We lease 606 square feet of
office premises for our representative office in Moscow, at an annual rent of
approximately $59,000. RiT Technologies, Inc., our U.S. subsidiary, leases
approximately 1,400 square feet in Mahwah, New Jersey, from an affiliate of ours, at an
annual rent of approximately $44,000. See Item 7  Major Shareholders and
Related Party Transactions and Notes 5B and 9 to our Consolidated Financial
Statements included elsewhere in this annual report.

We believe that our facilities are
suitable and adequate for our operations as currently conducted and as currently foreseen.
In the event that additional facilities are required, we believe that we could obtain such
facilities at commercially reasonable rates.

|ITEM 4A. |  | UNRESOLVED STAFF COMMENTS
|-------- |  | -------------------------

Not applicable.

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|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

|5.A. | Operating
Results
|---- | -----------------

You should read the following
discussion of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this annual
report.The consolidated financial statements have been prepared in accordance with
U.S. GAAP.

The following discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as a result
of certain factors, including, but not limited to, those set forth in Item
3Key InformationRisk Factors.

# Executive Summary 
Year Ended December 31, 2006

In 2006, the sales of our enterprise
sales solutions increased by more than 29% compared with 2005 due to our successful
marketing and sales efforts in the past two years, including expanding our base of OEM
partners and our ability to address opportunities in emerging markets such as India, the
Peoples Republic of China and other targeted regions in Asia and Latin America. As a
result, our OEM sales increased significantly to $5.1 million compared to $2.8 million in
2005, an increase of about 80%.

Although the 2006 results reflect
continually increasing sales of our enterprise solutions in the past years, there is no
assurance that this growth will continue in the future.

The sales of our carrier business
solutions decreased by more than 82% compared with 2005 primarily due to a few exceptional
large carrier deals delivered during 2005 and to the delay from 2006 of high-probability
deals well beyond their original forecast.

In 2006, the geographical breakdown
sales changed compared with 2005. Our sales to North America increased while our sales to
Europe decreased. The classification of sales by geographical regions in 2006 was
approximately 40% of sales to North America compared with approximately 25% in 2005 and of
approximately 50% sales to Europe compared with approximately 65% in 2005.

The increase in our enterprise
revenues increased our operational expenses since 2005. In addition, in order to respond
to the growing demand for our enterprise solutions we are required to maintain higher
levels of inventories of our enterprise products.

Sales in 2006 were approximately
$25.1 million, a decrease of approximately 10% compared with sales of approximately $27.9
million in 2005. This decrease in our 2006 sales was mainly due to the substantial
decrease in our carrier solutions sales during the period. See Item 4.B.2 
Sales by Major Product Lines.

The cost of sales as a percentage of
revenues increased by approximately 10% compared with 2005. This increase resulted mainly
from higher proportions of carrier sales in 2005, 35% compared with 7% in 2006. Our
carrier solutions sales usually have higher margins than our enterprise sales solutions.
See Note 8B1 to our Consolidated Financial Statements included elsewhere in this annual
report.

Research and development expenses,
net, were approximately $4.3 million in 2006, a slight increase of 2.7% compared with
research and development expenses of approximately $4.2 million in 2005. The increase is
primarily due to the decrease in the value of the dollar in relation to the NIS with
respect to compensation paid to employees engaged in Research and Development activities
and to outsourcing services and from the recognition of expenses associated with
share-based payments in accordance with SFAS 123R requirements which we adopted in 2006.

Sales and marketing expenses were
approximately $7.7 million in 2006, compared with approximately $7.6 million in 2005. The
increase is mainly due to higher marketing and promotion expenses incurred by us and by
our U.S. subsidiary targeted to increase sales. In addition, the increase in the sales and
marketing expenses is also due to the decrease in the value of the dollar in relation to
the NIS, especially with respect to compensation paid to employees engaged in sales and
marketing activities and from the recognition of expenses associated with share-based
payments in accordance with SFAS 123R requirements which we adopted in 2006.

26

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General and administrative expenses
consist primarily of compensation costs for administration, finance and general management
personnel, office maintenance and administrative costs and doubtful debt expenses. General
and administrative expenses were approximately $2.2 million in 2006 compared with
approximately $2.0 million in 2005. This 10.0% increase was due to the increase in the
allowance for doubtful debts accounts, the advances of this disallowed expenses write-off
and from the recognition of expenses associated with share-based payments in accordance
with SFAS 123R requirements which we adopted in 2006.

We had a net loss of approximately
$1.7 million in 2006, compared with net income of approximately $1.4 million in 2005. Our
cash, cash equivalents and marketable securities decreased from $7.7 million as of
December 31, 2005 to approximately $6.5 million as of December 31, 2006. The decrease in
the net income in 2006 compared with 2005 is attributable mainly and the decrease in the
proportion of carrier revenues as a percentage of total revenues, from 35% in 2005 to 7%
in 2006, which resulted in lower margins and from the recognition of expenses associated
with share-based payments in accordance with SFAS 123R requirements which we adopted in
2006. The total compensation expense recorded was approximately $500,000. See Note 6B4 to
our Consolidated Financial Statements included elsewhere in this annual report.

We may need to raise additional
financing in the future to support our operations and our growth strategy. There is no
assurance that we will be able to raise additional financing in the future or on what
terms, which may have a negative effect on our operations and growth strategy.

Critical Accounting
Policies

The preparation of our financial
statements in conformity with generally accepted accounting principles requires us to make
estimates, judgments 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. We evaluate our estimates on a regular basis and may revise our
estimates. We base our estimates on historical experience and various other assumptions
that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent. Some of those judgments can be subjective and complex, and
consequently, actual results may differ from those estimates. For any given individual
estimate, judgment or assumption made by us, there may be alternative estimates, judgments
or assumptions, which are also reasonable. The following sections include references to
certain critical accounting policies that are impacted significantly by judgments,
assumptions and estimates used in the preparation of our consolidated financial
statements. These policies are discussed in Note 2 to our Consolidated Financial
Statements included in this annual report. We are also subject to risks and uncertainties
that may cause actual results to differ from our estimates, judgments and assumptions,
such as changes in the economic environment and competition. Certain of these risks and
uncertainties are described in Item 3.D. herein. Our critical accounting polices include:

# 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, several of which are discussed below, in measuring
revenue. However, such guidelines may require the exercise of certain judgments, estimates
and assumptions.

Contracts and customer purchase
orders are generally used to determine the existence of an arrangement. We assess whether
the fee is fixed or determinable based on the payment terms associated with the
transaction and whether the sales price is subject to refund or adjustment. We assess
collectibility based primarily on the creditworthiness of the customer as determined by
credit checks and analysis, as well as the customers payment history. When the sale
arrangement includes customer acceptance provisions, revenue is not recognized before we
have demonstrated that the criteria specified in the acceptance provisions have been
satisfied, including a written approval received from the customer.

We apply the guidance in Emerging
Issues Task Force (EITF) Issue No. 00-21 to determine if the contract or
arrangement contains more than one unit of accounting, as defined in EITF 00-21, and, if
applicable, the allocation of the arrangement consideration to such units of accounting.

All of our contracts include a
warranty period and some also include training services. We have no obligation to provide
installation services or customer service and support with sales of our products.

27

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We believe that in the future these
or enhanced training services may be sold separately, after the delivery of the systems.
In such cases, based on the objective and reliable evidence of the fair value of these
training services, we would alter our revenue recognition policy accordingly.

We sell most of our products and
solutions through distributors, strategic alliance partners, value-added resellers, system
integrators, OEMs and installers. We generally recognize revenue at the time of shipment
to such distribution channels.

Amounts received from customers prior
to product shipment are classified as advances from customers.

We generally do not grant the right
to return except for replacement of defective products, for which a warranty allowance is
recorded at the time of shipment.

# Allowances for product
warranties

It is our policy to grant a warranty
for periods of 12 to 36 months, except with respect to our end-to-end cabling systems (the
SMART Cabling System, SMART GIGA Cabling System and CLASSix Cabling System) which, when
installed by a certified cabling installer, and registered by us, are granted 15-year
warranties (for the SMART Cabling System and the SMART GIGA Cabling System) or 20-year
warranties (for the CLASSix Cabling System) for system performance. The balance sheet
provision for warranties for all periods through December 31, 2006 is determined based
upon our experience regarding the relationship between sales and actual warranty expenses
incurred. See Note 2M to our Consolidated Financial Statements included elsewhere in this
annual report. This determination may require the exercise of certain judgments, estimates
and assumptions.

The warranty for our products is a
basic manufacturer warranty accounted for under SFAS No. 5 and is not a portion of
multiple element revenue. Besides the warranty period, we have no obligation for
continuing customer service and support.

| | Our
provision for warranty is calculated for sales of carrier and enterprise systems (PairQ,
PairView and our PatchView products). The formula that we use to estimate the warranty
provision for the systems being sold for each period takes into consideration, among
others, the following variables:
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Number
 and nature of  systems sold;
| | - | ------------------------------------

| |  | Price;
| | - | ------

| |  | Remaining
warranty period; and
| | - | ------------------------------

| |  | Elements
related to the customer's history and traits (e.g.  sales region, number of systems
bought, past                   warranty claims experience)
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

28

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The Companys provision for
warranty claims is calculated on a quarterly basis for sales of Carrier and Enterprise
systems. The Carrier product is comprised of two types of systems  Pair View and
Pair-Q. The Enterprise product is comprised of one type of system- Patch View. The
provision for the Carrier products is calculated separately for those types of products in
order to appropriately take into consideration any differences in product or customer
characteristics (i.e. professionalism of the customer work force, environmental conditions
and working conditions in the field). Based on past years experience, the
calculation of the Enterprise products warranty provision is based on a fixed percentage
from the sales of these products.

# Allowances for doubtful
accounts

Our financial statements include an
allowance that we believe reflects adequately the loss inherent in receivables for which
collection is in doubt. In determining the adequacy of the allowance, we based our
estimate on information at hand about debtors financial situations, the volume of
their operations, aging of the balance and evaluation of the security received from them
or their guarantors and the existence of credit insurance policies and the terms of
payment. 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.

The balance sheet allowance for
doubtful debts for all the periods through December 31, 2006, is determined as a specific
amount for those accounts the collection of which is uncertain.

In performing this evaluation,
significant judgments and estimates are involved based upon the factors that affect a
debtors ability to pay, all of which can change rapidly and without advance warning.

# Inventories

Inventories are stated at the lower
of cost or market. In respect of work in process and finished products, the cost of raw
materials and components is determined on the moving average basis and labor costs and the
cost of overhead components are determined on the basis of actual manufacturing costs. In
determining inventory value, we make assumptions as to the market value of inventory. If
there is a sudden and significant decrease in demand for our products or there is a higher
risk of inventory obsolescence because of a rapidly changing technology and customer
requirements, we may be required to increase our inventory writedowns and our gross
margin could be adversely affected. In addition, we add the overhead from our
manufacturing process to the cost of our inventory items. The amount of overhead allocated
to cost of revenues is reviewed and updated periodically. In 2006, our inventory
write-down charge was $1.0 million compared with $1.2 million in 2005.

# Accounting for
Stock-based Compensation

At December 31, 2006, we had several
employee compensation plans, which are more fully described in Item 6E of this annual
report. Prior to January 1, 2006, we accounted for those plans under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and related interpretations as
permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting
for Stock-Based Compensation(SFAS 123). Effective January 1, 2006, we
adopted the fair value recognition method detailed in SFAS 123R, Share-Based
Payment using the modified prospective transition method. Under that transition
method, compensation cost recognized includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions of SFAS
123R.

The fair value of each option grant
is estimated on the date of grant using the Black and Scholes option pricing model using
the following assumptions:

| | The
current price of the share is the fair market value of such shares at the date of
issuance.
|- | -----------------------------------------------------------------------------------------------

| | Dividend
yield of zero percent for all relevant periods.
|- | --------------------------------------------------------

| | Risk
free interest rates are as follows:
|- | ----------------------------------------

|Year ended December 31 | Interest Rate (%)
|---------------------- | -----------------
|
|
|
|
|2006                   | 4.80             
|2005                   | 4.37             
|2004                   | 3.63             

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| | Expected
lives of options range from 1 to 4 years (most of the options lives is 4 years as
of the date of the grant) for each option granted.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Expected
volatility of 79% for the year ended December 31, 2006 (85.6% and 87.2% for the years
ended December 31, 2005 and 2004, respectively).
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

Most of our option awards are
generally subject to graded vesting over a service period. In those cases, we recognize
compensation cost on a straight-line basis over the requisite service period for the
entire award.

With respect to non-employees, we
apply the fair value-based method of accounting set forth in SFAS 123 and EITF Issue No.
9618, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods or Services to
account for stock-based compensation to non-employees. Using the fair value method, the
total compensation expense is computed based on the fair value of the options on the date
the options are granted to the non-employees from the date in which the options are fully
vested. As a result of adopting SFAS 123R on January 1, 2006, our net loss for the year
ended December 31, 2006 is higher, respectively, than if it had continued to account for
share-based compensation under APB 25. We grant options at market value and therefore,
under APB 25 there were no compensation expenses.

The adoption of this standard, could
adversely affect our profitability in the future. In addition, if as a result of SFAS 123R
we would stop or limit the use of stock options as an incentive and retention tool, it
could have a negative effect on our ability to recruit and retain employees.

# Staff Accounting
Bulletin No. 108

The Companys previous
accounting policy with respect to quantification of prior year misstatements was based on
the rollover method. Accordingly, we assessed misstatements primarily from an income
statement perspective. In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. SAB 108 addresses
the process and diversity in practice of quantifying financial misstatements resulting in
the potential build-up of improper amounts on the balance sheet. The SEC staff believes
registrants must quantify errors using both a balance sheet and income statement approach
and evaluate whether either approach results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is material. Adjustments
made under this pronouncement are reflected in the opening balance of shareholders
equity in the year of adoption. The SAB allows for the adjustment to be made through a
cumulative effect transition. We adopted and applied SAB 108 a to the year ended December
31, 2006. See Note 2T to our Consolidated Financial Statements included elsewhere in this
annual report

# Accounting for income
taxes

As part of the process of preparing
our consolidated financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate. This process requires us to estimate our
actual current tax exposure and make an assessment of temporary differences resulting from
differing treatment of items, for tax and accounting purposes. We have recorded a
valuation allowance of $7.1 million as of December 31, 2006, which relates primarily
to the value of the deferred tax asset consisting of our net operating loss
carry-forwards. This indicates our managements current determination that because we
have yet to generate taxable income, we cannot determine that it is more likely than not
that we will be able to use this asset in the future. As of December 31, 2006, we have not
yet generated any taxable income. In the event that we generate taxable income in the
future, we may be required to adjust our valuation allowance.

30

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# Financial Data

The following table sets forth, for
the periods indicated, certain financial data expressed as a percentage of total revenue:

|                                   | Year Ended December 31,
|---------------------------------- | -----------------------
|
|
|
|
|Sales                              |                        
|Cost of sales                      |                        
|                                   |                        
|Gross margin                       |                        
|                                   |                        
|Operating cost and expenses:       |                        
|Research and development, gross    |                        
|Less royalty-bearing participation |                        
|                                   |                        
|Research and development, net      |                        
|Sales and marketing                |                        
|General and administrative         |                        
|                                   |                        
|Total operating expenses           |                        
|                                   |                        
|Operating income (loss)            |                        
|Financial income, net              |                        
|                                   |                        
|Net Income (loss) for the year     |                        
|                                   |                        

Year Ended
December 31, 2006 Compared with Year Ended December 31, 2005.

Sales.           Sales consist of gross sales of products less discounts and refunds. Sales
          decreased to approximately $25.1 million in 2006 from approximately $27.9
          million in 2005, primarily due to a significant decrease in our carrier
          solutions revenues.

Our carrier business revenues
decreased by more than_82% in 2006 compared to 2005. This weakness was primarily due to a
few exceptional large carrier deals delivered during 2005 and to the delay of the closing
of certain sales from 2006 well beyond their original forecast.

Our enterprise business revenues
increased by more than 29% in 2006 compared to 2005. During 2006, we succeeded in
establishing our enterprise business as a solid and profitable platform for our future
growth, which resulted in annual sales of our enterprise products exceeding annual sales
of our enterprise products for all prior years. This increase resulted mainly from the
significant growth (more then 80% compared with 2005) of our OEM sales. We believe that
the increased revenues demonstrate the strong growth in overall market demand for managed
infrastructure systems and the value of our solutions together with our successful sales
and marketing efforts. However, we cannot predict whether this trend will continue in
2007.

Cost of Sales. Cost of sales
consists primarily of materials, sub-contractors expenses, warranty expenses, compensation
costs attributable to employees, write-down of inventory and overhead expenses related to
our manufacturing operations. Cost of sales was approximately $12.9 million in 2006
compared with $12.9 million in 2005. Cost of sales as a percentage of sales was 51.6% in
2006, compared with 46.4% in 2005. This increase resulted mainly from: (i) lower portions
of carrier sales as a percentage of total sales (from 35% in 2005 to 7% in 2006), which
usually have higher margin; (ii) the impact of the decrease in the dollar value compared
with the NIS, and; (iii) increase in the prices of some components required to the
manufacture of our products due to a a sharp increase in the Copper prices worldwide. See
Note 8B1 to our Consolidated Financial Statements included elsewhere in this annual
report. Our inventory write-down charge in 2006 was $1.0 million compared with $1.2
million in 2005.

Gross Margin. Gross margin
decreased from 53.6% in 2005 to 48.4% in 2006, due primarily to the decrease in revenue
from carrier sales, which typically have higher margins than enterprise sales.

Research and Development
Expenses. Research and development expenses consist primarily of compensation costs
attributable to employees engaged in ongoing research and development activities,
development-related raw materials and sub-contractors, and other related costs. Research
and development expenses were approximately $4.3 million in 2006 compared with $4.2
million in 2005. The increase was caused primarily by the recognition of expenses
associated with share-based payments in accordance with SFAS 123R requirements which we
adopted in 2006.

As a percentage of sales, research
and development expenses increased to 17.2%of sales in 2006 from 15.1% of sales in 2005,
due to the lower level of revenues.

Grants from the Chief Scientist were
approximately $0.1 million in 2006, the same level of the amount as in 2005.

Sales and Marketing Expenses. Gross
sales and marketing expenses consist primarily of costs relating to compensation
attributable to employees engaged in sales and marketing activities, promotion,
advertising, trade shows and exhibitions, sales support, travel, commissions and related
expenses. Sales and marketing expenses were approximately $7.7 million in 2006, compared
with approximately $7.6 million in 2005. The slight increase is mainly due to higher
marketing and promotion expenses incurred by us and by our US subsidiary which were
partially offset by the decrease in value of the dollar in relation to the NIS, especially
with respect to compensation paid to employees engaged in sales and marketing activities
and from the recognition of expenses associated with share-based payments in accordance
with SFAS 123R requirements which we adopted in 2006.

31

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General and Administrative
Expenses. General and administrative expenses consist primarily of compensation costs
for administration, finance and general management personnel, office maintenance and
administrative costs and doubtful debt expenses. General and administrative expenses were
approximately $2.2 million in 2006, compared with approximately $2.0 million in 2005. This
10.0% increase was primarily due to the increase in the allowance for doubtful debts
accounts, the expense recorded for Israeli tax nondeductible expenses paid in 2006 and
from the recognition of expenses associated with share-based payments in accordance with
SFAS 123R requirements which we adopted in 2006.

Financial Income, Net. Net
financial income was approximately $0.2 million in 2006, the same as in 2005.

Net Loss (Income). We had net
loss of approximately $1.7 million in 2006, compared with a net income of approximately
$1.4 million in 2005. The decrease is attributable primarily to the decrease in our
carrier revenues which are usually characterized by high margins and to the influence of
the implementation of FAS123R in to 2006. The total compensation expense recorded in
accordance with SFAS 123R was approximately $500,000. See Note 6B4 to our Consolidated
Financial Statements included elsewhere in this annual report.

Year Ended
December 31, 2005 Compared with Year Ended December 31, 2004.

Sales.
          Sales increased to approximately $27.9 million in 2005 from approximately $18.4
          million in 2004, primarily due to a significant increase in our carrier
          solutions revenues.

Our carrier solutions increased by
over 300% in 2005 compared to 2004 primarily due to several relatively large transactions
for the sale of carrier products concluded during the year.

The enterprise solutions market has
experienced a slow-down from the latter part of 2000 and up to the beginning of 2004. This
slowdown has negatively affected our enterprise solutions sales beginning in 2002. Our
enterprise solutions sales both direct and via distributors and OEMs have also increased
since 2004 mainly due to the increase in the market acceptance of the IPLMS concept.

Cost of Sales. Cost of sales
was approximately $12.9 million in 2005 compared with $10.1 million in 2004. Cost of sales
as a percentage of sales was 46.4% in 2005, compared with 54.6% in 2004. This decrease
resulted mainly from the increase in the portions of carrier sales as a percentage of
total sales (from 13% in 2004 to 35% in 2005), which provided us with higher margins. See
Note 8B1 to our Consolidated Financial Statements included elsewhere in this annual
report. Our inventory write-down charge in 2005 was $1.2 million compared with $0.4
million in 2004.

In 2004, we significantly decreased
the inventory write-down charge, since both the carrier solutions and the enterprise
solutions markets showed indications of the beginning of a recovery and we estimated,
based on our 2005 plans, that the inventory levels corresponded to our sales forecasts.

By the end of 2005, based on our
future road map and future products plan, especially on the enterprise side, we
significantly increased the write-down inventory provision. This increase resulted from
(a) a significant increase in our products with very slow movement during the last two
years and (b) a cancellation of the old products versions.

Gross Margin. Gross margin
increased from 45.4% in 2004 to 53.6% in 2005, due primarily to the increase in revenue
from carrier sales, which typically have higher margins than enterprise sales.

Research and Development
Expenses. Research and development expenses were approximately $4.2 million in 2005
compared with $3.8 million in 2004. As a percentage of sales, research and development
expenses decreased to 15.1% of sales in 2005 from 20.4% of sales in 2004, due to the
higher level of revenues.

Grants from the Chief Scientist were
approximately $0.1 million in 2005 compared with $0.3 million in 2004.

Sales and Marketing Expenses. Sales
and marketing expenses were approximately $7.6 million in 2005, compared with
approximately $6.2 million in 2004. The increase is mainly due to the increase in our
local marketing and promotional efforts, which we implemented in order to increase our
sales.

32

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General and Administrative
Expenses. General and administrative expenses were approximately $2 million in 2005,
compared with approximately $1.7 million in 2004. This 16.7% increase was primarily
related to the reductions in the allowance for doubtful debts accounts in 2004.

Financial Income, Net. Net
financial income was approximately $0.2 million in 2005, compared with financial income of
approximately $0.03 million in 2004. This increase was due to the increase in our cash and
cash equivalents during the year resulting from the significant increase in our revenues.

Net Income (Loss). We had net
income of approximately $1.4 million in 2005, compared with a net loss of approximately $3
million in 2004. The increase is attributable primarily to the increase in our carrier
revenues, which provide us with high margins

Impact of Foreign Currency
Fluctuation. For a description of the impact of foreign currency fluctuations on us,
see the heading entitled Impact of Inflation and Currency Fluctuationsin Item 11.

Government Policies Which Could
Affect Our Operations.We are entitled to receive tax benefits under the Israeli Law
for the Encouragement of Capital Investments, 1959 (the Investments Law) for
investment programs in our production facilities that are designated as Approved
Enterprises. To maintain our eligibility for these tax benefits, we must continue to
meet several conditions. If we fail to comply with these conditions in the future, the tax
benefits received could be cancelled. The termination or reduction of the tax benefits
could seriously harm our business, financial condition and results of operations. For more
information about Approved Enterprises, see Item 10.E. Israeli Tax
Considerations  Law for the Encouragement of Capital Investments, 1959 below
and Note 7B to our Consolidated Financial Statements.

See Item 5.C. Research and
Development, Patents and Licenses for further discussion of government programs and
policies which may affect us.

# Recently Enacted
Accounting Pronouncements

# FIN 48  Accounting
for Uncertainty in Income Taxes

In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a companys financial
statements in accordance with SFAS No. 109, Accounting for IncomeTaxes. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 is effective for fiscal years beginning after December
15, 2006. We are currently reviewing this new standard to determine its effects, if any,
on its results of operations or financial position.

# SFAS 157  Fair
Value Measurements

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 establishes
a framework for measuring fair value and expands disclosures about fair value
measurements. The changes in current practice resulting from the application of SFAS 157
relate to the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value remeasurement. SFAS 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal years. We
do not believe that the adoption of the provisions of SFAS 157 will have a material impact
on our consolidated financial position and results of operations.

# SFAS 159  The Fair
Value Option for Financial Assets and Financial Liabilities

In February, 2007, the FASB issued
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities  Including an amendment of FASB Statement No. 115, which permits
entities to choose to measure many financial instruments at fair value. The Statement
allows entities to achieve an offset accounting effect for certain changes in fair value
of certain related assets and liabilities without having to apply complex hedge accounting
provisions, and is expected to expand the use of fair value measurement consistent with
the Boards long-term objectives for financial instruments. This Statement is
effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007. The Company is currently reviewing this new standard to determine its
effects, if any, on its results of operations or financial position.

33

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|5.B. | Liquidity
and Capital Resources
|---- | -------------------------------

Since our initial public offering, we
have met our financial requirements primarily through cash generated from operations,
research and development and marketing grants from the Government of Israel, short-term
bank borrowing and our sale of ordinary shares and warrants.

On July 26, 2004, we completed a
private placement transaction in which we issued 5,064,129 of our ordinary shares at $1.40
per share, for aggregate proceeds (before expenses) of approximately $7.1 million. In
connection with this transaction, we also issued warrants to purchase up to 1,266,032 of
our ordinary shares. The warrants are exercisable through July 26, 2009 at an exercise
price of $1.75 per ordinary share.

Capital expenditures were
approximately $0.03 million in 2004, $0.4 million in 2005 and $0.5 million in 2006. These
expenditures were principally for machinery, computers and research and development
equipment purchases. During 2007, we expect to invest additional resources for capital
equipment at the same level as in 2006. We did not have any material commitments for
capital expenditures as of December 31, 2006.

On December 31, 2006, we had
cash, cash equivalents and marketable securities of approximately $6.5 million, compared
with $7.7 million on December 31, 2005. This decrease resulted from the significant
decrease in our revenues and margins.

We believe that cash generated from
operations and our cash, cash equivalents and time deposit balances will be sufficient to
finance our operations and the projected expansion of our marketing and research and
development activities for at least the next 12 months. However, we cannot assure you that
our actual cash requirements will not be greater than we currently expect. In addition,
depending upon our future level of revenues and the strategies that we have adopted, we
may need to raise additional debt or equity capital to meet our working capital needs in
the future.

In January 2007, we arranged for a
line of credit from Bank Hapoalim in the amount of $1 million, which will expire on
January 31, 2008, unless extended with the consent of the bank. The interest rate for the
use of such line of credit will be determined by the bank when we make a withdrawal. As of
March 15, 2007, we did not have any outstanding amount under this line of credit. The
availability of this line of credit is conditioned upon our compliance with the following
financial requirements during the term of the line of credit: (1) a floating charge on all
assets; (2) total shareholders equity will not be less than $3 million and not less
than 35% of the total balance sheet assets; and (3) total working capital, calculated as
trade receivables and inventory less accounts payable, will not be less than $3 million.
Other than the above detailed terms, no other covenants were provided to Bank Hapoalim.
Although we currently are in compliance, if we do not satisfy these conditions in full,
Bank Hapoalim may demand payment of the outstanding amount of the line of credit and may
refuse to grant us further credit.

Net cash used for operating
activities was $1.0 million in 2006. Net cash provided for operating activities was $1.55
million in 2005, and net cash used for operating expenses in 2004 was $4.0 million. Net
cash used in operating activities decreased during 2006 primarily as a result of the
significant decrease in our 2006 sales and the increase in our inventories based on the
Companys sales pipeline and backlog. Net cash provided for investing activities was
$0.04 million in 2006. Net cash used for investing activities was $0.4 million in 2005 and
$0.2 million in 2004. Investments were primarily in fixed assets. Our principal investing
activity in 2006, 2005 and 2004 was the purchase of equipment.

Our contractual and contingent
obligations and commitments on December 31, 2006 primarily consisted of obligations
associated with our future operating lease obligations, our suppliers obligations
and a contingent liability to the Chief Scientist. See Note 5 to our Consolidated
Financial Statements included elsewhere in this annual report. We expect to finance these
contractual commitments with cash on hand and cash generated from operations.

See Item 5.F. for a table of our
material contractual obligations.

Impact of Related Party
Transactions

We have entered into a number of
agreements with certain companies with whom our principal shareholders are affiliated.
Please see Item 7B  Related Party Transactions below for specific
details as to certain other related party transactions entered into by us. We believe that
the terms of these related party transactions are not different in any material respect
than the terms we could receive from unaffiliated third parties. The pricing and/or value
of such transactions were arrived based on arms-length negotiations between the
parties. Our management reviewed the pricing of such transactions and confirmed that they
were not materially different than could have been obtained from unaffiliated third
parties.

34

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Under the Companies Law and recently
issued NASDAQ rules, certain transactions and arrangements with interested parties require
approval by our board of directors and our audit committee and, in some cases, also
require approval by our shareholders.

|5.C. | Research
and Development, Patents and Licenses
|---- | ----------------------------------------------

We believe that our future success will
depend upon our ability to enhance our existing products and solutions and introduce new
commercially viable products and solutions that address the demands of evolving markets
for intelligent infrastructure solutions and, more specifically, enterprise infrastructure
solutions and outside plant qualification and management products on a timely basis. As
part of the product development process, we work closely with current and potential
customers, distribution channels and leaders in certain industry segments to identify
market needs and define appropriate product specifications. Our employees also participate
in numerous industry and standards forums in order to stay informed about the latest
industry developments. As of December 31, 2006, we employed 39 persons in research and
development.

Our gross research and development
expenses were approximately $4.3 million in 2006, $4.2 million in 2005 and $3.8 million in
2004, and (17.2%, 15.1% and 20.4% respectively of sales). To date, all research and
development expenses have been charged to operating expense as incurred. Aggregate
research and development expenses funded by the Chief Scientist were approximately $0.1
million in 2006, $0.1 million in 2005 and $0.3 million. We believe that our investment in
product development activities in 2007 will be at the same level of our expenditures in
2006.

Grants from the Office of
the Chief Scientist

The Government of Israel encourages
research and development projects through the Office of Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the Chief Scientist, pursuant to the Law for the
Encouragement of Industrial Research and Development, 1984, and the regulations
promulgated thereunder, or the R&D Law. Generally, grants from the Chief Scientist
constitute up to 50% of qualifying research and development expenditures for particular
approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to
5% is due on revenues from sales of products and related services that incorporate
know-how developed, in whole or in part, within the framework of projects funded by the
Chief Scientist. Royalty obligations are usually 100% of the dollar-linked amount of the
grant, plus interest. The royalty rate applicable to our programs is 3.5%.

The Israeli government is currently
in the process of formulating a proposed amendment to the royalty regulations
promulgated under the R&D Law. The amendment is expected to include
changes to the royalty rates, which would vary from company to company based on the
amount of its revenues and approval date of its program, up to a rate of 6%, and, as
of 2006, to increase the rate of interest accruing on grants by 1% per
year. The amendment is expected to have retroactive effect from January
1, 2006, although there is no assurance as to whether and when it will
be adopted.

The R&D Law generally requires
that the product developed under a program be manufactured in Israel. However, with the
approval of the Chief Scientist, some of the manufacturing volume may be performed outside
of Israel. Ordinarily, any such approval will be conditioned upon acceleration of the rate
of royalties and an increase in the total amount to be repaid to up to 300% of the grants,
depending on the portion of the total manufacturing volume that is performed outside of
Israel. The R&D Law further permits the Chief Scientist, among other things, to
approve the transfer of manufacturing rights outside Israel in exchange for an import of
different manufacturing rights into Israel, in lieu of the increased royalties. The
R&D Law also allows for the approval of grants in cases in which the applicant
declares that part of the manufacturing will be performed outside of Israel or by
non-Israeli residents and the research committee is convinced that doing so is essential
for the execution of the program.

The R&D Law also provides that
know-how developed under an approved research and development program may not be
transferred to another person or entity in Israel without the approval of the research
committee. Such approval is not required for the sale or export of any products resulting
from such research or development. The R&D Law further provides that the know-how
developed under an approved research and development program may not be transferred to
another person or entity outside Israel, except in certain circumstances and subject to
prior approval. Generally, the Chief Scientist may approve the transfer of Chief
Scientist-funded know-how outside Israel in the following circumstances: (a) the grant
recipient pays to the Chief Scientist a portion of the sale price paid in consideration
for such Chief Scientist-funded know-how (according to certain formulas); (b) the grant
recipient receives know-how from a third party in exchange for its Chief Scientist-funded
know-how; or (c) such transfer of Chief Scientist-funded know-how arises in connection
with certain cooperative in research and development activities.

35

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The R&D Law imposes reporting
requirements with respect to certain changes in the ownership of a grant recipient. The
law requires that the grant recipient and its controlling shareholders and foreign
interested parties notify the Chief Scientist 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. The law further
requires that the new interested party to undertake to the Chief Scientist to comply with
the R&D Law. In addition, the rules of the Chief Scientist may require additional
information or representations in respect of certain such events. For purposes of the
R&D Law, 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 Chief Scientist that it has become an interested party and to sign an undertaking to
comply with the R&D Law.

The
funds available for Chief Scientist grants under the annual budget of the State of Israel
were reduced in 1998, and the Israeli authorities have indicated that the government may
further reduce or abolish Chief Scientist grants in the future. Even if these grants are
maintained, we cannot presently predict the amounts of any future grants that we may
receive. In each of the last ten fiscal years, we have received such royalty-bearing
grants from the Chief Scientist. On December 31, 2006, our contingent liability
including interest to the Chief Scientist in respect of grants received was approximately
$1.1 million.

|5.D. | Trend
Information
|---- | -----------------

We have identified certain trends in
our markets that may affect our future operations, both in the enterprise and carrier
solutions fields.

In the enterprise market we
identified growing demand for infrastructure management solutions through our OEM partners
worldwide and specifically in Asia (mainly in the Peoples Republic of China and India). As
a result our sales through our OEM partners have significantly increased. In addition, in
order to respond to the growing demand for our enterprise solutions we are required to
maintain higher levels of inventories of our enterprise products.

In the carrier market, our carrier products targeted at telcos generally have long sales
cycles. Because of the large size and institutional nature of most telcos and the degree
of governmental regulation to which they are often subject, companies (such as ourselves)
which seek to market their products and services to telcos must often engage in sales
efforts over an extended period of time, sometimes years, and provide a significant level
of education to prospective telco customers regarding the use and benefits of such
products or services. As a result, sales of carrier solutions to telcos require a lengthy
sales cycle from the commencement of marketing efforts to the consummation of an actual
transaction and may involve significant expenditures which may not be offset (on a timely
basis or at any time) by revenues. Delays in the sales cycle of our products could also
result in significant fluctuations in our quarterly and yearly operating results and reduce the
predictability of our earnings.

As described in Item 4.B 
Competitive Position, two products directly compete with our PatchViewsystems: the iTRACS Infrastructure Manager system produced by the iTRACS Corporation,
and the iPatch System produced by Systimax Solutions. We identified growing acceptance of
the infrastructure management concept and a year over year growth of this segment. Such
growing acceptance is also corroborated by the fact that most of the major vendors are
proposing infrastructure management systems based on one our technology or on the
technology of our competitors listed above.

We also have identified a trend of
longer delivery times from subcontractors for certain components of which our products are
comprised. In order to compensate for this trend and in order ensure timely delivery based
on our pipeline and backlog, we must hold larger stocks of these components in our
inventory at any given time.

|5.E. | Off-Balance
Sheet Arrangements
|---- | ------------------------------

We do not have any off-balance
sheet arrangements which are required to be disclosed under this Item 5.E. of Form
20-F.

|5.F. | Tabular
Disclosure of Contractual Obligations
|---- | ---------------------------------------------

The following table summarizes our
material contractual obligations as of December 31, 2006:

36

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|                            | Total
(Dollars in
thousands) | Less than 1 year
(Dollars in
thousands) | 1-3 years
(Dollars in
thousands) | 3-5 years
(Dollars in
thousands)
|--------------------------- | ---------------------------- | --------------------------------------- | -------------------------------- | --------------------------------
|
|
|
|
|Contractual Obligations     |                              |                                         |                                  |                                 
|Leases on Premises          |                              |                                         |                                  | 1.46                            
|Operating Lease Obligations |                              |                                         |                                  | 0.76                            
|Purchase Obligations        |                              |                                         |                                  | 6.10                            
|Total                       |                              |                                         | $                                | 8.32                            

On December 31, 2006, our contingent
liability to the Chief Scientist in respect of grants received was approximately $1.1
million including interest. See Note 5A to our Consolidated Financial Statements included
elsewhere in this annual report. We are only required to repay this liability in the form
of royalties based on revenues derived from products developed with funding from these
grants.

|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------

|6.A. | Directors
and Senior Management
|---- | -------------------------------

The following table sets forth, as of
March 1, 2007, the name, age and position of each of our directors and executive officers:

|Name                           | Age |  | Position                                     
|------------------------------ | --- |  | ---------------------------------------------
|
|
|
|
|Yehuda Zisapel (3)             | 65  |  | Chairman of the Board of Directors           
|Doron Zinger                   | 53  |  | President and Chief Executive Officer        
|Liora Katzenstein (1)(2)(3)    | 51  |  | Director                                     
|Dr. Hagen Hultzsch (1)(2)(3)   | 67  |  | Director                                     
|Israel Frieder (1)(2)(3)(4)(5) | 57  |  | Director                                     
|Dr. Meir Barel (1)(2)(5)       | 56  |  | Director                                     
|Simona Green                   | 39  |  | Vice President Finance                       
|Avi Kovarsky                   | 50  |  | Senior Vice President Sales                  
|Guy Shapira                    | 37  |  | Vice President Research and Development      
|Rafi Ben-Asher                 | 63  |  | Vice President Operations                    
|Zafi Shatz                     | 47  |  | Vice President Human Resources               
|Hila Hubsch                    | 39  |  | General Counsel and Corporate Secretary      
|Oded Nachmoni                  | 40  |  | Vice President Marketing and Product Strategy
|Ely Cohen                      | 48  |  | Vice President Business Development          

(1) Independent Director.(2) Outside Director.(3) Member of the Audit Committee.(4) Member of the Share Incentive Committee.(5) Member of the Compensation and Nominating Committee.

Mr. Yehuda Zisapel is a
co-founder of our company and has served as our Chairman of the Board since our inception
in 1989 and is also a director of RiT Technologies, Inc. Mr. Zisapel is also a founder and
a director of RAD Data Communications Ltd. (RAD), a leading worldwide data
communications company headquartered in Israel, and Bynet Data Communications Ltd.
(BYNET) and its subsidiaries. Mr. Zisapel is also the Chairman of the Board of
Directors of RADWARE Ltd., and a director of other companies in the RAD-BYNET Group,
including SILICOM Ltd., and several private companies. We have certain dealings with
companies belonging to the RAD BYNET Group. See Item 7.B.  Related Party
Transactions. Mr. Zisapel has B.Sc. and M.Sc. degrees in Electrical Engineering from
the Technion, Israel Institute of Technology (Technion) and an M.B.A. degree
in Business Administration from Tel Aviv University.

Mr. Doron Zinger joined us in June 2004 as our President and CEO. Mr. Zinger is
          also a director of RiT Technologies, Inc. Mr. Zinger has a 25-year track record
          of building and managing Israeli high-tech companies. Prior to joining us, Mr.
          Zinger served as a consultant to a number of Israeli high-tech companies and
          venture capital firms: Giza VC (Venture partner), Pitango VC. (Consulting
          Services), Hyperion (Consulting Services), Iamba (Advisory Board  member),
          Cellot (Board member), V-Secure (Board member) and TTI (Board Member).
          From 1997-2000, Mr. Zinger served as CEO of the pioneering VoIP company VocalTec
          (NASDAQ: VOCL).  From 1980-1997, he served in a variety of positions at ECI
          Telecom (NASDAQ: ECIL), Israels largest telecommunications equipment
          company, including heading up its DCME strategic business unit
          and serving as Senior Vice President and Chief Operating Officer
          responsible for more than 2,000 employees.  He currently serves as a
          director on the board of TTI Team Telecom International Ltd. Mr. Zinger holds an
          M.B.A. from Tel Aviv University and a B.Sc. in Electrical Engineering from the
          Technion.

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Prof.           Liora Katzensteinhas served as a director since February 2003. Prof.
          Katzenstein divides her time between the worlds of business and academia. Her
          experience as Associate Dean of TISOM (Tel Aviv International School of
          Management), the first private international business school in Israel, led
          directly to her initiative in bringing Swinburne University of Technologys
          renowned Entrepreneurship and Innovation program to Israel in the framework of
          ISEMI (Institute for the Study of Entrepreneurship and Management of
          Innovation), where she serves as Founder and President since 1996. As one of the
          pioneers of entrepreneurial education in Israel and worldwide, she has published
          many articles and lectured on this and related subjects at most of Israels
          prestigious universities and management institutions as well as at major public
          organizations and private technology based corporations. In addition, Prof.
          Katzenstein is a member of the Board of Directors of several companies including
          Clal Insurance, Degem Ltd., Polysac (Israel), RADWARE (NASDAQ: RDWR) and
          RADVision (the latter two companies are part of the RAD BYNET Group).She
          holds an MALD in Law and Diplomacy from Tufts University, Boston and a Visiting
          Doctoral Scholarship at the Harvard Graduate School of Business Administration,
          and a Ph.D. in International Economics from the University of Geneva.

Dr.
          Hagen Hultzsch has served as a director since January 2002. Dr. Hultzsch was
          originally a nuclear physicist with computing and telecommunications background
          and has been a Member of the Board of Management of Deutsche Telekom responsible
          for the Technology and Services Division since 1993. He also served Volkswagen
          AG as Corporate Executive Director Organization and Information Systems,
          reporting to the CEO from 1988 to 1993. Prior to that, he worked for EDS,
          Electronic Data Systems as their Director of the Technical Services Group in
          Germany starting in 1985. From 1977, he was head of the Computer Center at the
          Heavy Ion Research Center in Darmstadt, Germany. He currently serves on several
          boards as a non-executive director, including the chair of the Supervisory
          Boards of XTraMind Technologies and T-Systems Solutions for Research, a member
          of the boards of SCM-Microsystems, TranSwitch Corporation and Radware Ltd. and
          as a member of the Supervisory Boards of Authentidate International AG and as
          well as of the University Clinics Bonn and Dresden. Dr. Hultzsch received his
          Ph.D. in physics from Johannes Gutenberg University in Mainz, Germany.

Mr.
          Israel Frieder has served as a director since January 2002. Mr. Frieder
          is the Chairman and CEO of Israel Technology Acquisition Corp Inc. and
          Chairman of A.A. Pearl Inv. and serves as director and provides management
          services at several companies including R.R. Satellites Ltd.,
          Teledata-Networks and Cellvine Ltd. Mr. Frieders previous
          positions include serving as the Chief Executive Officer of Kardan
          Communications Ltd., Corporate Vice President of Business Development &
          Strategic Planning of ECI Telecom, the President of ECI Telecom, Inc., and the
          President of Network Systems of Tadiran Telecommunication Ltd. While at Tadiran,
          Mr. Frieder served as a director of Tadiran Telecommunications Canada, Inc., ECI
           Tadiran Synchronous System Limited Partnership, Tadiran
          Telecommunications Public Switching Ltd., Tadiran Telecom (Kunming) Co. Ltd.
          (Joint Venture), Tadiran Telecommunication UK Ltd., and TNN  Tadiran
          Newbridge Networks Ltd. Mr. Frieder also served as the President of Elisra
          Tadiran, Public Switching Ltd. and served as a director of Motorola Tadiran
          Cellular Ltd. (PelePhone). Mr. Frieder holds a B.Sc. in Electrical Engineering
          from the Technion and an M.B.A. in Operational Research from the Hebrew
          University in Jerusalem.

Dr.
          Meir Barel has served as a director since February 2004. Dr. Barel is the
          principal managing partner of STAR Ventures and the Vice Chairman of Alvarion
          Ltd. Dr. Barel has been active for more than 20 years in venture capital
          investments in Israel, the United States, Germany and other European countries.
          From 1986 until 1992, Dr. Barel served as investment manager and later managing
          partner of TVM Techno Venture Management GmbH & Co. KG, one of the largest
          venture capital companies in Germany. Dr. Barel established STAR at the
          beginning of 1992 with the objective of actively investing in Israel-related
          companies. Since then, STAR has made more than 180 investments and had over 55
          exits in the form of IPO or sale to other corporations. Dr. Barel holds a
          masters degree and a doctorate (Dr. Eng.) in Electrical Engineering from
          the Department of Data Communication at the Technical University in Aachen,
          Germany.

Ms.
          Simona Greenjoined us in April 2000 as the Company Controller. In October
          2002, Ms. Green was appointed Financial Director of RiT. In 2004, Ms. Green was
          appointed Vice President Finance. Ms. Green was appointed a director of RiT
          Technologies, Inc. as of May 2004. Prior to joining us, Ms. Green worked for
          seven years at Somekh Chaikin, Certified Public Accountants (Israel), a member
          firm of KPMG International.Ms. Green holds a BBA in business
          administration and accounting from the School of Business Administration of the
          College of Management.

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Mr.
          Avi Kovarsky joined us in 1997 as Senior Marketing Manager. In 1999, Mr.
          Kovarsky became Vice President, Marketing and Sales, Data Communications
          Systems. In 2002, he became Senior Vice President Sales. Prior to joining us,
          Mr. Kovarsky was Software Sales Manager at Digital Corp. for seven years. Mr.
          Kovarsky holds M.Sc. degrees in Computer Science and Civil Engineering from the
          Technion.

Mr.
          Guy Shapira joined us in 1999 as a Project Manager in the telecommunications
          and data communications fields. In April 2000, he was appointed as Vice
          President of Research and Development. In his ten years of experience prior to
          joining us, Mr. Shapira held senior research and development positions with the
          Israeli Ministry of Defense in the field of telecommunications. Mr. Shapira
          holds a B.Sc. degree in Electrical Engineering from Tel Aviv University.

Mr.
          Oded Nachmoni joined us as Senior Director of Product Management in June
          2005. Prior to joining us, Mr. Nachmoni held positions of Director of Product
          Management, Business Development and Pre-Sales at ECtel Ltd. Previously, he
          served as Senior Vice President of Marketing and Sales at NetEye. Prior to that,
          Mr. Nachmoni filled a number of product management & system engineering
          positions at Telrad and the Israeli Ministry of Defense. Mr. Nachmoni holds a
          B.Sc. in Electrical Engineering from the Technion and an M.B.A., from Tel Aviv
          University.

Mr.
          Ely Cohen joined us in 2001 as Director of Strategy and in 2003 gained
          responsibility for the Product Management of the PV4E solution.  In
          December 2004, Mr. Cohen was appointed Senior Director, Business
          Development. Prior to joining us, Mr. Cohen served as Director of Marketing at
          the pioneering VoIP company VocalTec (NASDAQ: VOCL).  In addition, Mr.
          Cohen has spent over ten years in enterprise and carrier network management in
          various marketing and product positions at Lannet (AVAYA), TTI Telecom (NASDAQ:
          TTIL) and Telrad. Mr. Cohen holds a B.A. in Computer Science from Queens
          College, NY.

Mr.
          Raphael (Rafi) Ben Asher joined us in November 2005 as Vice President
          Operations.  Prior to joining us, Mr. Ben Asher managed Oriba Consulting, a
          company that advised hi-tech companies in Israel in the area of operations,
          manufacturing, cost reduction and value engineering.  Prior to that, Mr.
          Ben Asher served as Senior Vice President Operations of ECI Telecom Ltd.
          (NASDAQ: ECIL).  Mr. Ben Asher holds a B.Sc. in Electricity from the
          Technion.

Ms.
          Zafi Shatzjoined us in June 2006 as Vice President Human Resources. Prior
          to joining us, Ms. Shatz held the position of Human Resources Director at
          Airspan Networks for four years and prior to that served as Human Resources
          Director in Flexlight Networks and Teva Pharmaceuticals. Ms. Shatz has a
          bachelors degree in Psychology & Sociology from Tel Aviv University
          where she also studied towards M.Sc. degree in Organizational Behavior in the
          Tel Aviv University.

Ms.
          Hila Hubsch joined us in August 2004 as the General Counsel and Corporate
          Secretary. Prior to joining us, she was the General Counsel and Corporate
          Secretary of On Track Innovations Ltd. for four years and prior to that served
          as the Corporate Secretary of Rotem Amfert Negev Ltd., a subsidiary of ICL. Ms.
          Hubsch has a bachelors degree in law from Tel-Aviv University, is a member
          of the Israeli Bar and has an M.B.A. from Bradford University in Israel.

|6.B. | Compensation
|---- | ------------

The aggregate direct remuneration
paid to all our directors and officers as a group (16 persons) for the year ended
December 31, 2006 was approximately $1,148,000 compared with $1,341,00 in 2005 (the
group consisted of 16 persons in 2005). This includes amounts expended by us for
automobiles made available to our officers and other fringe benefits commonly reimbursed
or paid by companies in Israel and approximately $213,000 which was set aside or accrued
to provide retirement annuities or similar benefits. The amount does not include any
expenses (including business travel, professional and business association dues and
expenses) reimbursed to officers. Our directors (who are not also officers) received no
compensation in 2006, other than the options granted to such directors under our
Directors Share Incentive Plan or the RiT Technologies Ltd. 2003 Share Option Plan
described below. See Item 7  Major Shareholders and Related Party
Transactions.

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In 2006, we granted options to
purchase an aggregate amount of ordinary shares to our officers under the 2003 Plan at
exercise prices ranging between $1.11 and $1.86 per share and no options were granted to
our directors. The options expire on the tenth anniversary of the date of grant.

The following table summarizes
information about all employee and non-employee stock options outstanding as of March 15,
2007:

| |           |  | Options unexercised
| | --------- |  | -------------------
|
|
|
|
| | 1.11-1.60 |  |                    
| | 1.61-1.86 |  |                    
| | 2.58-2.75 |  |                    
| | 2.82      |  |                    
| | 3.15      |  |                    
| | 3.69      |  |                    
| | 7.38      |  |                    
| |           |  |                    
| |           |  |                    

The aggregate number of options
outstanding and exercisable within 60 days held by all our directors and officers as a
group as of December 31, 2006, was 397,834 at exercise prices that range between $1.11 to
$3.15 per ordinary share and with expiration dates that range between January 2007 and
August 2016.

We believe that no adverse tax
consequences will result to us in connection with such grant or exercise of the options.

|6.C. | Board
Practices
|---- | ---------------

Our Articles of Association provide
that the board of directors shall consist of not less than 3 nor more than 7 directors.
Currently, our board of directors consists of 5 members.

According to the Israeli Companies
Law and our Articles of Association, the oversight of 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 determines,
including the grant of security interests in all or any part of our property.

Our directors are elected by the
shareholders, except in certain cases where directors are appointed by the board of
directors, such as filling vacancies, and their appointment is subject to ratification by
the shareholders at the next annual or extraordinary meeting of shareholders. Except for
external directors (as described below), directors elected by the shareholders hold office
until the next annual meeting of shareholders, which is required to be held at least once
during every calendar year and not more than 15 months after the last preceding meeting.
Directors may be removed earlier from office by resolution passed at a general meeting of
our shareholders.

Our Articles of Association allow for
a director to appoint another person who is not a director as an alternate for himself.
Under the Israeli Companies Law, an external director may not appoint an alternate
director, except in very limited circumstances. Unless the appointing director limits the
period or scope of such appointment, it shall be for a period that will expire upon the
expiration of the appointing directors term, and shall be for all purposes. Under
the Israeli Companies Law, a director may serve as an alternate director on any committee
of the board of directors of which he or she is not already a member.

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External Directors;
Independent Directors

Under the Companies Law, companies
incorporated under the laws of Israel whose shares are listed for trade on a stock
exchange or have been offered to the public in or outside of Israel, are required to
appoint at least two external directors. The Companies Law provides that a person may not
be appointed as an external director 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 external 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 financial officer and any officer of the company who is directly subject to the
chief executive officer.

Pursuant to an amendment to the
Companies Law, effective as of April 19, 2006, (1) each external director
must have either accounting and financial expertise or
professional qualifications (as such terms are defined in regulations
promulgated under the Companies Law) and (2) at least one of the external directors must
have accounting and financial expertise. These requirements will apply to
us upon the election of one or more external directors.

No person can serve as an external
director if the persons position or other business creates, or may create, conflict
of interests with the persons responsibilities as an external director or may
otherwise interfere with the persons ability to serve as an external director. Until
the lapse of two years from termination of office, a company may not engage an external
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.

External 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 of non-controlling shareholders voted against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The initial term of an external
director is three years and he or she may be reelected to one additional term of three
years. Thereafter, our external directors may be reelected by our shareholders for
additional periods of up to three years each only if the audit committee and the board of
directors confirm that, in light of the external directors expertise and special
contribution to the work of the board of directors and its committees, the reelection for
such additional period is beneficial to the Company. External directors may be removed
from office only by the same percentage of shareholders as is required for their election,
or by a court, only if the external directors cease to meet the statutory qualifications
for their appointment or if they violate their duty of loyalty to the company. Each
committee of a companys board of directors is required to include at least one
external director, and the audit committee is required to include all the external
directors. Currently, Israel Frieder and Hagen Hultzsch qualify as external directors.

An external director is entitled to
consideration and to reimbursement of expenses, only as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with his service as an external
director. Nevertheless, the grant of an exemption from liability for breach of duty of
care toward the company, an undertaking to indemnify, indemnification or insurance
pursuant to the provisions of the Companies Law shall not be deemed as compensation.

Our ordinary shares are listed for
quotation on the NASDAQ Capital Market and we are subject to the rules of the NASDAQ
Capital Market applicable to listed companies. Under NASDAQs rules a majority of the
members of our board of directors are required to be independent, as defined
thereunder. We currently satisfy this requirement as Israel Frieder, Hagen Hultzsch, Prof.
Liora Katzenstein and Dr. Meir Barel were determined by our board to qualify as
independent directors under NASDAQs rules.

41

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Committees

Audit Committee

Pursuant to applicable SEC and NASDAQ
rules, we are required to have an audit committee of at least three members, each of whom
must satisfy the independence requirements of the SEC and NASDAQ. In addition, pursuant to
NASDAQs rules, all of the members of the audit committee must be financially
literate and at least one member must possess accounting or related financial management
expertise. The audit committee must also have a written charter specifying the
committees duties and responsibilities, which include, among other things, the
selection and evaluation of our independent auditors.

Under the Companies Law, our board of
directors is required to appoint an audit committee, which must be comprised of at least
three directors and include all of the external 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 under
the Companies Law is to examine flaws in the business management of the company, including
in consultation with the internal auditor and the companys independent accountants,
and to suggest remedial measures to the board. Pursuant to NASDAQs corporate
governance rules, all related party transactions must be approved by the audit committee
(or another independent body of the board of directors). In addition, as more fully
described under Item 10.B. below, the approval of the audit committee is required under
the Companies Law to effect certain actions and transactions with office holders and
interested parties. The audit committee may not approve such actions or transactions
unless at the time of such approval the two external directors are serving as members of
the audit committee and at least one of them is present at the meeting at which such
approval is granted.

Our audit committee consists of Liora
Katzenstein, Israel Frieder and Dr. Hagen Hultzsch and satisfies the requirements of the
Companies Law and the SEC and NASDAQ rules. Our board of directors has determined that
Israel Frieder is an audit committee financial expert, as defined by applicable SEC
regulations, and that he also has the requisite financial expertise, as defined under the
NASDAQ rules. Our audit committee adopted a written charter specifying the
committees duties and responsibilities, which include, among other things, the
selection and evaluation of our independent auditors.

Compensation and
Nominating Committee

Pursuant to applicable NASDAQ rules,
director nominees must be selected or recommended for the boards selection either by
a nominations committee composed solely of independent directors or by a majority of
independent directors, subject to certain exceptions. Similarly, the compensation payable
to a companys chief executive officer and other executive officers must be approved
either by a majority of the independent directors on the board or a compensation committee
comprised solely of independent directors, subject to certain exceptions. Our compensation
and nominating committee consists of Meir Barel and Israel Frieder and satisfies the
requirements of the NASDAQs rules. On July 19, 2005, our board of directors approved
a written charter specifying the nominating committees duties and responsibilities.

Share Incentive Committee

Our share incentive committee
administers our share incentive plan and option grants. However, under the Israeli
Companies Law, the Share Incentive Committee may only advise the Board of Directors with
regard to the grant of options, and the actual grant to directors and officers (as opposed
to other employees) is carried out by the Board of Directors. Our share incentive
committee consists of Yehuda Zisapel and Israel Frieder.

Internal Auditor

Under the Companies Law, the board of
directors of a public company must also appoint an internal auditor proposed by the audit
committee.  The duty of the internal auditor is to examine, among other things,
whether the companys conduct complies with applicable law and orderly business
procedure.  Under the Companies Law, the internal auditor may not be an interested
party, an office holder, or an affiliate, or a relative of an interested party, an office
holder or affiliate, nor may the internal auditor be the companys independent
accountant or its representative. Our internal auditor is the accounting firm of Fahn
Kanne Control Management Ltd.

42

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External Auditor

Somekh Chaikin Certified Public
Accountants (Israel), a member of KPMG International, independent registered public
accounting firm, serves as our external auditor.

|6.D. | Employees
|---- | ---------

As of December 31, 2006, we had 128
employees worldwide, of which 50 were employed in sales and marketing, 39 in research and
development, 23 in operations and 16 in management. As of December 31, 2006, 110 of our
employees were based in Israel, Six employees were based at our sales office in Russia,
Four employees were based at our sales office in China and eight employees were based at
our wholly-owned United States subsidiary, RiT Technologies, Inc.

As of December 31, 2005, we had 142
employees worldwide, of which 47 were employed in sales and marketing, 47 in research and
development, 28 in operations and 20 in management. As of December 31, 2005, 128 of our
employees were based in Israel, five employees were based at our sales office in Russia,
one employee was based in our office in Germany and eight employees were based at our
wholly-owned United States subsidiary, RiT Technologies, Inc.

As of December 31, 2004, we had 132
employees worldwide, of which 42 were employed in sales and marketing, 44 in research and
development, 30 in operations and 16 in management. As of December 31, 2004, 119 of our
employees were based in Israel, five employees were based at our sales office in Russia,
one employee was based in our office in Germany and seven employees were based at our
wholly-owned United States subsidiary, RiT Technologies, Inc.

We consider our relations with our
employees to be excellent and have never experienced a labor dispute, strike or work
stoppage. Substantially all of our employees have employment agreements and none is
represented by a labor union. Typically, the employment agreements provide for employees
in Israel to receive an insurance policy known as managers insurance and
a savings fund for professional enrichment. We also provide employees in Israel with
long-term disability insurance.

We maintain an incentive plan for our
marketing and sales personnel, pursuant to which monthly remuneration is based, in part,
upon sales and margin quotas. In addition, marketing and sales personnel occasionally
receive bonuses for special achievements.

Our Israeli employees are not party
to any collective bargaining agreement. However, we are subject to certain provisions of
collective bargaining agreements among the Government of Israel, the Histadrut (General
Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists Association) that are applicable to our Israeli
employees by virtue of expansion orders of the Israeli Ministry of Labor and Welfare. In
addition, Israeli labor laws are applicable to all of our employees in Israel. Those
provisions and laws principally concern the length of the work day, minimum daily
wages for workers, procedures for dismissing employees, determination of severance pay and
other conditions of employment. See Note 4 to the Consolidated Financial Statements
included elsewhere in this annual report.

Pursuant to Israeli law, we are
legally required to pay severance benefits upon the retirement or death of an employee or
the termination of employment of an employee without due cause. The Company partially
funds this liability by the purchase of managers insurance policies. The current
redemption value of such insurance policies is included in the balance sheet as assets
held for severance benefits. This policy provides a combination of savings plans,
insurance and severance pay, if legally entitled, upon termination of employment. The
remaining part of this obligation is presented in our balance sheet as provision of
severance pay.

All Israeli employers, including us,
are required to provide certain increases as partial compensation for increases in the
Consumer Price Index. The specific formula for such increases varies according to
agreements reached among the Government of Israel, the Manufacturers Association and
the Histadrut. Israeli employees and employers also are required to pay pre-determined
sums (which include a contribution to national health insurance) to the Israel National
Insurance Institute, which provides a range of social security benefits.

|6.E. | Share
Ownership
|---- | ---------------

The following table details the
number of our ordinary shares beneficially owned (including the shares underlying options
or warrants held by such person that are exercisable within 60 days), by members of our
senior management, as of March 1, 2007:

43

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|Name                                            | Title/Office | No. of
Ordinary
Shares | As a % of Outstanding Ordinary
Shares           
|----------------------------------------------- | ------------ | ---------------------- | ------------------------------------------------
|
|
|
|
|Yehuda Zisapel                                  |              |                        | Chairman of the Board of Directors              
|                                                |              |                       
|Doron Zinger                                    |              |                        | CEO and President                               
|                                                |              |                       
|Simona Green                                    |              |                        | Vice President Finance                          
|                                                |              |                       
|Avi Kovarsky                                    |              |                        | Senior Vice President Sales                     
|                                                |              |                       
|Guy Shapira                                     |              |                        | Vice President Research and Development         
|                                                |              |                       
|Rafi Ben-Asher                                  |              |                        | Vice President Operations                       
|                                                |              |                       
|Zafi Shatz                                      |              |                        | Vice President Human Resources                  
|                                                |              |                       
|Hila Hubsch                                     |              |                        | General Counsel and Corporate Secretary         
|                                                |              |                       
|Oded Nachmoni                                   |              |                        | Vice President of Marketing and Product Strategy
|                                                |              |                       
|Ely Cohen                                       |              |                        | Vice President of Business Development          
|                                                |              |                       
|Prof. Liora Katzenstein                         |              |                        | Director                                        
|                                                |              |                       
|Hagen Hultzsch                                  |              |                        | Director                                        
|                                                |              |                       
|Israel Frieder                                  |              |                        | Director                                        
|                                                |              |                       
|Meir Barel                                      |              |                        | Director                                        
|                                                |              |                       
|All directors and executive officers as a group |              |                        |                                                 

* Less than 1%

(1)
          The aggregate number of options outstanding and exercisable within 60 days that
          are held by Yehuda Zisapel as of March 1, 2007 was 60,000 at exercise prices
          that range between $1.15 to $2.82 per ordinary share and expiration dates that
          range between January 2010 and December 2014.

(2)
          The aggregate number of options outstanding and exercisable within 60 days that
          are held by Meir Barel as of March 1, 2007 was 30,000 with an exercise price of
          $2.82 per ordinary share with an expiration date of December 2014.

Share Option Plans

In July 2003, we adopted the RiT
Technologies Ltd. 2003 Share Option Plan, or the 2003 Plan. The purpose of the 2003 Plan
is to provide incentives to our employees, directors, consultants and contractors, or any
subsidiary thereof, by providing them with opportunities to purchase our ordinary shares.
The 2003 Plan is administered by the Share Incentive Committee. The exercise price and
vesting schedule of options granted under the 2003 Plan are recommended by the Share
Incentive Committee and approved by the Board of Directors, as specified in the grant
letter issued by us to the grantee. Unless otherwise determined by the Board of Directors,
the options fully vest on the third anniversary following their grant, vesting in three
equal shares annually. We have reserved 3,236,666 ordinary shares for the grant of options
under the 2003 Plan, of which we have as of March 15, 2007 outstanding 1,457,768 options
to purchase ordinary shares at a weighted exercise price of $1.88 per ordinary share.

44

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In November 2003, we adopted an
Option Exchange Plan pursuant to which our and our subsidiaries employees and
consultants were given the opportunity to waive their rights to all of their unvested
options which were outstanding on the date of exchange, and to receive in exchange new
options pursuant to our 2003 Plan at an exchange ratio of 1:1. The Option Exchange Plan
was implemented in order to allow the employees and consultants to benefit from more
favorable tax treatment offered under the 2003 Plan as a result of certain changes in
Israeli tax law. Each new option continues to vest in accordance with the same vesting
schedule that was in effect for the related cancelled option. The exercise price per share
for each new option is equal to the exercise price per share of the related cancelled
option and the expiration date of each new option takes into account the expiration date
that was set with respect to the related cancelled option. We have exchanged options to
purchase 452,625 ordinary shares under the Option Exchange Plan.

In addition, in May 1999, we adopted
the RiT Technologies, Inc. Employee Stock Option Plan, or the RiT Inc. Plan, pursuant to
which options to purchase our ordinary shares may be granted to the employees of RiT
Technologies, Inc. The RiT Inc. Plan is administered by the Board of Directors of RiT
Technologies, Inc. which designates the optionees, dates of grant and the exercise price
of the options. We have reserved 216,000 ordinary shares for the grant of options under
the RiT Inc. Plan, of which we have outstanding as of March 15, 2007, 107,833 options to
purchase ordinary shares at a weighted exercise price of $1.89 per ordinary share.

We still have 60,000 outstanding
options that were granted under the RiT Directors Share Incentive Plan (1997), or
the Directors Plan, which we adopted June 1997.

In 2006, we granted options to
purchase an aggregate amount of ordinary shares to our officers under the 2003 Plan at
exercise prices ranging between $1.11 and $1.86 per share and no options were granted to
our directors. The options expire on the tenth anniversary of the date of grant.

The following table summarizes
information about all employee and non-employee stock options outstanding as of March 15,
2007:

| |           |  | Options unexercised
| | --------- |  | -------------------
|
|
|
|
| | 1.11-1.60 |  |                    
| | 1.61-1.86 |  |                    
| | 2.58-2.75 |  |                    
| | 2.82      |  |                    
| | 3.15      |  |                    
| | 3.69      |  |                    
| | 7.38      |  |                    
| |           |  |                    
| |           |  |                    

The aggregate number of options
outstanding and exercisable within 60 days held by all our directors and officers as a
group as of December 31, 2006, was 397,834 at exercise prices that range between $1.11 to
$3.15 per ordinary share and with expiration dates that range between January 2007 and
August 2016.

|ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- |  | -------------------------------------------------

|7.A. | Major
Shareholders,
|---- | -------------------

We are not directly or indirectly
owned or controlled by another corporation or by any foreign government.

The following table sets forth
certain information regarding the beneficial ownership of our ordinary shares as March 1,
2007 (except as noted below) by each person who is known by us to own beneficially more
than 5% of our outstanding ordinary shares. Except as otherwise noted and pursuant to
applicable community property laws, each person or entity named in the table has sole
voting and investment power with respect to all ordinary shares listed as owned by such
person or entity. Each ordinary share is entitled to one vote per share and none of our
major shareholders has any different voting rights than any other shareholder. For
additional information regarding ownership by all officers and directors, see Item
6.E.  Share Ownership.

45

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|Name                                     | Number of Ordinary Shares
Owned Excluding Options and
Warrants | Number of Ordinary
Shares Beneficially
Owned | Number of Ordinary Shares
Beneficially Owned as Percent
of Total Shares1
|---------------------------------------- | -------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------------
|
|
|
|
|Yehuda Zisapel2                          |                                                                |                                              |                                                                         
|Zohar Zisapel3                           |                                                                |                                              |                                                                         
|Dr. Meir Barel4                          |                                                                |                                              |                                                                         
|Austin W. Marxe and David M. Greenhouse5 |                                                                |                                              |                                                                         

---

|(1) | Based
on 14,658,573 ordinary shares outstanding as of March 1, 2007.Beneficial
               ownership is determined in accordance with the rules of the SEC and
generally                includes voting or investment power with respect to securities.
Ordinary shares                relating to options or warrants currently exercisable or
exercisable within 60                days of the date of this table are deemed
outstanding for computing the                percentage of the person holding such
securities but are not deemed outstanding                for computing the percentage of
any other person.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
1,335,650 ordinary shares held of record by Retem Local Networks Ltd.,                of
which Yehuda Zisapel is the beneficial owner.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
403,571 ordinary shares and warrants to purchase 100,893 shares held of
               record by Lomsha Ltd., of which Zohar Zisapel is the beneficial owner.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | As
of December 31, 2006, based on a Schedule 13G/A filed by Dr. Meir Barel with
               the SEC on January 22, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(5) | As
of December 31, 2006, based on a Schedule 13G/A filed by Austin W. Marxe and
               David M. Greenhouse with the SEC on January 10, 2007. The Schedule 13G/A
               indicates that Messrs. Marxe and Greenhouse share voting and dispositive
power                as to (i) 1,285,723 ordinary shares and 276,800 warrants owned
by Special                Situations Private Equity Fund, L.P., (ii) 1,174,300
ordinary shares and                232,500 warrants owned by Special Situations
Technology Fund II, L.P. and                (iii) 218,220 ordinary shares and 44,275
warrants owned by Special                Situations Technology Fund, L.P. Messrs. Marxe
and Greenhouse are members of MG                Advisers L.L.C., the general partner of
and investment adviser to Special                Situations Private Equity Fund, L.P.,
and of SST Advisers, L.L.C., the general                partner of and investment adviser
to Special Situations Technology Fund, L.P.                and Special Situations
Technology Fund II, L.P.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Record Holders

Based on a review of the information
provided to us by our transfer agent, as of March 15, 2007, there were 24 holders of
record of our ordinary shares, of which record holders, holding approximately 25% of our
ordinary shares, had registered addresses 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 (including one U.S. nominee company, CEDE & Co.).

We are not aware of any arrangements
of the operation of which may at a subsequent date result in a change of our control.

|7.B. | Related
Party Transactions
|---- | --------------------------

The RAD-BYNET Group

Yehuda and Zohar Zisapel are our
founders and principal shareholders. Yehuda Zisapel is a director and the Chairman of the
Board of Directors. Zohar Zisapel was a director until November 30, 2003. One or both of
Yehuda Zisapel and Zohar Zisapel are also founders, directors and principal shareholders
of several other companies which, together with us and their respective subsidiaries and
affiliates, are known as the RAD-BYNET Group. See Item 6  Directors,
Senior Management and Employees.

Members of the RAD-BYNET Group, each
of which is a separate legal entity, are actively engaged in designing, manufacturing,
marketing and supporting data communications and telecommunications products, none of
which is currently the same as any product of ours.  One or both of Yehuda Zisapel
and Zohar Zisapel are also founders, directors and principal shareholders of several other
real estate, services, holdings and pharmaceutical companies. The above list does not
constitute a complete list of the investments of Yehuda and Zohar Zisapel.

46

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Certain companies in the RAD-BYNET
Group provide certain services to us. We reimburse each of these companies for their costs
in providing such services. In 2006, these services accounted for approximately $0.5
million. Some of these services are obtained through tenders to suppliers for the
RAD-BYNET group as a whole, allowing us to benefit from the purchasing and bargaining
power of a larger entity.

We also lease office, manufacturing
and warehousing premises in Tel Aviv from an affiliate of our principal shareholders,
Yehuda and Zohar Zisapel. The aggregate annual payments in 2006 to these related parties
were approximately $420,000. A United States subsidiary of RAD provides administrative
services and leases premises in Mahwah, New Jersey, to RiT Technologies, Inc. The annual
payments in 2006 were approximately $44,000.

We have a non-exclusive distribution
arrangement with Bynet Applications for the distribution of our enterprise solutions in
Israel. In 2006, sales through this arrangement were approximately $1.0 million.

We believe that the terms of the
transactions in which we have engaged and are currently engaged with other members of the
RAD-BYNET Group are beneficial to us and no less favorable to us than terms which might be
available to us from unaffiliated third parties. All transactions and arrangements (or
modifications of existing ones) with members of the RAD-BYNET Group in which our Office
Holders have a personal interest or which raise issues of such Office Holders
fiduciary duties require approval by a majority of the disinterested members of the Board
of Directors and by the Audit Committee and, in certain circumstances, our shareholders,
as required under the Companies Law.

|7.C. | Interests
of Experts and Counsel
|---- | --------------------------------

Not applicable.

|ITEM 8. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

|8.A. | Consolidated
Statements and Other Financial Information
|---- | -------------------------------------------------------

See Item 18.

Export Sales

See Item 4.B.2
Sales.

Legal Proceedings

We are not a party to any material
litigation, either in Israel or abroad, and are not aware of any pending or threatened
litigation that would have a material adverse effect on us or our business.

Dividend Policy

We have never declared or paid any
cash dividends on our ordinary shares and we do not anticipate paying any cash dividends
on our ordinary shares in the future. We currently intend to retain all future earnings to
finance our operations and to expand our business. Any future determination relating to
our dividend policy will be made at the discretion of our board of directors and will
depend on a number of factors, including future earnings, capital requirements, financial
condition and future prospects and other factors the board of directors may deem relevant.

|8.B. | Significant
Changes
|---- | -------------------

No significant change has occurred
since the date of the annual financial statements, and/or since the date of the most
recent interim financial statements, if any, included in this document.

47

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|ITEM 9. |  | THE OFFER AND LISTING
|------- |  | ---------------------

|9.A. | Share
History
|---- | -------------

The following table sets forth, for
the periods indicated, the high and low sales prices of our ordinary shares as reported on
NASDAQ (in dollars).

|                    | High | Low
|------------------- | ---- | ---
|
|
|
|
|2002 Full Year      |      |    
|2003 Full Year      |      |    
|2004 Full Year      |      |    
|2005 Full Year      |      |    
|First Quarter 2005  |      |    
|Second Quarter 2005 |      |    
|Third Quarter 2005  |      |    
|Fourth Quarter 2005 |      |    
|2006 Full Year      |      |    
|First Quarter 2006  |      |    
|Second Quarter 2006 |      |    
|Third Quarter 2006  |      |    
|Fourth Quarter 2006 |      |    
|September 2006      |      |    
|October 2006        |      |    
|November 2006       |      |    
|December 2006       |      |    
|January 2007        |      |    
|February 2007       |      |    

On March 28, 2007, the last reported
sale price of our ordinary shares on the NASDAQ was $1.69 per share.

Effective January 2004, our ordinary shares
were transferred from the NASDAQ Global Market (formerly, NASDAQ National Market) to the
NASDAQ Capital Market (formerly NASDAQ SmallCap Market). Our ordinary shares are currently
traded on the NASDAQ Capital Market, under the symbol RITT.

As of March 1, 2007, we had
14,658,573 ordinary shares outstanding.

|9.B. | Plan
of Distribution
|---- | --------------------

Not applicable.

|9.C. | Markets
|---- | -------

Our ordinary shares trade exclusively
on the NASDAQ Capital Market under the symbol RITT.

|9.D. | Selling
Shareholders
|---- | --------------------

Not applicable.

|9.E. | Dilution
|---- | --------

Not applicable.

|9.F. | Expenses
of the Issue
|---- | ---------------------

Not applicable.

|ITEM 10. |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

|10.A. | Share
Capital
|----- | -------------

Not applicable.

48

---

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|10.B. | Memorandum
and Articles of Association
|----- | --------------------------------------

Set out below is a description of
certain provisions of our Memorandum and Articles of Association, and of the Israeli
Companies Law related to such provisions. This description is only a summary and does not
purport to be complete and is qualified by reference to the full text of the Memorandum
and Articles which are filed as exhibits hereto and are incorporated herein by reference.

We were first registered under
Israeli law on July 16, 1989 as a private company. In July 1997, we became a public
company. We are registered with the Registrar of Companies in Israel under number
520043357.

Objects and Purposes

Pursuant to Section 2 of our
Memorandum of Association, the principal object for which we are established is to
manufacture, market, sell, import, export, acquire, rent to, lease to, rent from, lease
from and engage in any manner whatsoever in computer equipment.

Limitation on Rights to
Own Shares

Neither our Memorandum of Association
or our Articles of Association nor the laws of the State of Israel restrict in any way the
ownership or voting of ordinary shares by non-residents of Israel, except with regard to
subjects of countries which are in a state of war with Israel who may not be recognized as
owners of ordinary shares.

Directors

The Companies Law requires that
transactions between a company and its office holders (which term includes directors) or
that benefit its office holders, including arrangements as to the compensation of office
holders, be approved as provided for in the Companies Law and the companys articles
of association. For further information as to such approval provisions, see below under
Approval of Specified Related Party Transactions under Israeli Law.

Under our Articles, in general, the
oversight of the management of our business is vested in the board of directors, which may
exercise all such powers, including the power to borrow or secure the payment of any sum
of money for our purposes, and may secure or provide for repayment of such sum, in such
manner as it thinks fit.

There is no requirement under our
Articles or Israeli law for directors to retire on attaining a specific age. Our Articles
do not require directors to hold our ordinary shares to qualify for election.

Approval of Specified
Related Party Transactions under Israeli Law

Fiduciary Duties of
Office Holders

The Companies Law imposes a duty of
care and a duty of loyalty on all office holders (as defined under the Companies Law, see
Item 6.C.  Board Practices) of a company. Each person listed in the
table under Directors and Senior Management above is an office holder.

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 of an office
holder includes a duty to use reasonable means to obtain:

| |  | information
 on the  advisability  of a given action  brought for his or her approval or performed by
him or          her by virtue of his or her 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 or her duties in the company
and the performance of his or her other duties or his or her personal affairs;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

Disclosure of Personal
Interests of an Office Holder

The Companies Law requires that an
office holder of a company disclose to the company any personal interest that he or she
may have and all related material information known to him or her, 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.A personal interest of an office holder includes an
interest of a company in which the office holder is, directly or indirectly, a 5% or
greater shareholder, director or general manager or in which the office holder has the
right to appoint at least one director or the general manager. In the case of an
extraordinary transaction, the office holders duty to disclose applies also to a
personal interest of the office holders relative, which term is defined in the
Companies Law as the persons spouse, siblings, parents, grandparents, descendants,
spouses descendants and the spouses of any of the foregoing.

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 on the company's profitability, assets or liabilities.
| | - | -----------------------------------------------------------------------------------------------

Under the Companies Law, once an
office holder complies with the above disclosure requirement, the board of directors may
approve the transaction, unless the articles of association provide otherwise.
Nevertheless, 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 a matter which is considered at a meeting of the
board of directors or the audit committee generally may not be present at this meeting or
vote on this matter, unless a majority of 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 the
members of the board of directors has a personal interest, shareholder approval is also
required.

Duties of Shareholders

Under the Companies Law, the
disclosure requirements, which 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 holds 25% or
more of the voting rights if no other shareholder owns more than 50% of the voting rights
in the company, but excluding a shareholder whose power derives solely from his or her
position as a director of the company 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, generally
require the approval of the audit committee, the board of directors and the shareholders
of the company, in that order. The shareholder approval must be by majority vote, provided
that either:

| |  | at
least one-third of the shares of shareholders who have no personal interest in the
transaction and are present and voting, in person, by proxy or by written ballot, at the
meeting, vote in favor; 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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For information concerning the direct
and indirect personal interests of certain of our office holders and principal
shareholders in certain transactions with us, see Item 7  Major Shareholders
and Related Party Transactions.

In addition, under the Companies Law,
each shareholder has a duty to act in good faith in exercising his rights and fulfilling
his obligations toward the company and other shareholders and to refrain from abusing its
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 or to prevent the appointment of an
office holder or any other power toward the company. However, the Companies Law does not
define the substance of this duty of fairness.

Exculpation, Insurance
and Indemnification of Office Holders

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 (except in connection with distributions), provided
that the articles of association of the company allow it to do so. Our Articles of
Association allow us to exempt our office holders to the fullest extent permitted by law.

Insurance of Office
Holders

Our Articles of Association provide
that, subject to the provisions of the Companies Law, we may enter into a contract for the
insurance of the liability of any of our office holders with respect to an act performed
in his or her capacity as an office holder, for:

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

| |  | a
breach of his or her 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 obligation imposed upon him or her in favor of another person.
| | - | --------------------------------------------------------------------------

Indemnification of Office
Holders

Under the Companies Law, we may
indemnify an office holder with respect to an act performed in his capacity as an office
holder, retroactively (after the liability has been incurred) or in advance, provided that
our articles of association allow us to do so, against the following:

| |  | a
financial liability imposed on him in favor of another person by any judgment, including
a settlement or an arbitration award approved by a court; such indemnification may be
approved (i) after the liability has been incurred or (ii) in advance, provided that our
undertaking to indemnify is limited to events that our board of directors believes are
foreseeable in light of our actual operations at the time of providing the undertaking
and to a sum or criterion that our board of directors determines to be reasonable under
the circumstances.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an
indictment against him and either (A) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (B) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense
that does not require proof of criminal intent; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him by a court, in proceedings we institute against him or instituted on our
behalf or by another person, a criminal indictment from which he was acquitted, or a
criminal indictment in which he was convicted for a criminal offense that does not
require proof of criminal intent.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Our
articles of association were amended in April 2006 to contain provisions which conform
with the aforesaid provisions.
| | - | -------------------------------------------------------------------------------------------------------------------------

Limitations on
Exculpation, Insurance and Indemnification

The Companies Law provides that a
company may not exculpate or indemnify an office holder nor enter into an insurance
contract that would provide coverage for any monetary liability incurred as a result of
any of the following:

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

| | a
breach by the office holder of his or her duty of care if the breach was done
intentionally or recklessly, unless the breach was done negligently;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

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

| | any
fine imposed against the office holder.
| | -------------------------------------------

In addition, under the Companies Law,
exculpation and indemnification of, and procurement of insurance coverage for, the office
holders must be approved by our audit committee and board of directors and, if the
beneficiary is a director, by our shareholders. Our current policy for directors and
officers liability insurance will expire in July 2007. At our 2007 annual meeting of
shareholders, we plan to propose the ratification and approval of a renewal to our
liability insurance policy and indemnification agreements for the benefit of our officers
and directors and amendments to our Articles of Association relating to, among other
things, indemnification of officers and directors.

Share Capital

Our share capital is divided into two
classes of shares, par value 0.10 NIS per share: (i) ordinary shares, which entitle their
holders to notice of and to participate in and to vote one vote per ordinary share at
shareholder meetings, the right to receive dividends upon the declaration of dividends by
the board of directors and the right to participate in the distribution of our assets upon
liquidation; and (ii) deferred shares, which entitle their holders no rights other than
the right to their par value upon our liquidation. The rights attached to any class may be
modified or abrogated by a simple majority of the voting power represented at a
shareholder meeting, in person or by proxy, and voting thereon, subject to the approval of
a majority of the shares of such class present and voting at a separate class meeting.

All of our outstanding shares are
fully paid and non-assessable. The shares do not entitle their holders to preemptive
rights.

Dividends

Dividends on our ordinary shares may
be paid only out of profits, as defined in the Companies Law, as of the end of the most
recent fiscal year 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 not
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
payment of the dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. Profits, for purposes of the Israeli Companies Law, means
the greater of retained earnings or earnings accumulated during the preceding two years,
after deduction of previous distributions that were not already deducted from the
surpluses, as evidenced by financial statements prepared no more than six months prior to
the date of distribution.

General Meetings

An annual shareholder meeting is
required to be held once every calendar year, within a period not to exceed 15 months
after the last preceding annual meeting. The board of directors, whenever it thinks fit,
may convene an extraordinary shareholder meeting and, pursuant to the Companies Law, must
convene a meeting upon the demand of two directors or one quarter of the directors in
office or upon the demand of the holder or holders of at least 5% of our outstanding
ordinary shares and 1% of the voting rights, or one or more shareholders holding in the
aggregate at least 5% of the voting rights in the company.

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We are required to give prior notice
of a shareholder meeting of at least 21 days. Two or more shareholders, present in person
or by proxy and holding at least 35% of our outstanding voting power constitute a quorum.
Unless otherwise required by the Companies Law, resolutions at shareholder meetings are
deemed adopted if approved by the holders of a majority of the voting power represented at
the meeting in person or by proxy and voting thereon.

Anti-Takeover Provisions;
Mergers and Acquisitions

There are no specific provisions of
our Memorandum or Articles that would have an effect of delaying, deferring or preventing
a change in control of us or that would operate only with respect to a merger, acquisition
or corporate restructuring involving us. However, certain provisions of the Companies Law
may have such effect.

The 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. For purposes of the shareholder vote of each party, unless a court rules
otherwise, the merger will not be deemed approved if shares representing a majority of the
voting power present at the shareholders meeting and which are not held by the other party
to the merger, or by any person who holds 25% or more of the voting power 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 (i)
50 days have passed from the time that the requisite proposals for approval of the merger
have been filed with the Israeli Registrar of Companies by each merging company and (ii)
30 days have passed since the merger was approved by the shareholders of each merging
company.

The Companies Law also provides that
an acquisition of shares in 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% or greater shareholder of the
company and there is no existing 25% or greater shareholder of the company. An acquisition
of shares in 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% or greater shareholder of the company,
unless there is already a 45% or greater shareholder of the company. These requirements do
not apply if, in general, the acquisition (1) was made in a private placement that
received shareholder approval, (2) was from a 25% or greater shareholder of the company
which resulted in the acquirer becoming a 25% or greater shareholder of the company, or
(3) was from a 45% or greater shareholder of the company which resulted in the acquirer
becoming a 45% or greater shareholder of the company. The tender offer must be extended to
all shareholders, but the offeror is not required to purchase more than 5% of the
companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
companys outstanding shares will be acquired by the offeror and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the
offer.

If, as a result of an acquisition of
shares, the acquirer will hold more than 90% of a companys outstanding shares, the
acquisition must be made by means of a tender offer for all of the outstanding shares. If
less than 5% of the outstanding shares are not tendered in the tender offer, all the
shares that the acquirer offered to purchase will be transferred to it. The Companies Law
provides for appraisal rights if any shareholder files a request in court within three
months following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquirer may not acquire
shares in the tender offer that will cause his shareholding to exceed 90% of the
outstanding shares.

Finally, Israeli tax law treats some
acquisitions, such as stock-for-stock acquisitions exchanges between an Israeli company
and another company less favorably than does U.S. tax law. 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.

|10.C. | Material
Contracts
|----- | ------------------

Pursuant to a purchase agreement we
entered into with certain investors on June 16, 2004, on July 26, 2004, we completed a
private placement transaction in which we issued to such investors 5,064,129 ordinary
shares at $1.40 per share and warrants to purchase up to 1,266,032 ordinary shares, for
aggregate proceeds (before expenses) of approximately $7.1 million. The purchase agreement
contained customary representations, warranties, covenants and indemnities.

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The warrants are exercisable through
July 26, 2009, at an exercise price of $1.75 per ordinary share, and are subject to (i)
customary adjustments for share dividends, splits, combinations and similar events and
(ii) weighted-average anti-dilution protection in the event that, during the
three-year period following the closing of the transaction, we issue or are deemed to have
issued (subject to certain exceptions) ordinary shares at a price per share that is lower
than the exercise price in effect at the time of such issuance or deemed issuance. As of
December 31, 2006, warrants to purchase 150,001 ordinary shares were exercised.

Pursuant to a registration rights
agreement we entered into on July 26, 2004 with the investors in connection with the
private placement transaction,we undertook to register the shares and keep the
registration statement effective through July 2009. If a registration statement was not
filed or declared effective within the time period detailed in the agreement or if after a
registration statement had been declared effective by the SEC, sales cannot be made
pursuant to such registration statement, we will be required to pay to the investors
liquidated damages equal to 1.5% of the aggregate amount invested by such investor per
month. We have registered the resale of the ordinary shares (and the ordinary shares
issuable upon exercise of the warrants) issued in the private placement pursuant to a
registration statement on Form F-3 which was declared effective on November 22, 2004.

Pursuant to the terms of the purchase
agreement, for as long as an investor holds at least 50% of the aggregate number of
ordinary shares (including the ordinary shares issuable upon exercise of the warrants)
purchased by such investor in the private placement transaction, such investor has the
right to participate, pro rata based on its holdings of ordinary shares issued in the
private placement transaction (including any ordinary shares issuable upon exercise of any
unexercised warrants issued in the private placement transaction), in any future,
non-public offer or sale of any of our ordinary shares and/or securities that would
entitle the holders thereof to acquire ordinary shares, to one or more institutional
investors, at an effective price per share issued or issuable thereunder that is less than
the price per share paid in the private placement transaction (as adjusted).

The foregoing descriptions of the
purchase agreement, warrants and registration right agreement do not purport to be
complete and are qualified in their entirety by reference to the full text of such
documents, which are filed as exhibits hereto and incorporated herein by reference.

|10.D. | Exchange
Controls
|----- | -----------------

Any dividends declared on our
ordinary shares, and any amounts payable upon the dissolution, liquidation or winding up
of our affairs, as well as the proceeds of any sale in Israel of the ordinary shares to an
Israeli resident may be paid in non-Israeli currency, or if paid in Israeli currency,
shall be freely repatriable in non-Israeli currency, at a rate of exchange prevailing at
the time of conversion.

|10.E. | Taxation
|----- | --------

# Israeli Tax
Considerations

The following is a summary of the
current tax structure applicable to companies in Israel, with special reference to its
effect on us and certain Israeli Government programs benefiting us. The following also
contains a discussion of the material Israeli tax consequences to persons purchasing our
ordinary shares. To the extent that the discussion is based on tax legislation, which has
not been subject to judicial or administrative interpretation, we cannot assure you that
the tax authorities or the courts will accept the views expressed in the discussion in
question.

This summary does not discuss all the
aspects of Israeli tax law that may be relevant to a particular investor in light of his
or her personal investment circumstances or to some types of investors subject to special
treatment under Israeli law. Prospective purchasers of our ordinary shares should consult
their own tax advisors as to Israeli or other tax consequences of the purchase, ownership
and disposition of ordinary shares.

General Corporate Tax
Structure

Israeli companies are generally
subject to corporate tax on their taxable income at the rate of 31% for the 2006 tax year.
Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the
Tax Ordinance), which came into effect on January 1, 2006, the corporate tax
rate is scheduled to decrease as follows: 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. Israeli
companies are generally subject to capital gains tax at a rate of 25% for capital gains
(other than gains deriving from the sale of listed securities) derived after January 1,
2003. However, the effective tax rate payable by a company that derives income from an
approved enterprise (as defined below) may be considerably less, as further discussed
below.

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Special Provisions
Relating to Taxation Under Inflationary Conditions

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

Where a companys equity, as
calculated under the Inflationary Adjustments Law, exceeds the depreciated cost of its
Fixed Assets (as defined in the Inflationary Adjustments Law), a deduction from taxable
income is permitted equal to the excess multiplied by the applicable annual rate of
inflation. The maximum deduction permitted in any single tax year is 70% of taxable
income, with the unused portion permitted to be carried forward.

| | 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 depreciated cost of Fixed Assets exceeds its equity, the excess
multiplied by the applicable annual rate of inflation is added to taxable income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subject
to certain limitations, depreciation deductions on Fixed Assets and losses carried
forward are adjusted for inflation based on the increase in the consumer price index (CPI).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Israeli Tax Law and certain
regulations promulgated thereunder allow Foreign-Invested Companies, which
maintain their accounts in U.S. dollars in compliance with the regulations published by
the Israeli Minister of Finance, to base their tax returns on their operating results as
reflected in the dollar financials statements or to adjust their tax returns based on
exchange rate changes rather than changes in the Israeli CPI, in lieu of the principles
set forth by the Inflationary Adjustments Law. For these purposes, a Foreign-Invested
Company is a company, more than 25% of whose share capital, in terms of rights to profits,
voting and appointment of directors, and of whose combined share and loan capital is held
by persons who are not residents of Israel. A company that elects to measure its results
for tax purposes based on the dollar exchange rate cannot change that election for a
period of three years following the election. We believe that we qualify as a Foreign
Investment Company within the meaning of the Inflationary Adjustments Law. We have not yet
elected to measure our results for tax purposes based on the U.S. dollar exchange rate,
but may do so in the future.

Law for the Encouragement
of Capital Investments, 1959

Our facilities currently enjoy Approved
Enterprise status under The Law for Encouragement of Capital Investments, 1959 (the
Investments Law). See discussion below regarding an amendment to the
Investments Law that came into effect in 2005.

The Investments Law provided (prior
to its amendment in 2005) that upon application to the Investment Center of the Ministry
of Industry and Trade of the State of Israel (Investment Center), 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 attributable
to 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 benefits under the law are usually not
available with respect to income derived from products manufactured outside of Israel. The
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.

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Taxable income 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 a reduced corporate tax rate of 25% rather than
the usual corporate tax rate, for the benefits period subject to compliance with the
conditions for approval as disclosed below. This period is ordinarily seven years, or ten
years for a company whose foreign investment level as defined below exceeds 25%,
commencing with the year in which the Approved Enterprise first generates taxable income,
and is limited to twelve years from the commencement of production or fourteen years from
the date of approval, whichever is earlier. That income is eligible for further reductions
in tax rates if the company qualifies as a foreign investors company. A foreign
investors company is a company in which more than 25% of its combined share capital
(in terms of shares, rights to profits, voting and appointment of directors) and loan
capital is owned by non-Israeli residents. The tax rate is reduced to 20% if the foreign
ownership of the foreign investors company is 49% or more but less than 74%; 15% if
the foreign ownership of the foreign investors company is 74% or more but less than
90%; and 10% if the foreign ownership of the foreign investors company is 90% or
more. The determination of foreign ownership is made on the basis of the lowest level of
foreign ownership during the tax year.

In the event that a company is
operating under more than one approval, or that not all of its capital investments are
approved, its effective corporate tax rate is the result of a weighted combination of the
various applicable rates. A company may elect to forego entitlement to the grants
otherwise available under the Investments Law and, in lieu thereof, participate in an
alternative benefits program, referred to as the Alternative Benefits Program, under which
the undistributed income from the Approved Enterprise is fully exempt from corporate tax
for a period of between two and ten years, depending upon the geographic location within
Israel and the type of the Approved Enterprise. Upon expiration of the exemption period,
the Approved Enterprise is eligible for beneficial tax rates under the Investments Law for
the remainder, if any, of the otherwise applicable benefits period.

Dividends paid by a company that owns
an Approved Enterprise and that are attributable to income derived from that Approved
Enterprise during the applicable benefits period, are taxed at a reduced rate of 15%, if
the dividends are paid during the benefit period or no more than twelve years thereafter;
or, if we qualify as a foreign investors company without any time limitations. This
tax must be withheld at source by the company paying the dividend. A dividend paid from
income derived from an enterprise owned by a company that has elected the Alternative
Benefits Program during the period in which it is exempt from tax is also subject to
withholding tax at a 15% rate but causes the company to be liable for corporate tax on the
gross-up amount distributed which for this purpose includes the amount of the corporate
tax at the rate that would have been applicable had the company not elected the
Alternative Benefits Program of up to 25%.

Subject to certain provisions
concerning income under the alternative package of benefits, 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 various applicable tax rates. We are not obliged to
distribute exempt retained profits under the alternative package of benefits, and we may
generally decide from which years profits to declare dividends.

Under the Investments Law, we are
entitled to tax benefits relating to investments in Approved Enterprises in
accordance with letters of approval we received. A major part of our production facilities
has been granted the status of an Approved Enterprise under the Investments
Law.

Income arising from our
Approved Enterprise is subject to zero tax rates under the Alternative
Benefits Program and reduced tax rates based on our level of foreign ownership for
specific period. The period of benefits in respect of most of our production facilities
will terminate in the years 2007  2011 (the period of benefits in respect of the
first approval was terminated in 2005). No new approvals have been received since 1997.
See Note 7(B) to the Consolidated Financial Statements included elsewhere in this annual
report.

Benefits available to an Approved
Enterprise are conditioned upon terms stipulated in the Investments Law and the
regulations thereunder and the criteria set forth in the applicable certificate of
approval. In the event that we do not fulfill these conditions in whole or in part, the
benefits can be canceled and we may be required to refund the amount of the benefits, with
the addition of the Israeli consumer price index linkage differences and interest. We
believe that our Approved Enterprises currently operate in compliance with all applicable
conditions and criteria, but there can be no assurance that they will continue to do so.

Amendment of the
Investments Law

On April 1, 2005, an amendment to the
Investments Law came into force. Pursuant to the amendment, a companys facility will
be granted the status of Approved Enterprise only if it is proven to be an
industrial facility (as defined in the Investments Law) that contributes to the economic
independence of the Israeli economy and is a competitive facility that contributes to the
Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and
not the Investment Center will be responsible for an Approved Enterprise under the
alternative package of benefits, referred to as a Benefited Enterprise. A company wishing
to receive the tax benefits afforded to a Benefited Enterprise is required to select the
tax year from which the period of benefits under the Investment Law are to commence by
simply notifying the Israeli Tax Authority within 12 months of the end of that year. In
order to be recognized as owning a Benefited Enterprise, a company is required to meet a
number of conditions set forth in the amendment, including making a minimal investment in
manufacturing assets for the Benefited Enterprise and having completed a cooling-off
period of not less than three years from the companys previous year of commencement
of benefits under the Investments Law.

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Pursuant to the amendment, a company
with a Benefited Enterprise is entitled, in each tax year, to accelerated depreciation for
the manufacturing assets used by the Benefited Enterprise and to certain tax benefits,
provided that no more than 12 to 14 years have passed since the beginning of the year of
election under the Investments Law. The tax benefits granted to a Benefited Enterprise are
determined, as applicable to us, according to one of the following new tax routes:

| |  | Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of from seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%).
The company is required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefited Enterprise; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
special tax route enabling companies owning facilities in certain geographical locations
in Israel to pay corporate tax at the rate of 11.5% on income of the Benefiting
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate
of 4% for foreign residents.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally, a company that is Abundant
in Foreign Investment (as defined in the Investments Law) is entitled to an extension of
the benefits period by an additional five years, depending on the rate of its income that
is derived in foreign currency.

The amendment changes the definition
of foreign investment in the Investments Law so that the definition now
requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such
definition now also includes the purchase of shares of a company from another shareholder,
provided that the companys outstanding and paid-up share capital exceeds NIS 5
million. Such changes to the aforementioned definition are effective retroactively from
2003.

The amendment applies 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.

Law for the Encouragement
of Industry (Taxes), 1969

We believe that we currently qualify
as an Industrial Company within the meaning of the Law for the Encouragement
of Industry (Taxes), 1969, or the Industry Encouragement Law. According to the Industry
Encouragement Law, an Industrial Company is a company resident in Israel, 90%
or more of the income of which in any tax year, other than 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.

The following corporate tax benefits
are available to Industrial Companies, among others:

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

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

| | under
specified  conditions,  an election to file  consolidated tax returns with additional
 related Israeli          Industrial Companies; and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

57

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

Eligibility for the benefits under
the Industry Encouragement Law is not subject to receipt of prior approval from any
governmental authority. No assurance can be given that we qualify or will continue to
qualify as an Industrial Company or that the benefits described above will be
available in the future.

Capital Gains Tax

Israeli law generally imposes a
capital gain tax on the sale of any capital assets by residents of Israel, as defined for
Israeli tax purposes, and on the sale of assets in Israel including our ordinary shares by
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 the inflationary surplus and the real gain. The inflationary surplus
is a portion of the total capital gain which is equivalent to the increase of the relevant
assets purchase price that 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.

The tax rate applicable to capital
gains derived from the sale of shares, whether listed on a stock market or not, 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 significant shareholder
at any time during the 12-month period preceding such sale ( i.e. such shareholder holds
directly or indirectly, including jointly with others, at least 10% of any means of
control in the company), the tax rate will 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 Adjustments Law (or certain regulations) as of August 10, 2005, in
which case the applicable tax rate is 25%. However, the different tax rates will not apply
to dealers in securities and shareholders who acquired their shares prior to an initial
public offering (that may be subject to a different tax arrangement).

The tax basis of shares acquired by
individuals 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 generally
exempt from Israeli capital gains tax on any gains derived from the sale of shares of
Israeli companies publicly traded on a recognized stock market outside of Israel (such as
the NASDAQ), provided however that such capital gains are not derived from a permanent
establishment in Israel that such shareholders did not acquire their shares prior to the
issuers initial public offering and that such shareholders are not subject to the
Inflationary Adjustments Law. In addition, 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 of or is entitled to 25% or more
of the revenues or profits of such non-Israeli corporation, whether directly or
indirectly.

In some instances where our
shareholders may be liable 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.

Application of the
U.S.-Israel Income Tax Treaty to Capital Gains Tax

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 (the the U.S.-Israel Tax Treaty), the sale of
shares by a person who qualifies as a resident of the United States within the meaning of
the treaty and who is entitled to claim the benefits afforded to a resident by the treaty
will not be subject to Israeli capital gains tax. This exemption does not apply if (i) the
person holds, directly or indirectly, shares representing 10% or more of our voting power
during any part of the 12-month period preceding the applicable sale; or (ii) the capital
gains from such sale can be allocated to a permanent establishment in Israel. A sale,
exchange or disposition of our ordinary shares by a Treaty U.S. Resident who held,
directly or indirectly, shares representing 10% or more of our voting power at any time
during the 12-month period preceding the sale, exchange or disposition will be subject to
Israeli capital gains tax, to the extent applicable. However, the person would be
permitted to claim a credit for the capital gains tax paid in Israel against the U.S.
federal income tax imposed with respect to the applicable sale, subject to the limitations
in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate
to state or local taxes.

58

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Tax on 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. On distributions of dividends other than bonus
shares, or stock dividends, income tax is withheld at the source at the following rates:
(i) 20%, or 25% for a shareholder that is considered a significant shareholder at any time
during the 12-month period preceding such distribution; (ii) if the income out of which
the dividend is being paid is attributable to an Approved Enterprise (or Benefiting
Enterprise). A different rate may be provided in a treaty between Israel and the
shareholders country of residence. Under the U.S.-Israel tax treaty, the maximum tax
on dividends paid to a holder of our ordinary shares who is a U.S. resident is 25% or 15%
if the dividends are generated by an Approved Enterprise (or Benefiting Enterprise);
however if the income out of which the dividend is being paid is not attributable to an
Approved Enterprise, then the maximum tax is 12.5% if the shareholders is a U.S.
corporations holding at least 10% of our issued voting power during the part of the
taxable year preceding the date of payment of dividends and during the whole of the prior
taxable year, and provided that not more than 25% of our gross income consists of interest
or dividends.

# U.S. Federal Income Tax
Considerations

The following summary describes the
material U.S. federal income tax considerations relating to an investment in the ordinary
shares. This summary deals only with ordinary shares held as capital assets within the
meaning of section 1221 of the U.S. Internal Revenue Code of 1986, as amended (the
Code), and does not deal with special situations, such as those of dealers or
traders in securities or currencies, financial institutions, tax-exempt organizations,
life insurance companies, individual retirement and tax-deferred accounts, persons holding
the ordinary shares as part of a hedging or conversion transaction or a straddle, persons
subject to the alternative minimum tax, or persons who have a functional currency other
than the U.S. dollar. Furthermore, the discussion below is based upon the Code, existing
and proposed Treasury regulations promulgated thereunder, and applicable administrative
rulings and judicial decisions now in effect, all of which are subject to change, possibly
on a retroactive basis, so as to result in U.S. federal income tax consequences different
from those discussed below.

The following discussion describes
the material U.S. federal income tax consequences to a holder of ordinary shares that is:
(1) an individual citizen or resident of the United States, (2) a corporation created or
organized in or under the laws of the United States or any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income taxation regardless of
its source, or (4) a trust if either (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust or (b) the
trust has a valid election in effect under applicable treasury regulations to be treated
as a United States person (a U.S. holder). Except to the limited extent
discussed below, this summary does not consider the U.S. tax consequences to a person that
is not a U.S. holder (a non-U.S. holder). In addition, the tax treatment of
persons who hold ordinary shares through a partnership or other pass-through entity are
not considered, nor are the possible application of U.S. federal gift or estate taxes or
any aspect of state, local or non-U.S. tax laws.

This summary does not discuss all
aspects of U.S. federal income taxation that may be relevant to a particular shareholder
in light of its personal circumstances. Each shareholder is therefore advised to consult
such persons own tax advisor with respect to the specific U.S. federal income tax
consequences to such person of purchasing, holding or disposing of the ordinary shares, as
well as the effect of any state, local or other tax laws.

To comply with Internal Revenue
Service Circular 230, readers are hereby notified that any discussion of federal tax
issues in this report is not intended or written by the Company to be used, and cannot be
used by any person or entity (A) for the purpose of avoiding penalties that may be imposed
on any taxpayer under the Internal Revenue Code or (B) in connection with the promotion or
marketing to another party any transactions or matters addressed herein.

Distributions on Ordinary
Shares

Subject to the discussion under the
headings Passive Foreign Investment Companies and Controlled Foreign
Corporations, U.S. holders are required to include in gross income as ordinary
income the amount of any distribution paid on ordinary shares to the extent of our current
and accumulated earnings and profits attributable to the distribution, as determined for
U.S. federal income tax purposes. A non-corporate U.S. Holder that meets certain
eligibility requirements may qualify for a 15% or lower rate of U.S. federal income
taxation on dividends paid in taxable years beginning before January 1, 2009 if we are a
qualified foreign corporation for U.S. federal income tax purposes. We
generally will be treated as a qualified foreign corporation if (i) we are eligible for
benefits under the United States-Israel income tax treaty or (ii) the ordinary shares are
listed on an established securities market in the United States. We believe that we
currently are treated as a qualified foreign corporation, and we generally expect to be a
qualified foreign corporation during all taxable years before 2009. However, no assurance
can be given that a change in circumstances will not affect our treatment as a qualified
foreign corporation for U.S. federal income tax purposes in any taxable year. In addition,
a non-corporate U.S. Holder will not be eligible for the reduced rate if (a) such U.S.
Holder has not held the ordinary shares for at least 61 days of the 120-day period
beginning on the date which is 60 days before the ex-dividend date, (b) to the extent the
U.S. Holder is under an obligation to make related payments on substantially similar or
related property or (c) with respect to any portion of a dividend that is taken into
account by the U.S. Holder as investment income under Section 163(d)(4)(B) of the Code.
Any days during which the U.S. Holder has diminished its risk of loss with respect to the
ordinary shares (for example, by holding an option to sell the ordinary shares) are not
counted towards meeting the 61-day holding period. Non-corporate U.S. Holders should
consult their own tax advisors concerning whether dividends received by them qualify for
the reduced rate of tax.

59

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The amount of a distribution which
exceeds our earnings and profits will be treated first as a non-taxable return of capital,
reducing the U.S. holders tax basis for the ordinary shares to the extent thereof,
and then as capital gain. Preferential tax rates for long-term capital gains are
applicable for U.S. holders that are individuals, estates or trusts. Corporate holders
generally will not be allowed a deduction for dividends received from us.

The amount of a distribution with
respect to our ordinary shares equals the amount of cash and the fair market value of any
property distributed plus the amount of any Israeli taxes withheld therefrom. The amount
of any cash distributions paid in NIS equals the U.S. dollar value of the NIS on the date
of distribution based upon the exchange rate in effect on such date, and U.S. holders will
have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S.
dollar value.

Pursuant to the United States-Israel
income tax treaty, the maximum rate of Israeli withholding tax on dividends paid to a U.S.
holder is 25 percent. U.S. holders may generally be entitled to a foreign tax credit or
deduction in an amount equal to the Israeli tax withheld on distributions on the ordinary
shares. Distributions paid by us will generally be foreign source passive income for U.S.
foreign tax credit purposes. The Code applies various limitations on the amount of foreign
tax credits that may be available to a U.S. holder, including special rules with respect
to dividends received by non-corporate U.S. holders that are subject to U.S. federal
income taxation at the reduced rate described above. Because of the complexity of these
limitations, U.S. holders should consult their own tax advisors to determine whether and
to what extent they would be entitled to such credit.

Disposition of Shares

Subject to the discussion under the
headings Passive Foreign Investment Companies and Controlled Foreign
Corporations, upon the sale, exchange or other disposition of ordinary shares, a
U.S. holder generally will recognize capital gain or loss in an amount equal to the
difference between the amount realized on the disposition and such U.S. holders
adjusted tax basis in the ordinary shares. The gain or loss realized on the sale, exchange
or other disposition of ordinary shares will be long-term capital gain or loss if the U.S.
holder held the shares for more than one year as of the time of disposition. Any gain or
loss realized by a U.S. holder on the sale, exchange or other disposition of ordinary
shares generally will be treated as from sources within the United States for U.S. foreign
tax credit purposes, except for losses treated as foreign source to the extent certain
dividends were received by the U.S holder within the 24-month period preceding the date on
which the U.S holder recognized the loss.

Passive Foreign
Investment Companies

We will be a passive foreign
investment company (PFIC) if: (1) 75% or more of our gross income in a taxable
year is passive income or (2) at least 50% of our assets (averaged over the year and
generally determined based upon value) in a taxable year are held for the production of
passive income. Certain look-through rules apply in making this determination.
Passive income generally consists of dividends, interest, rents, royalties, annuities, and
income from certain commodities transactions and from notional principal contracts. If we
are a PFIC, each U.S. holder who has not elected to treat us as a qualified electing
fund (the QEF election) would, upon receipt of certain distributions by
us and upon disposition of the ordinary shares at a gain, be liable to pay tax at the then
prevailing highest tax rates on ordinary income plus interest on the tax, as if the
distribution or gain had been recognized ratably over the U.S. holders holding
period for the ordinary shares.

A U.S. holder of PFIC stock which is
publicly traded could elect to mark the stock to market annually, recognizing as ordinary
income or loss each year an amount equal to the difference as of the close of the taxable
year between the fair market value of the PFIC stock and the U.S. holders adjusted
tax basis in the PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. holder under the election for prior
taxable years. If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.

60

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We were not a PFIC for the fiscal
year ended December 31, 2006. The tests for determining PFIC status, however, are applied
annually, and it is difficult to make accurate predictions of future income and assets
which are relevant to this determination. Accordingly, there can be no assurance that we
will not become a PFIC. U.S. holders who hold ordinary shares during a period when we are
a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to
certain exceptions for U.S. holders who made a mark-to-market or QEF election. U.S.
holders are strongly urged to consult their tax advisors about the PFIC rules, including
the eligibility, manner and consequences to them of making a mark-to-market or QEF
election with respect to our ordinary shares in the event that we qualify as a PFIC.

Controlled Foreign
Corporations

Special U.S. tax rules apply to
certain shareholders of a controlled foreign corporation (CFC). If more than
50% of the voting power or total value of all classes of our shares is owned, directly or
indirectly, by U.S. shareholders, we would be treated as a CFC for U.S. tax
purposes. For purposes of the CFC rules a U.S. shareholder is a U.S. person who owns 10%
or more of the total combined voting power of all our classes of shares. Our
Classification as a CFC would require such U.S. shareholders to include in income their
pro rata share of our subpart F income, as defined in the Code. In addition,
gain from the sale or exchange of ordinary shares by a U.S. shareholder who is or was a
10% or greater shareholder at any time during the five year period ending with the sale or
exchange will be ordinary dividend income to the extent of our earnings and profits
attributable to the ordinary shares sold or exchanged. We believe that we are not a CFC.
However, in the event we become a CFC in the future, the CFC rules would apply to those
U.S. holders that are U.S. shareholders.

Information Reporting and Backup Withholding

A U.S. holder may be subject to
backup withholding with respect to cash dividend payments and proceeds from a disposition
of ordinary shares. In general, backup withholding will apply only if a U.S. holder fails
to comply with certain identification procedures. Information reporting and backup
withholding will not apply with respect to payments made to certain exempt recipients,
such as corporations and tax-exempt organizations. Backup withholding is not an additional
tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S.
holder, provided that the required information is furnished to the Internal Revenue
Service.

Non-U.S. Holders of
Ordinary Shares

Except as provided below, a non-U.S.
holder of ordinary shares generally will not be subject to U.S. income or withholding tax
on the payment of dividends on, and the proceeds from the disposition of ordinary shares.

A non-U.S. holder may be subject to
U.S. income tax on income from the disposition of ordinary shares if (1) such income 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 an income tax
treaty with the United States, such item is attributable to a permanent establishment or a
fixed place of business in the United States; (2) the individual non-U.S. holder is
present in the United States for 183 days or more in the taxable year of the sale and
certain other conditions are met; or (3) the non-U.S. holder is subject to tax pursuant to
the provisions of the U.S. tax law applicable to U.S. expatriates.

Non-U.S.
          holders generally may be subject to backup withholding on the payment of
          dividends on ordinary shares, or the proceeds from the disposition of ordinary
          shares made in the United States or by a U.S. related person, unless the
          non-U.S. holder provides a taxpayer identification number, certifies to its
          foreign status, or otherwise establishes an exemption. A U.S. related person for
          these purposes is a person with one or more specified relationships with the
          United States. In general, non-U.S. holders will not be subject to backup
          withholding with respect to the payment of proceeds from the disposition of
          ordinary shares by a foreign office of a broker.

The amount of any backup withholding
from a payment to a non-U.S. holder will be allowed as a credit against such holders
U.S. federal income tax liability, provided that the required information is furnished to
the Internal Revenue Service.

|10.F. | Dividends
and Paying Agents
|----- | ---------------------------

Not applicable.

61

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|10.G | Statement
by Experts
|---- | --------------------

Not applicable.

|10.H. | Documents
on Display
|----- | --------------------

We are subject to the informational requirements
of the Securities Exchange Act of 1934, 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 with the SEC without charge at the
SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Certain of
our SEC filings are also available to the public at the SECs website at
http://www.sec.gov. 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. In addition, all
corporate documents are available for review at our headquarters, 24 Raoul Wallenberg
Street, Tel Aviv 69719, Israel.

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. However,
we intend to file with the SEC, within 180 days after the end of each fiscal year, an
annual report on Form 20-F containing financial statements which will be examined and
reported on, with an opinion expressed, by an independent public accounting firm, as well
as reports on Form 6-K containing unaudited financial information for the first three
quarters of each fiscal year, within 60 days after the end of each such quarter. We have
received an exemption from the NASDAQ Stock Market, Inc. from the requirement to
distribute an annual report to our shareholders, but we have undertaken to post a copy of
our annual report on Form 20-F on our website, www.rittech.com, after filing it with the
SEC.

|10.I. | Subsidiary
Information
|----- | ----------------------

Not applicable.

|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

We
are exposed to market risk, including movements in interest rates and foreign currency
exchange rates. Our primary market risk exposure occurs because we generate most of our
revenues in U.S. dollars and Euros and incur a portion of our expenses in NIS. To date, we
are not engaged in any hedging transactions and/or derivative financial instruments. If we
were to determine that it was in our best interests to enter into any hedging transactions
in the future, there can be no assurance that we will be able to do so or that such
transactions, if entered into, will materially reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations.

Impact of Inflation and
Currency Fluctuations

Substantially most of our sales and
most of our expenses are denominated in U.S. dollars or are dollar-linked. The currency of
the primary economic environment in which our operations are conducted is, therefore, the
dollar, which is our functional currency.

Since we pay the salaries of our
Israeli employees in NIS, the dollar cost of our operations is influenced by the extent to
which inflation in Israel is (or is not) offset (or is offset on a lagging basis) by a
devaluation of the NIS in relation to the dollar. Inflation in Israel will have a negative
effect on our profits for contracts under which we are to receive payment in dollars or
dollar-linked NIS while incurring expenses in NIS, unless such inflation is offset on a
timely basis by a devaluation of the NIS in relation to the dollar.

62

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For some time, until 1997, inflation
in Israel exceeded the devaluation of the NIS against the dollar and we experienced
increases in the dollar cost of our operations in Israel. This trend was reversed in 1997
and has continued in reverse for every year thereafter until the present. In 2005, the
rate of decrease in value of the NIS against the dollar was 6.8% and the rate of inflation
was 2.4%. Because exchange rates between the NIS and the dollar fluctuate continuously
(albeit with a historically declining trend in the value of the NIS), 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 financial
statements as financial income or expense.

We do not believe that, historically,
inflation in Israel, as well as exchange rate fluctuations between the NIS and the dollar,
have had a material effect on our results of operations.

|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not applicable.

# PART II

|ITEM 13. |  | DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
|-------- |  | ------------------------------------------------

Not applicable.

|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- |  | ----------------------------------------------------------------------------

Not applicable.

|ITEM 15. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

In designing and evaluating our
disclosure controls and procedures and internal control over financial reporting, we
recognize that any such controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives.

Our management evaluated, with the
participation of our Chief Executive Officer and Vice President Finance, the effectiveness
of the design and operation of our disclosure controls and procedures as of December 31,
2006. Based upon this evaluation, our Chief Executive Officer and Vice President Finance
have concluded that, as of December 31, 2006, our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by us
in the reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and timely reported as provided in the
SECs rules and forms and is accumulated and communicated to our management,
including our Chief Executive Officer and Vice President Finance, by others within the
Company, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal
control over financial reporting during the year ended December 31, 2006, that have
materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our board of directors has determined
that Israel Frieder is an audit committee financial expert, as defined by applicable SEC
regulations. Mr. Frieder is independent, as that term is defined under
NASDAQs rules.

|ITEM 16B. |  | CODE OF ETHICS
|--------- |  | --------------

We have adopted a code of ethics
applicable to our directors, officers and all other employees. Our code of ethics is
publicly available on our website at www.rittech.com. Any waivers from or
amendments to our code of ethics will be posted on our website.

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

The following table sets forth, for
each of the years indicated, the fees paid to our independent auditors, Somekh Chaikin,
Certified Public Accountants (Isr.), a member of KPMG International, independent
registered public accounting firm.

|                   | 2005 | 2006
|------------------ | ---- | ----
|
|
|
|
|Audit Fees billed  |      |     
|Audit-Related Fees |      |     
|Tax Fees           |      |     
|All Other Fees     |      |     
|                   |      |     
|                   |      |     
|Total              |      |     
|                   |      |     

|(1) | Audit
fees consist of services that have been provided in connection with
               statutory and regulatory filings or engagements, including services that
               generally only the independent accountant can reasonably provide. This
included                audit of our annual financial statements, review of our quarterly
financial                results, consultations on various accounting issues and
performance of local                statutory audits.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees relate to assurance and associated services that are                performed by the
independent accountant, including: attest services that are not                required
by statute or regulation; accounting consultation; and consultation
               concerning financial accounting and reporting standards.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax
fees relate to services performed by the tax division for tax compliance,
               planning and advice.
|--- | -----------------------------------------------------------------------------------------------------------------

The audit committee of our board of
directors approves all audit, audit-related, tax and other services to be provided by KPMG
prior to any engagement.

|ITEM 16D. |  | EXEMPTIONS FROM LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE
|--------- |  | ----------------------------------------------------------------------

Not applicable.

|ITEM 16E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- |  | ----------------------------------------------------------------------

Not applicable.

# PART III

|ITEM 17. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

The Company has elected to furnish
financial statements and related information specified in Item 18.

64

---

---



|ITEM 18. |  | FINANCIAL
STATEMENTS
|-------- |  | --------------------

# Index to Financial
Statements

|                                                                   | Page
|------------------------------------------------------------------ | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm            | F-2 
|                                                                  
|Consolidated Balance Sheets as of December 31, 2005 and 2006       | F-3 
|                                                                  
|Consolidated Statements of Operations for the Years               
|ended December 31, 2004, 2005 and 2006                             | F-4 
|                                                                  
|Statements of Changes in Shareholders' Equity and Comprehensive   
|Income (Loss) for the Years ended December 31, 2004, 2005 and 2006 | F-5 
|                                                                  
|Consolidated Statements of Cash Flows for the Years               
|ended December 31, 2004, 2005 and 2006                             | F-6 
|                                                                  
|Notes to the Consolidated Financial Statements                     | F-7 

65

---

---



|ITEM 19. |  | EXHIBITS
|-------- |  | --------

|(b) | List
of Exhibits
|--- | ----------------

| | 1.1 | Memorandum
of Association.*
| | --- | ---------------------------

| | 1.2 | Articles
of Association.*******
| | --- | -------------------------------

| | 2.1 | Form
of Share Certificate Representing Ordinary Shares.**
| | --- | ---------------------------------------------------------

| | 4.1 | Lease
agreements with related parties and executive summaries thereof.***
| | --- | -------------------------------------------------------------------------

| | 4.2 | RiT
Technologies Ltd. 2003 Share Option Plan **** and Amendment No. 1 thereto.
| | --- | ------------------------------------------------------------------------------

| | 4.3 | Purchase
Agreement, dated as of June 16, 2004, by and among the Registrant and the investors set
                  forth on the signature pages thereto.*****
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.4 | Registration
Rights Agreement, dated as of July 26, 2004, by and among the Registrant and the
                  investors named in the Purchase Agreement dated as of June 16,
2004.*****
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.5 | Form
of Warrant issued on July 26, 2004.*****
| | --- | ---------------------------------------------

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

| | 12.1 | Certification
of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
| | ---- | -------------------------------------------------------------------------------------------------------------------------

| | 12.2 | Certification
of the Vice President Finance pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.
| | ---- | ------------------------------------------------------------------------------------------------------------------------

| | 13.1 | Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 13.2 | Certification
of the Vice President Finance pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 15.1 | Consent
of Somekh, Chaikin, Independent Registered Public Accounting Firm.
| | ---- | --------------------------------------------------------------------------

| | 
| | 

| | *Incorporated
by reference to the Annual Report on Form 20-F for the year ended December 31, 2002.
| | --------------------------------------------------------------------------------------------------

| | **
Incorporated by reference to Exhibit 4.1 to the Registrants Registration Statement
on Form 8-A filed on July 26, 1997.
| | --------------------------------------------------------------------------------------------------------------------------

| | ***Incorporated
by reference to the Annual Report on Form 20-F for the year ended December 31, 2001.
| | ----------------------------------------------------------------------------------------------------

| | ****Incorporated
by reference to Exhibit 99.1 to the Registrants Registration Statement on Form S-8
filed on July 26, 2004 (File No. 333-117646).
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | *****Incorporated
by reference to Exhibit 10.1 to the Registrants Report of Foreign Private Issuer on
Form 6-K submitted on June 29, 2004 (File No. 0-29360).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ******
Incorporated by reference to Exhibit 8.1 to the Annual Report on Form 20-F for the year
ended December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------

| | *******
Incorporated by reference to the Registrants Registration Statement on Form 6-K
filed on March 8, 2006 (File No. 0-29360).
| | -----------------------------------------------------------------------------------------------------------------------------------

66

---

---



# SIGNATURE

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.

| |  | RiT TECHNOLOGIES LTD.By: /s/ Doron Zinger
Doron ZingerPresident and Chief Executive Officer
| |  | ---------------------------------------------------------------------------------------------------------

March 29, 2007

67

---

---



# RiT Technologies Ltd.
and itsConsolidated Subsidiaries

# Financial Statements

# December 31, 2006



---

---



|                                                         
|---------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                 
|                                                         
|Consolidated Financial Statements as of December 31, 2006
|                                                         

Contents

|                                                                                                                                                    |  |      
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|                                                                                                                                                    |  | Page 
|                                                                                                                                                    |  |      
|                                                                                                                                                    |  |      
|Report of Independent Registered Public Accounting Firm                                                                                             |  | F  2
|                                                                                                                                                    |  |      
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                                        |  | F  3
|                                                                                                                                                    |  |      
|Consolidated Statements of Operations for the years ended December
  31, 2006, 2005 and 2004                                                        |  | F  4
|                                                                                                                                                    |  |      
|Consolidated Statements of Changes in Shareholders Equity and
  Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and
  2004 |  | F  5
|                                                                                                                                                    |  |      
|Consolidated Statements of Cash Flows for the years ended December
  31, 2006, 2005 and 2004                                                        |  | F  6
|                                                                                                                                                    |  |      
|Notes to the Consolidated Financial Statements                                                                                                      |  | F  7

---

---



Report of Independent Registered Public Accounting Firm

The Board of
Directors and Shareholders of
RiT Technologies Ltd.

We  have audited the accompanying  consolidated balance sheets of
RiT Technologies Ltd. and Subsidiaries (the Company) as of December 31, 2006 and 2005 and the related
consolidated statements of operations, changes in shareholders equity and
comprehensive income (loss) and cash flows for each of the years in the three-year period
ended December 31, 2006. These consolidated financial statements are the responsibility of
the Companys Board of Directors and of its 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 board of directors and 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 RiT Technologies Ltd. and subsidiaries as
of December 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2T to the consolidated financial statements, the Company
changed its method of quantifying errors in 2006.

As discussed in Note 2N to the
consolidated financial statements, effective January 1, 2006, the Company
adopted Financial Accounting Standards Board Statement 123R Share-Based
Payment.

Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International

Tel-Aviv, Israel,
March 29, 2007

F  2

---

---



|                                        
|----------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries
|                                        
|Consolidated Balance Sheets             
|                                        

|                                                                 |  |                    |         |                    |  |         |  
|---------------------------------------------------------------- |  | ------------------ | ------- | ------------------ |  | ------- | -
|                                                                 |  | December 31        |        
|                                                                 |  |                    |        
|                                                                 |  | 2006               |         | 2005               | 
|                                                                 |  |                    |         |                    | 
|                                                                 |  | US$ (in thousands) |         | US$ (in thousands) | 
|                                                                 |  |                    |         |                    | 
|                                                                 |  |                    |         |                    |  |         |  
|Assets                                                           |  |                    |         |                    |  |         |  
|Current
  Assets (Note 8A)                                       |  |                    |         |                    |  |         |  
|Cash and cash equivalents                                        |  |                    | 6,515   |                    |  | 7,222   |  
|Marketable securities                                            |  |                    | -       |                    |  | 506     |  
|Trade receivables, net                                           |  |                    | 4,485   |                    |  | 4,725   |  
|Other current assets                                             |  |                    | 474     |                    |  | 741     |  
|Inventories                                                      |  |                    | 7,567   |                    |  | 5,101   |  
|                                                                 |  |                    |         |                    |  |         |  
|Total Current Assets                                             |  |                    | 19,041  |                    |  | 18,295  |  
|                                                                 |  |                    |         |                    |  |         |  
|                                                                 |  |                    |         |                    |  |         |  
|Other
  Assets                                                   |  |                    |         |                    |  |         |  
|Assets held for severance
  benefits (Note 4)                    |  |                    | 1,919   |                    |  | 1,751   |  
|                                                                 |  |                    |         |                    |  |         |  
|                                                                 |  |                    |         |                    |  |         |  
|Property
  and Equipment (Note 3)                                |  |                    |         |                    |  |         |  
|Cost                                                             |  |                    | 2,942   |                    |  | 2,544   |  
|Less - accumulated
  depreciation                                |  |                    | 2,141   |                    |  | 1,875   |  
|                                                                 |  |                    |         |                    |  |         |  
|                                                                 |  |                    | 801     |                    |  | 669     |  
|                                                                 |  |                    |         |                    |  |         |  
|Total
  Assets                                                   |  |                    | 21,761  |                    |  | 20,715  |  
|                                                                 |  |                    |         |                    |  |         |  
|                                                                 |  |                    |         |                    |  |         |  
|Liabilities
  and Shareholders Equity                           |  |                    |         |                    |  |         |  
|Current
  Liabilities                                            |  |                    |         |                    |  |         |  
|Trade payables                                                   |  |                    | 6,107   |                    |  | 3,270   |  
|Other payables and accrued
  liabilities (Note 8A6)              |  |                    | 2,088   |                    |  | 2,680   |  
|                                                                 |  |                    |         |                    |  |         |  
|Total Current Liabilities                                        |  |                    | 8,195   |                    |  | 5,950   |  
|                                                                 |  |                    |         |                    |  |         |  
|                                                                 |  |                    |         |                    |  |         |  
|Liability in respect of
  employees severance benefits (Note 4) |  |                    | 2,398   |                    |  | 2,253   |  
|                                                                 |  |                    |         |                    |  |         |  
|Total Liabilities                                                |  |                    | 10,593  |                    |  | 8,203   |  
|                                                                 |  |                    |         |                    |  |         |  
|Commitments
  and Contingencies (Note 5)                         |  |                    |         |                    |  |         |  
|                                                                 |  |                    |         |                    |  |         |  
|Shareholders
  Equity (Note 6)                                  |  |                    |         |                    |  |         |  
|Share capital*                                                   |  |                    | 388     |                    |  | 383     |  
|Treasury Stock                                                   |  |                    | (27     | )                  |  | (27     | )
|Additional paid-in capital                                       |  |                    | 32,127  |                    |  | 31,335  |  
|Accumulated other
  comprehensive loss                           |  |                    | -       |                    |  | (39     | )
|Accumulated deficit                                              |  |                    | (21,320 | )                  |  | (19,140 | )
|                                                                 |  |                    |         |                    |  |         |  
|Total Shareholders Equity                                       |  |                    | 11,168  |                    |  | 12,512  |  
|                                                                 |  |                    |         |                    |  |         |  
|Total
  Liabilities and Shareholders Equity                     |  |                    | 21,761  |                    |  | 20,715  |  
|                                                                 |  |                    |         |                    |  |         |  

|  |                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Ordinary Shares  NIS 0.1
  par value                                                                                                                                                                                                                                                                
| 
|  | Authorized shares:
  39,979,990 as of December 31, 2006 and 2005; issued 14,658,573 and 14,427,074
  as of December 31, 2006 and 2005 respectively (including 17,000 of which are
  held by a subsidiary) and outstanding 14,641,573 and 14,410,074 as of
  December 31, 2006 and 2005, respectively.
|  |                                                                                                                                                                                                                                                                                                      
|  | Deferred Shares  NIS 0.1 par value                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                      
|  | Authorized shares: 20,230, issued and outstanding 17,030 shares as of
  December 31, 2006 and 2005.                                                                                                                                                                                                  

|         |  |                                        
|-------- |  | ---------------------------------------
|         |  |                                        
|Director |  | President
  and Chief Executive Officer

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

F  3

---

---



|                                        
|----------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries
|                                        
|Consolidated Statements of Operations   
|                                        

|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|--------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ------------------ |  | ------------------ | - |  | ---------- | -
|                                                                                                          |  | Year ended December 31 |           
|                                                                                                          |  |                        |           
|                                                                                                          |  | 2006                   |            | 2005               |  | 2004               |  
|                                                                                                          |  |                        |            |                    |  |                    |  
|                                                                                                          |  | US$ (in thousands)     |            | US$ (in thousands) |  | US$ (in thousands) |  
|                                                                                                          |  |                        |            |                    |  |                    |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Sales (Notes
  8B1)                                                                                       |  |                        | 25,092     |                    |  | 27,852             |   |  | 18,427     |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Cost of
  sales (Note 5A and 8B2)                                                                         |  |                        | 12,942     |                    |  | 12,923             |   |  | 10,066     |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Gross profit                                                                                              |  |                        | 12,150     |                    |  | 14,929             |   |  | 8,361      |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Operating expenses:                                                                                       |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Research and
  development, gross                                                                         |  |                        | 4,325      |                    |  | 4,212              |   |  | 3,767      |  
|Less 
  royalty-bearing participation (Note 5A)                                                          |  |                        | (128       | )                  |  | (119               | ) |  | (286       | )
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Research and
  development, net                                                                           |  |                        | 4,197      |                    |  | 4,093              |   |  | 3,481      |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Sales and
  marketing                                                                                     |  |                        | 7,735      |                    |  | 7,624              |   |  | 6,165      |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|General and
  administrative                                                                              |  |                        | 2,177      |                    |  | 2,007              |   |  | 1,719      |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Total operating expenses                                                                                  |  |                        | 14,109     |                    |  | 13,724             |   |  | 11,365     |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Operating income (loss)                                                                                   |  |                        | (1,959     | )                  |  | 1,205              |   |  | (3,004     | )
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Financing
  income, net (Note 8B3)                                                                        |  |                        | 237        |                    |  | 198                |   |  | 29         |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Taxes on
  income (Note 7)                                                                                |  |                        | -          |                    |  | -                  |   |  | -          |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Net income (loss) for the year                                                                            |  |                        | (1,722     | )                  |  | 1,403              |   |  | (2,975     | )
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Net income (loss) per share (Note 2Q):                                                                    |  |                        |            |                    |  |                    |   |  |            |  
|Basic net income (loss) per ordinary share (US$)                                                          |  |                        | (0.12      | )                  |  | 0.10               |   |  | (0.27      | )
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Diluted net income (loss) per ordinary share (US$)                                                        |  |                        | (0.12      | )                  |  | 0.09               |   |  | (0.27      | )
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Weighted average number of ordinary shares
  used to compute basic net income (loss) per ordinary share   |  |                        | 14,628,856 |                    |  | 14,288,900         |   |  | 11,174,865 |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  
|Weighted average number of ordinary shares
  used to compute diluted net income (loss) per ordinary share |  |                        | 14,628,856 |                    |  | 15,459,384         |   |  | 11,174,865 |  
|                                                                                                          |  |                        |            |                    |  |                    |   |  |            |  

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

F  4

---

---



|                                                                                 
|---------------------------------------------------------------------------------
|RiT Technologies Ltd.                                                            
|and Subsidiaries                                                                 
|                                                                                 
|Consolidated Statements of Shareholders Equity and Comprehensive
  Income (Loss)
|                                                                                 

|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|----------------------------------------------------------------------- |  | ------------------ |  | ----------------- |  | ---------------- |  | --------------------------------------------------- |  | ----------------- |  | ---------------- | - | ------------------------------ |  | -------------- | ------------------ | ------- | ----- | ------ | -
|                                                                        |  | Share
  capital    |  |                   |  |                  |  | Accumulated
  other
  comprehensive
  income (loss) |  |                   |  |                  |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                 
|                                                                        |  | Deferred
  shares  |  | Ordinary
  shares |  | Treasury
  Stock |  | Deferred
  shares                                   |  | Ordinary
  shares |  | Treasury
  Stock |   | Additional
  paid-in
  capital |  |                | Accumulateddeficit |         | Total |       
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|                                                                        |  | (Note
  6A)        |  | (Note
  6A)       |  | (Note
  6A)      |  | US$                                                 |  | US$               |  | US$              |   | US$                            |  | US$            |                    | US$     |       | US$    |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|                                                                        |  | Number
  of shares |  | (in thousands)    |  | (in thousands)   |  | (in thousands)                                      |  | (in thousands)    |  | (in thousands)   |   | (in thousands)                 |  | (in thousands) |                   
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                   
|Balance as of January 1, 2004                                           |  | 17,030             |  | 8,910,352         |  | 17,000           |  | *                                                   |  | 260               |  | (27              | ) | 23,928                         |  | 15             |                    | (17,568 | )     | 6,608  |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Changes during 2004                                                     |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Issuance of shares and warrants, net of US$ 372 thousand issue
expenses |  | -                  |  | 5,064,129         |  | -                |  | -                                                   |  | 113               |  | -                |   | 6,606                          |  | -              |                    | -       |       | 6,719  |  
|Exercise of options                                                     |  | -                  |  | 2,000             |  | -                |  | -                                                   |  | *                 |  | -                |   | 2                              |  | -              |                    | -       |       | 2      |  
|Exercise of warrants                                                    |  | -                  |  | 42,858            |  | -                |  | -                                                   |  | 1                 |  | -                |   | 74                             |  | -              |                    | -       |       | 75     |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Net loss for the year                                                   |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | (2,975  | )     | (2,975 | )
|Net unrealized change on available for sale securities                  |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | (29            | )                  | -       |       | (29    | )
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Total comprehensive loss                                                |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | -       |       | (3,004 | )
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Balance as of December 31, 2004                                         |  | 17,030             |  | 14,019,339        |  | 17,000           |  | *                                                   |  | 374               |  | (27              | ) | 30,610                         |  | (14            | )                  | (20,543 | )     | 10,400 |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Changes during 2005                                                     |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Exercise of options                                                     |  | -                  |  | 283,592           |  | -                |  | -                                                   |  | 7                 |  | -                |   | 540                            |  | -              |                    | -       |       | 547    |  
|Exercise of warrants                                                    |  | -                  |  | 107,143           |  | -                |  | -                                                   |  | 2                 |  | -                |   | 185                            |  | -              |                    | -       |       | 187    |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Net income for the year                                                 |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | 1,403   |       | 1,403  |  
|Net unrealized change on available for sale securities                  |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | (25            | )                  | -       |       | (25    | )
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Total comprehensive income                                              |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | -       |       | 1,378  |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Balance as of December 31, 2005                                         |  | 17,030             |  | 14,410,074        |  | 17,000           |  | *                                                   |  | 383               |  | (27              | ) | 31,335                         |  | (39            | )                  | (19,140 | )     | 12,512 |  
|Transition adjustment from applying SAB 108 (**)                        |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | (458    | )     | (458   | )
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Adjusted balance as of December 31, 2005                                |  | 17,030             |  | 14,410,074        |  | 17,000           |  | *                                                   |  | 383               |  | (27              | ) | 31,335                         |  | (39            | )                  | 19,598  |       | 12,054 |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Changes during 2006                                                     |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Exercise of options                                                     |  | -                  |  | 231,499           |  | -                |  | -                                                   |  | 5                 |  | -                |   | 292                            |  | -              |                    | -       |       | 297    |  
|Stock compensation expense                                              |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | 500                            |  | -              |                    | -       |       | 500    |  
|Net loss for the year                                                   |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | (1,722  | )     | (1,722 | )
|Net realized change on available for sale securities                    |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | 39             |                    | -       |       | 39     |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Total comprehensive income                                              |  | -                  |  | -                 |  | -                |  | -                                                   |  | -                 |  | -                |   | -                              |  | -              |                    | -       |       | (1,683 | )
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  
|Balance as of December 31, 2006                                         |  | 17,030             |  | 14,641,573        |  | 17,000           |  | *                                                   |  | 388               |  | (27              | ) | 32,127                         |  | -              |                    | (21,320 | )     | 11,168 |  
|                                                                        |  |                    |  |                   |  |                  |  |                                                     |  |                   |  |                  |   |                                |  |                |                    |         |       |        |  

|   |                                   
|-- | ----------------------------------
|*  | An amount less than US$ 1 thousand
|   |                                   
|** | See Note 2T.                      

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

F  5

---

---



|                                     
|-------------------------------------
|RiT Technologies Ltd.                
|and Subsidiaries                     
|                                     
|Consolidated Statements of Cash Flows
|                                     

|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ------------------ |  | ------------------ | - |  | ------ | -
|                                                                                                      |  | Year ended December 31 |       
|                                                                                                      |  |                        |       
|                                                                                                      |  | 2006                   |        | 2005               |  | 2004               |  
|                                                                                                      |  |                        |        |                    |  |                    |  
|                                                                                                      |  | US$ (in thousands)     |        | US$ (in thousands) |  | US$ (in thousands) |  
|                                                                                                      |  |                        |        |                    |  |                    |  
|                                                                                                     
|Net income (loss) for the year                                                                        |  |                        | (1,722 | )                  |  | 1,403              |   |  | (2,975 | )
|Adjustments to reconcile net income (loss) to net
  cash provided by (used for) operating activities: |  |                        |        |                    |  |                    |   |  |        |  
|Allowance for doubtful accounts                                                                       |  |                        | (116   | )                  |  | (4                 | ) |  | (272   | )
|Severance pay benefits, net                                                                           |  |                        | (23    | )                  |  | 11                 |   |  | (44    | )
|Net realized loss on marketable securities                                                            |  |                        | 26     |                    |  | -                  |   |  | -      |  
|Depreciation                                                                                          |  |                        | 266    |                    |  | 180                |   |  | 190    |  
|Stock compensation expense                                                                            |  |                        | 500    |                    |  | -                  |   |  | -      |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Changes in operating assets and
liabilities:                                                          |  |                        |        |                    |  |                    |   |  |        |  
|Decrease (increase) in trade receivables                                                              |  |                        | 356    |                    |  | (345               | ) |  | (734   | )
|Decrease (increase) in other current assets                                                           |  |                        | (191   | )                  |  | 275                |   |  | (250   | )
|Decrease (increase) in inventories                                                                    |  |                        | (2,466 | )                  |  | 1,447              |   |  | (1,788 | )
|Increase (decrease) in accounts payable and
accruals:                                                 |  |                        |        |                    |  |                    |   |  |        |  
|Trade                                                                                                 |  |                        | 2,921  |                    |  | (1,672             | ) |  | 1,635  |  
|Other *                                                                                               |  |                        | (592   | )                  |  | 255                |   |  | 273    |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Net cash provided by (used for) operating
activities                                                  |  |                        | (1,041 | )                  |  | 1,550              |   |  | (3,965 | )
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Investing                                                                                             |  |                        |        |                    |  |                    |   |  |        |  
|Proceeds from sale of marketable securities                                                           |  |                        | 519    |                    |  | -                  |   |  | -      |  
|Purchase of property and equipment *                                                                  |  |                        | (482   | )                  |  | (368               | ) |  | (239   | )
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Net cash provided by (used for) investing
activities                                                  |  |                        | 37     |                    |  | (368               | ) |  | (239   | )
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Financing                                                                                             |  |                        |        |                    |  |                    |   |  |        |  
|Short-term bank credits, net                                                                          |  |                        | -      |                    |  | (2,467             | ) |  | 1,621  |  
|Proceeds from issuance of shares and warrants, net                                                    |  |                        | -      |                    |  | -                  |   |  | 6,719  |  
|Proceeds from exercise of options                                                                     |  |                        | 297    |                    |  | 547                |   |  | 2      |  
|Proceeds from exercise of warrants                                                                    |  |                        | -      |                    |  | 187                |   |  | 75     |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Net cash provided by (used for) financing
activities                                                  |  |                        | 297    |                    |  | (1,733             | ) |  | 8,417  |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Net increase (decrease) in cash and cash
equivalents                                                  |  |                        | (707   | )                  |  | (551               | ) |  | 4,213  |  
|Cash and cash equivalents, beginning of
year                                                          |  |                        | 7,222  |                    |  | 7,773              |   |  | 3,560  |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Cash and cash equivalents, end of year                                                                |  |                        | 6,515  |                    |  | 7,222              |   |  | 7,773  |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Non cash investing activities:                                                                        |  |                        |        |                    |  |                    |   |  |        |  
|Purchase of property and equipment *                                                                  |  |                        | 37     |                    |  | 121                |   |  | 50     |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  
|Cash paid during the year for:                                                                        |  |                        |        |                    |  |                    |   |  |        |  
|Interest                                                                                              |  |                        | 52     |                    |  | 22                 |   |  | 85     |  
|                                                                                                      |  |                        |        |                    |  |                    |   |  |        |  

|  |                                                                                
|- | -------------------------------------------------------------------------------
|* | Prior year amounts have
  been revised due to corrections of immaterial errors.

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

F  6

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 1    | General                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | RiT
  Technologies Ltd. (the
  Company or RiT), an Israeli company, which was incorporated and commenced
  operations in 1989, pioneered the development of intelligent physical layer
  solutions, designed to provide superior control, utilization and maintenance
  of networks. In the enterprise market, RiTs solutions are designed to help
  customers to maximize control and maintenance efficiency and reduce an
  enterprises network infrastructure ownership costs. In the carrier market,
  the Companys solutions enable reliable mass verification and qualification
  by telcos.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | The Company
  has a wholly-owned subsidiary in the United States, RiT Technologies Inc.
  (the US subsidiary), which was incorporated in 1993 under the laws of the
  State of New Jersey. The US subsidiary is primarily engaged in the selling
  and marketing in the United States of the Companys products.                                                                                                                                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | In May 1997,
  the Company incorporated a wholly-owned subsidiary in Israel, RiT Tech (1997)
  Ltd. (the Israeli subsidiary), intended to make various investments
  including in securities. As at the balance sheet date, the Israeli subsidiary
  holds part of the Companys outstanding shares.                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Note 2    | Significant
  Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | The
  financial statements are presented in accordance with US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  significant accounting policies followed in the preparation of the financial
  statements, applied on a consistent basis, are as follows:                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Financial Statements in US dollars (dollars)                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | Most of the
  Companys sales are made outside Israel. Most sales outside Israel are
  denominated in dollars. Sales in Israel are denominated in New Israeli
  Shekels (NIS), but are dollar-linked. Most purchases of materials and
  components, and most marketing costs, are denominated in dollars or
  dollar-linked. Therefore, the currency of the primary economic environment in
  which the operations of the Company are conducted is the dollar, which is
  used as the functional currency of the Company.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | Transactions
  and balances originally denominated in dollars are presented at their
  original amounts. Transactions and balances in other currencies have been
  remeasured as follows:                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Monetary
  items  at the current exchange rate at balance sheet date.                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Nonmonetary
  items  at historical exchange rates.                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Income and
  expenditure items  at the current exchange rate as of date of recognition of
  those items (excluding depreciation and other items deriving from non-monetary
  items).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | All exchange
  gains and losses from remeasurement of monetary balance sheet items
  denominated in non-dollar currencies are reflected in the statements of
  operations when they arise.                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                      
| | Amounts in
  the financial statements representing the dollar equivalents of balances
  denominated in other currencies do not necessarily represent their real or
  economic value and they may not necessarily be exchangeable for dollars.                                                                                                                                                                                                                                                                            

F  7

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                         
|---------- | ----------------------------------------
|Note 2    | Significant Accounting Policies (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Estimates and assumptions in the financial statements
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | The
  preparation of the financial statements in conformity with United States
  generally accepted accounting principles (GAAP) 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 periods. Actual results may vary from these estimates.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | These are
  managements best estimates based on experience and historical data. Actual
  results, however, may vary from these estimates.                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Principles of consolidation                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | The
  consolidated financial statements include those of the Company and its
  subsidiaries, all of which are wholly-owned. All intercompany transactions
  and balances were eliminated in consolidation.                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Cash and cash equivalents                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | The Company
  considers all highly liquid investments with a maturity of three months or
  less at the date of purchase to be cash equivalents.                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Marketable securities                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | In
  accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
  Accounting for Certain Investments in
  Debt and Equity Securities (SFAS 115), the Company has
  classified all its marketable securities as available for sale. Such
  marketable securities are stated at market value.                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | Unrealized
  gains and losses are reported as a separate component of shareholders equity
  as other comprehensive income (loss) until realized.                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | Realized
  gains and losses are included in financial income, net.                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | Realized
  gains and losses from the sale of available for sale securities are
  determined on a specific identification basis.                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                      
| | A decline in
  the market value of any available-for-sale security below cost that is deemed
  to be other-than-temporary results in a reduction in carrying amount to fair
  value.                                                                                                                                                                                                                                                                                                

F  8

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                                                                                                                                                                                            |                               
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|Note 2    | Significant Accounting Policies
  (contd)                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                                                                                                                                                                                                                                                           
|           | E.                                                                                                                                                                                                                                                                                                                                                         | Marketable securities (contd)
|           |                                                                                                                                                                                                                                                                                                                                                            |                               
|           | All of the
  Companys marketable securities matured in June 2006.                                                                                                                                                                                                                                                                                        
|           |                                                                                                                                                                                                                                                                                                                                                            |                               
|           | 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, 2005:                                                                                                                                                                                                                                                                                                                                

| |                              |  |                     |   |                      |  |                    |  |                             |     |                    |  |                    |   |  |     |  |  |     |  
| | ---------------------------- |  | ------------------- | - | -------------------- |  | ------------------ |  | --------------------------- | --- | ------------------ |  | ------------------ | - |  | --- |  |  | --- | -
| |                              |  | Less than 12 months |   | 12 months or Greater |  |                    |  |                             |    
| |                              |  |                     |   |                      |  |                    |  | Total
  unrealized
  losses |    
| |                              |  | Fair value          |   | Unrealized
  losses  |  | Fair value         |  | Unrealized
  losses         |     | Total
  fair value |  |                   
| |                              |  |                     |   |                      |  |                    |  |                             |     |                    |  |                    |  
| |                              |  | US$ (in thousands)  |   | US$ (in thousands)   |  | US$ (in thousands) |  | US$ (in thousands)          |     | US$ (in thousands) |  | US$ (in thousands) |  
| |                              |  |                     |   |                      |  |                    |  |                             |     |                    |  |                    |  
| |                              |  |                     |   |                      |  |                    |  |                             |     |                    |  |                    |   |  |     |  |  |     |  
| | Corporate
  fixed rate bonds |  |                     | - |                      |  | -                  |  |                             | 506 |                    |  | (39                | ) |  | 506 |  |  | (39 | )
| |                              |  |                     |   |                      |  |                    |  |                             |     |                    |  |                    |   |  |     |  |  |     |  
| | Total                        |  |                     | - |                      |  | -                  |  |                             | 506 |                    |  | (39                | ) |  | 506 |  |  | (39 | )
| |                              |  |                     |   |                      |  |                    |  |                             |     |                    |  |                    |   |  |     |  |  |     |  

| |                                                                                                                                                                                                                                                                                                                                                         |                                
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
| | See also
  Note 8(A)2.                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                        
| | F.                                                                                                                                                                                                                                                                                                                                                      | Allowance for doubtful accounts
| |                                                                                                                                                                                                                                                                                                                                                        
| | Accounts
  receivable are recorded at cost, less related allowance for doubtful accounts
  receivable. Management considers current information and events regarding
  customers ability to repay their obligations and judge accounts receivable
  to be impaired when it is probable that the Company will not be able to
  collect all amounts due.
| |                                                                                                                                                                                                                                                                                                                                                        
| | The balance
  sheet allowance for doubtful accounts for all periods through December 31,
  2006 is determined as a specific amount for those accounts, the non-collection
  of which is probable.                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                        
| | G.                                                                                                                                                                                                                                                                                                                                                      | Inventories                    
| |                                                                                                                                                                                                                                                                                                                                                         |                                
| | Inventories
  are stated at the lower of cost or net realizable value.  Cost is determined as follows:                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                        
| | Raw
  materials  on the moving average basis.                                                                                                                                                                                                                                                                                                       
|
| | Work in
  process and finished products:                                                                                                                                                                                                                                                                                                               
|
| | Costs in
  inventory include direct materials, labor and overhead incurred.                                                                                                                                                                                                                                                                            
|
| | Labor and
  overhead  on the basis of actual manufacturing costs.                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                        
| | Inventory
  write-downs are provided to cover technological obsolescence, excess
  inventories, discontinued products and market prices lower than cost.                                                                                                                                                                                               

F  9

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                  |                                   
|---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------
|Note 2    | Significant Accounting Policies
  (contd)                                                                                                                                      
|           |                                                                                                                                                                                 
|           | H.                                                                                                                                                                               | Assets held for severance benefits
|           |                                                                                                                                                                                  |                                   
|           | Assets held
  for employees severance benefits represent mainly cash surrender managers
  insurance policies that are recorded at their current redemption value.              
|           |                                                                                                                                                                                 
|           | I.                                                                                                                                                                               | Property and equipment            
|           |                                                                                                                                                                                  |                                   
|           | Property and
  equipment are stated at cost less accumulated depreciation. Maintenance and
  repair expenses are charged to operations as incurred.                             
|           |                                                                                                                                                                                 
|           | Depreciation
  is recorded using the straight-line method based on the estimated useful
  lives of the assets, and commences once the assets are ready for their
  intended use.
|           |                                                                                                                                                                                 
|           | Annual rates
  of depreciation are as follows:                                                                                                                                  

| |                                      |   |  |         | 
| | ------------------------------------ | - |  | ------- | 
| |                                      | % | 
| |                                      |   |  |        
|
| | Research and
  development equipment |   |  | 25      | 
| | Manufacturing
  equipment            |   |  | 15  20 | 
| | Office
  furniture and equipment     |   |  | 7  33  | 
| | Leasehold
  improvements             |   |  | *       | 

| |                                                                                                                                                                                                                                                                                            |                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------
| | *  Over
  the shorter of the relevant lease period or their useful lives (mainly at
  25%)                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                            |                    
| | J.                                                                                                                                                                                                                                                                                         | Revenue recognition
| |                                                                                                                                                                                                                                                                                            |                    
| | Revenue is
  recognized when persuasive evidence of an arrangement exists, delivery has occurred,
  the sales price is fixed or determinable, and collection of the resulting
  receivable is reasonably assured.                                                                         
| |                                                                                                                                                                                                                                                                                           
| | Most of the
  Companys sales are sold through distributors, OEM partners, as well as
  through value added resellers, system integrators and installers. These
  distributions channels are the Companys end users and therefore sales occur
  when products are sold to these channels.
| |                                                                                                                                                                                                                                                                                           
| | The Company
  applies the guidance in Emerging Issues Task Force (EITF) 00-21 to determine
  if the contract or arrangement contains more than one unit of accounting and,
  if applicable, the allocation of arrangement consideration to such units of
  accounting.                    
| |                                                                                                                                                                                                                                                                                           
| | When the
  sale arrangement includes customer acceptance provisions, revenue is not
  recognized before it is demonstrated that the criteria specified in the
  acceptance provisions have been satisfied.                                                                                
| |                                                                                                                                                                                                                                                                                           
| | The Company
  does not, in the normal course of business, provide a right of return to any
  of its customers.                                                                                                                                                                            

F  10

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                                                                                                                     |                               
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|Note 2    | Significant Accounting Policies
  (contd)                                                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                     |                               
|           | K.                                                                                                                                                                                                                                                                                  | Research and development costs
|           |                                                                                                                                                                                                                                                                                     |                               
|           | Research and
  development costs are charged to the statements of operations as incurred.                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                    
|           | L.                                                                                                                                                                                                                                                                                  | Government grants             
|           |                                                                                                                                                                                                                                                                                     |                               
|           | When the
  Government of Israel has approved a grant for research and development (see
  Note 5A) the grants are recognized as receivables as and when the related
  research and development costs are incurred.                                                                  
|           |                                                                                                                                                                                                                                                                                    
|           | The grants
  are reflected as a reduction of research and development expenses. Royalty
  expenses, in respect of such grants are classified as part of cost of sales.                                                                                                             
|           |                                                                                                                                                                                                                                                                                    
|           | M.                                                                                                                                                                                                                                                                                  | Allowance for product warranty
|           |                                                                                                                                                                                                                                                                                     |                               
|           | It is the
  Companys policy to grant a warranty for certain products. The balance sheet
  provision for warranties for all periods through December 31, 2006 is
  determined based upon the Companys experience regarding the relationship
  between sales and warranty expenses.
|           |                                                                                                                                                                                                                                                                                    
|           | The
  following are the changes in liability for product warranty:                                                                                                                                                                                                                 

| |                                                                                 |  |                    |      |  
| | ------------------------------------------------------------------------------- |  | ------------------ | ---- | -
| |                                                                                 |  | US$ (in thousands) |     
| |                                                                                 |  |                    |     
|
| | Balance at December 31,
  2004                                                  |  |                    | 126  |  
| | Warranties for systems
  sold                                                   |  |                    | 277  |  
| | Lapsed warranties and
  change of estimate                                      |  |                    | (121 | )
| | Lapsed warranties and
  change of estimate relating to systems sold during 2005 |  |                    | (186 | )
| | Warranty costs incurred
  (actual warranty claims)                              |  |                    | (8   | )
| |                                                                                 |  |                    |      |  
| | Balance at December 31,
  2005                                                  |  |                    | 88   |  
| | Warranties for systems
  sold                                                   |  |                    | 86   |  
| | Lapsed warranties and
  change of estimate related to systems sold before 2006  |  |                    | (78  | )
| | Lapsed warranties and
  change of estimate related to systems sold during 2006  |  |                    | (16  | )
| | Warranty costs incurred
  (actual warranty claims)                              |  |                    | (20  | )
| |                                                                                 |  |                    |      |  
| | Balance at December 31,
  2006                                                  |  |                    | 60   |  
| |                                                                                 |  |                    |      |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------
| | N.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Stock option plans
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                   
| | At December
  31, 2006, the Company has several employee compensation plans, which are
  described more fully in Note 6. Prior to January 1, 2006, the Company
  accounted for those plans under the recognition and measurement provisions of
  Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
  interpretations as permitted by Financial Accounting Standards Board (FASB)
  Statement No. 123, Accounting for
  Stock-Based Compensation(SFAS 123). Effective January 1, 2006,
  the Company adopted the fair value recognition method in SFAS 123R, Share-Based Payment using the modified
  prospective transition method. Under that transition method, compensation
  cost recognized includes: (a) compensation cost for all share-based payments
  granted prior to, but not yet vested as of, January 1, 2006, based on the
  grant date fair value estimated in accordance with the original provisions of
  Statement 123, and (b) compensation cost for all share-based payments granted
  subsequent to January 1, 2006, based on the grant date fair value estimated
  in accordance with the provisions of Statement 123R. Results for prior
  periods have not been restated.

F  11

---

---



|                                                                         |                      
|------------------------------------------------------------------------ | ---------------------
|                                                                         | RiT Technologies Ltd.
|                                                                         | and Subsidiaries     
|Notes to the Consolidated Financial Statements as of December 31,
  2006 |                      
|                                                                        

|              |                                           
|------------- | ------------------------------------------
|Note 2
      | Significant
  Accounting Policies (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                            
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
| | N.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Stock option plans (contd)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Certain of
  the Companys option awards are generally subject to graded vesting over a
  service period. In those cases, the Company recognizes compensation cost on a
  straight-line basis over the requisite service period for the entire award.                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Company
  applies the fair value-based method of accounting set forth in Statement 123
  and EITF Issue No. 9618, Accounting for Equity Instruments That Are Issued
  to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods
  or Services to account for stock-based compensation to non-employees. Using
  the fair value method, the total compensation expense is computed based on
  the fair value of the options on the date the options are granted to the
  non-employees since the options are fully vested.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | As a result
  of adopting Statement 123R on January 1, 2006, the Companys net loss for the
  year ended December 31, 2006 is higher than if it had continued to account
  for share-based compensation under APB 25. Basic and diluted loss per share
  for the year ended December 31, 2006 would have been $ 0.08 if the Company had
  not adopted SFAS 123R, compared to reported basic and diluted loss per share
  of $ 0.10.                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
  following table illustrates the effect on net loss and loss per share if the
  Company had applied the fair value recognition provisions of Statement 123 to
  options granted under the Companys stock option plans in all periods
  presented. For purposes of this pro forma disclosure, the value of the
  options is estimated using a Black-Scholes option-pricing model and is
  amortized to expense over the options vesting period.                                                                                              

| |                                                                 |                                                                                                                                |  |                        |      |                    |        |      |  
| | --------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ---- | ------------------ | ------ | ---- | -
| |                                                                 |                                                                                                                                |  | Year ended December 31 |     
| |                                                                 |                                                                                                                                |  |                        |     
| |                                                                 |                                                                                                                                |  | 2005                   |      | 2004               |       
| |                                                                 |                                                                                                                                |  |                        |      |                    |       
| |                                                                 |                                                                                                                                |  | US$ (in thousands)     |      | US$ (in thousands) |       
| |                                                                 |                                                                                                                                |  |                        |      |                    |       
|
| | Net income (loss) as reported                                   |                                                                                                                                |  | 1,403                  |      |                    | (2,975 | )   
| | Add:                                                            | Stock-based employees compensation expense
  included in reported net income (loss), net of related tax effects                |  |                        | -    |                    |        | -    |  
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |      |  
| | Deduct:                                                         | Total stock-based employees compensation
  expenses under fair value based method for all awards, net of related tax
  effects |  |                        | (498 | )                  |        | (407 | )
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |      |  
| | Net income (loss) - pro forma                                   |                                                                                                                                |  | 905                    |      |                    | (3,382 | )   
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |     
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |      |  
| | Basic net income (loss) per share as
  reported (US$)           |                                                                                                                                |  | 0.10                   |      |                    | (0.27  | )   
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |     
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |      |  
| | Diluted net income (loss) per share as
  reported (US$)         |                                                                                                                                |  | 0.09                   |      |                    | (0.27  | )   
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |     
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |      |  
| | Pro forma basic and diluted net income
  (loss) per share (US$) |                                                                                                                                |  | 0.06                   |      |                    | (0.30  | )   
| |                                                                 |                                                                                                                                |  |                        |      |                    |        |     

F  12

---

---



|                                                                         |                      
|------------------------------------------------------------------------ | ---------------------
|                                                                         | RiT Technologies Ltd.
|                                                                         | and Subsidiaries     
|Notes to the Consolidated Financial Statements as of December 31,
  2006 |                      
|                                                                        

|        |                                           
|------- | ------------------------------------------
|Note 2 | Significant
  Accounting Policies (contd)

| |                                                                                                                                                        |                                                                                                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------
| | N.                                                                                                                                                     | Stock option plans (contd)                                                                        
| |                                                                                                                                                        |                                                                                                    
| | The fair
  value of each option grant is estimated on the date of grant using the Black
  Scholes option pricing model with the following assumptions:
| |                                                                                                                                                       
| | 1.                                                                                                                                                     | The current
  price of the share is the fair market value of such shares at the date of
  issuance.
| |                                                                                                                                                        |                                                                                                    
| | 2.                                                                                                                                                     | Dividend
  yield of zero percent for all relevant periods.                                         
| |                                                                                                                                                        |                                                                                                    
| | 3.                                                                                                                                                     | Risk free
  interest rates are as follows:                                                         

| |                          |  |   |      | 
| | ------------------------ |  | - | ---- | 
| | Year ended
  December 31 |  | % |     
| |                          |  |   |     
| |                          |  |   |      | 
| | 2006                     |  |   | 4.80 | 
| | 2005                     |  |   | 4.37 | 
| | 2004                     |  |   | 3.63 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                    
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Expected
  lives of 1-4 years (mainly 4 years as of the date of the grant) for each
  option granted.                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                    
| | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Expected
  volatility of 79% for the year ended December 31, 2006 (85.6% and 87.2% for
  the years ended December 31, 2005 and 2004, respectively).                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Pro forma
  disclosures for the year ended December 31, 2006 are not presented because
  share-based compensation was accounted for under SFAS No. 123(R)s fair-value
  method during this period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The exercise
  price for options granted to employees is generally at not less than the fair
  value of the Companys ordinary shares at the date of grant.                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                    
| | O.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Impairment of Long-Lived Assets                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                    
| | The Company
  accounts for the impairment of long-lived assets in accordance with the
  provisions of SFAS No. 144 Accounting for
  the Impairment or Disposal of Long-Lived Assets. This statement
  requires that long-lived assets and certain identifiable intangibles 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 undiscounted future net cash flows expected to be
  generated by the asset. If such assets are considered to be impaired, the
  impairment to be recognized is measured by the amount by which the carrying
  amount of the assets exceeds the fair value of the assets. Assets to be
  disposed of are reported at the lower of the carrying amount or fair value
  less costs to sell.

F  13

---

---



|                                                                         |                      
|------------------------------------------------------------------------ | ---------------------
|                                                                         | RiT Technologies Ltd.
|                                                                         | and Subsidiaries     
|Notes to the Consolidated Financial Statements as of December 31,
  2006 |                      
|                                                                        

|        |                                           
|------- | ------------------------------------------
|Note 2 | Significant
  Accounting Policies (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                     
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------
| | P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Deferred income taxes               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                     
| | The Company
  accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred
  tax asset and liability account balances are recognized for the future tax
  consequences attributable to differences between the financial statements
  carrying amounts of existing assets and liabilities and their respective tax
  bases and operating loss and tax credit carryforwards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Deferred tax
  assets and liabilities are measured using enacted tax rates expected to apply
  to taxable income in the years in which those temporary differences are
  expected to be recovered or settled. The effect on deferred tax assets and
  liabilities of a change in tax rates is recognized in the consolidated
  statement of operations in the period that includes the enactment date. The
  Company provides a valuation allowance to reduce deferred tax assets to their
  estimated realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Income (loss) per share             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                     
| | Basic income
  (loss) per share is computed by dividing net income (loss) available to
  common shareholders by the weighted average number of ordinary shares
  outstanding for the period. Diluted income (loss) per share reflects the
  effect of ordinary shares issuable upon exercise of stock options and
  warrants. The common stock equivalent of anti-dilutive securities (as of
  December 31, 2006 1,216,233 stock options and 1,116,031 warrants; as of
  December 31, 2005  403,785 stock options and no warrants; as of December 31,
  2004 - 2,197,033 stock options and 1,223,174 warrants) is not included in the
  computation of diluted earnings (loss) per share.                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | R.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Information about geographical areas
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                     
| | Disclosure
  about segments of an enterprise and related information requires the
  disclosure of information about geographical areas. Company sales as reported
  to management are divided into geographical areas based on the location of
  customers. This information is provided in Note 8B1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Treasury Shares                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                     
| | Holdings of
  the Companys shares by a consolidated subsidiary are presented as treasury
  stock, and are excluded from the calculation of income (loss) per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | T.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Staff Accounting Bulletin No. 108   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                     
| | The
  Companys previous accounting policy with regards to quantification and
  evaluation of misstatements was based on the rollover method. Accordingly,
  the Company assessed misstatements primarily from an income statement
  perspective.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In September
  2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering
  the Effects of Prior Year Misstatements when Quantifying Misstatements in
  Current Year Financial Statements. SAB 108 addresses the process and
  diversity in practice of quantifying financial misstatements resulting in the
  potential build-up of improper amounts on the balance sheet. The SEC Staff
  believes registrants must quantify errors using both a balance sheet and
  income statement approach and evaluate whether either approach results in
  quantifying a misstatement that, when all relevant quantitative and
  qualitative factors are considered, is material. Adjustments made under this
  pronouncement are reflected in the opening balance of shareholders equity in
  the year of adoption. The SAB allows for the adjustment to be made through a
  cumulative effect transition. SAB 108 is applied for the year ended December
  31, 2006.

F  14

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                                
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
  2    | Significant
  Accounting Policies (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | The Company
  assessed the impact of SAB 108 on its consolidated financial statements, and
  has determined that errors relating to non-refundable tax advances payments
  that had been recorded as other receivables and which were deemed to be
  immaterial under the Companys previous error assessment methodology, were
  material in 2006 under the dual method provisions of SAB 108. The error
  resulted from the inadvertent recording of such non-refundable tax advance as
  other receivables on the balance sheet rather than as a charge to the
  statements of operations. In accordance with SAB 108, the Company has
  adjusted its opening accumulated deficit as at January 1, 2006 with respect
  to these tax advance payments that previously have been recorded in other
  receivables at the amount of US$ 458 thousand and eliminated the balance in
  other receivables.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | U.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Recently Enacted
  Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | FIN 48  Accounting for Uncertainty in Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | In June
  2006, the FASB issued Interpretation No. 48, Accounting
  for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
  109 (FIN 48). FIN 48 clarifies the accounting for uncertainty
  in income taxes recognized in a companys financial statements in accordance
  with SFAS No. 109, Accounting for Income
  Taxes. FIN 48 prescribes a recognition threshold and measurement
  attribute for the financial statement recognition and measurement of a tax
  position taken or expected to be taken in a tax return. FIN 48 is effective
  for fiscal years beginning after December 15, 2006. The Company is currently
  reviewing this new standard to determine its effects, if any, on its results
  of operations or financial position.                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | SFAS 157 - Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | In September
  2006, the FASB issued SFAS No. 157, Fair
  Value Measurements, (SFAS 157). SFAS 157 establishes a framework
  for measuring fair value and expands disclosures about fair value
  measurements. The changes in current practice resulting from the application
  of the Statement relate to the definition of fair value, the methods used to
  measure fair value, and the expanded disclosures about fair value
  remeasurement. The statement is effective for fiscal years beginning after
  November 15, 2007 and interim periods within those fiscal years. The Company
  does not believe that the adoption of the provisions of SFAS 157 will have a
  material impact on its consolidated financial position and results of
  operations.                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | In February
  2007, the FASB issued FASB Statement No. 159, The Fair Value Option for
  Financial Assets and Financial Liabilities  Including an amendment of FASB
  Statement No. 115, which permits entities to choose to measure many financial
  instruments at fair value. The Statement allows entities to achieve an offset
  accounting effect for certain changes in fair value of certain related assets
  and liabilities without having to apply complex hedge accounting provisions,
  and is expected to expand the use of fair value measurement consistent with
  the Boards long-term objectives for financial instruments. This Statement is
  effective as of the beginning of an entitys first fiscal year that begins
  after November 15, 2007. The Company is currently reviewing this new standard
  to determine its effects, if any, on its results of operations or financial
  position.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certain prior year amounts have been reclassified to conform to the
  current year presentation. Such reclassifications did not have any impact on
  the Companys shareholders equity or net income (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F  15

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                                
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                         
|------------ | --------------------------------------------------------
|Note
  3    | Property
  and Equipment                                
|             |                                                         
|             | Property and
  equipment, net, consist of the following:

| |                                      |  |                    |       |                    |  |       | 
| | ------------------------------------ |  | ------------------ | ----- | ------------------ |  | ----- | 
| |                                      |  | December 31        |      
| |                                      |  |                    |      
| |                                      |  | 2006               |       | 2005               | 
| |                                      |  |                    |       |                    | 
| |                                      |  | US$ (in thousands) |       | US$ (in thousands) | 
| |                                      |  |                    |       |                    | 
| | Cost                                 |  |                    |       |                    |  |       | 
| | Research and
  development equipment |  |                    | 1,001 |                    |  | 755   | 
| | Manufacturing
  equipment            |  |                    | 459   |                    |  | 407   | 
| | Office
  furniture and equipment     |  |                    | 1,249 |                    |  | 1,152 | 
| | Leasehold
  improvements             |  |                    | 233   |                    |  | 230   | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    | 2,942 |                    |  | 2,544 | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    |       |                    |  |       | 
| | Less accumulated depreciation        |  |                    |       |                    |  |       | 
| | Research and
  development equipment |  |                    | 674   |                    |  | 586   | 
| | Manufacturing
  equipment            |  |                    | 361   |                    |  | 323   | 
| | Office
  furniture and equipment     |  |                    | 913   |                    |  | 783   | 
| | Leasehold
  improvements             |  |                    | 193   |                    |  | 183   | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    | 2,141 |                    |  | 1,875 | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    |       |                    |  |       | 
| |                                      |  |                    | 801   |                    |  | 669   | 
| |                                      |  |                    |       |                    |  |       | 

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|             | Depreciation
  expense for the years ended December 31, 2006, 2005 and 2004 was $ 266
  thousand, $ 180 thousand and $ 190 thousand, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|Note
  4    | Liability
  In Respect of Employees Severance Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|             | Under
  Israeli law and labor agreements, the Company is required to make severance
  payments to dismissed employees and those leaving the Company in certain
  other circumstances. The Companys severance pay liability to its employees,
  which is calculated on the basis of the salary of each employee for the last
  month of the reported period multiplied by the years of such employees
  employment, is reflected by the balance sheet accrual and classified as a
  long-term liability. The Company partially funds this liability by the
  purchase of managers insurance policies. The current redemption value of
  such insurance policies is included in the balance sheet as assets held for
  severance benefits.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|             | Severance
  pay expense for the years ended December 31, 2006, 2005 and 2004 was US$ 630
  thousand, US$ 479 thousand and US$ 462 thousand, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F  16

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                                
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
  5    | Commitments
  and Contingencies                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | A.                                                                                                                                                                                                                                                                                                                           | Royalty commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | The Company
  is obligated to pay royalties to the Office of the Chief Scientist of the
  Israeli Ministry of Industry and Trade (the OCS) on revenues from product
  sales, where the research and development in respect of these products was
  undertaken with royalty bearing participations (grants) from the OCS.
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | The
  Companys obligation to pay royalties is as follows:                                                                                                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | Projects
  approved prior to January 1999: 3.5% of the net sales until the cumulative
  amount of royalties paid equals 100% of the dollar-linked amount of grants
  received.                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | Projects
  approved after January 1999: 3.5% of the net sales until the cumulative
  amount of royalties paid equals 100% of the dollar-linked amounts of grants
  received, plus interest at the LIBOR rate.                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | Royalties
  are payable from the commencement of sales of each of these products until
  the cumulative amount of the royalties paid equals 100% of the dollar-linked
  amounts of the grants received, plus interest at the LIBOR rate.                                                                                    
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | As of
  December 31, 2006, total grants received, net of royalties paid or accrued,
  including interest to date at the above rate, amounted to approximately
  US$ 1,100 thousand.                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | Royalties
  expenses to the OCS are classified as part of cost of sales (see Note 8B2).                                                                                                                                                                                                                                     
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | B.                                                                                                                                                                                                                                                                                                                           | Lease commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | 1.                                                                                                                                                                                                                                                                                                                           | Premises
  occupied by the Company and the US subsidiary are rented under various
  operating leases with related parties (see Note 9) and others.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                              | The lease
  agreements in Israel for the premises in Tel-Aviv and Rosh Haayin expire in
  December 2009 and June 2008, respectively. The lease agreement for the
  premises in New Jersey is month-to-month and can be terminated upon 30 days
  notice. The lease agreement for the representative office in Beijing, China,
  expires in December 2007. The lease agreement for the representative office
  in Moscow expires in March 2007. Minimum future rental payments due under the
  above leases (except for New Jersey), at rates in effect on December 31,
  2006, assuming no options are exercised, are as follows:

| |                           |  |                    |       | 
| | ------------------------- |  | ------------------ | ----- | 
| | Year
  ending December 31 |  | US$ (in thousands) |      
| |                           |  |                    |      
|
| | 2007                      |  |                    | 506   | 
| | 2008                      |  |                    | 487   | 
| | 2009                      |  |                    | 469   | 
| |                           |  |                    |       | 
| |                           |  |                    |       | 
| |                           |  |                    | 1,462 | 
| |                           |  |                    |       | 

| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Part of the
  lease agreements in Israel are secured by a bank guarantee in the amount of
  US$ 21 thousand.                                     
| |                                                                                                                                                  
| | Lease
  expense was US$ 574 thousand, US$ 543 thousand and US$ 565 thousand for the
  years ended December 31, 2006, 2005 and 2004, respectively.

F  17

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd. and Subsidiaries                                  
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                          |                                                                                                                                                                                                                                                                                               
|---------- | ---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 5    | Commitments and Contingencies
  (contd)
|           |                                          |                                                                                                                                                                                                                                                                                               
|           | B.                                       | Lease commitments (contd)                                                                                                                                                                                                                                                                    
|           |                                          |                                                                                                                                                                                                                                                                                               
|           | 2.                                       | The Company
  has enters into several operating leases in respect of motor vehicles. These
  lease agreements expire on various dates from 2006 to 2009. Minimum future
  lease payments due under the above leases on December 31, 2006, assuming no
  options are exercised, are as follows:

| |                         |  |                    |     | 
| | ----------------------- |  | ------------------ | --- | 
| | Year ending December 31 |  | US$ (in thousands) |    
| |                         |  |                    |    
|
| | 2007                    |  |                    | 396 | 
| | 2008                    |  |                    | 286 | 
| | 2009                    |  |                    | 77  | 
| |                         |  |                    |     | 
| |                         |  |                    |     | 
| |                         |  |                    | 759 | 
| |                         |  |                    |     | 

| |                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                    | Lease
  expense was US$ 422 thousand, US$ 379 thousand and US$ 359 thousand for the
  years ended December 31, 2006, 2005 and 2004, respectively.
| |                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                  
| | C.                                                                                                                                                                                                                                                                                                                                                                                                 | Other commitments                                                                                                                                
|
| | As of
  December 31, 2006, bank guarantees in the amount of US$ 81 thousand have been
  issued, mostly for customs duty on importation.                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | D.                                                                                                                                                                                                                                                                                                                                                                                                 | Concentration of credit risk                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                  
| | Financial
  instruments that may subject the Company to significant concentrations of
  credit risk consist principally of cash investments, marketable securities
  and trade accounts receivable.                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | Cash and cash equivalents are deposited with major financial
  institutions in Israel and in the United States.                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | Marketable
  securities consisted of corporate bonds in US dollars held by the Company
  until June 2006.                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
  grants credit to customers without generally requiring collateral or
  security. The Company performs ongoing credit evaluations of the financial
  condition of its customers. The risk of collection associated with trade
  receivables is reduced by The Israeli Credit Insurance Company (ICIC), the
  large number and geographical dispersion of the Companys customer base.
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | On significant
  carrier sales and on sales in areas where there is a risk of collection, the
  Company secures the payment by customer bank guarantee (L.C.)                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | See also
  Note 8B1 for concentration of sale risks.                                                                                                                                                                                                                                                                                                                                              

F  18

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd. and Subsidiaries                                  
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
|Note 5    | Commitments and Contingencies
  (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                
|           | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Concentrations
of business risk
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                
|           | Although the
  Company generally uses standard parts and components for products, certain
  key components used in the products are currently available from only one
  source, and others are available from a limited number of sources. The
  Company believes that it will not experience delays in the supply of critical
  components in the future. If the Company experiences such delays and there is
  an insufficient inventory of critical components at that time, the Companys
  operations and financial results would be adversely affected.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Indemnification agreement      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                
|           | At the
  Annual General Meeting of the Company on December 1, 2003, it was resolved
  that the Company undertake to enter into an indemnification agreement with
  each of the Companys present and future serving directors and officers.                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | The
  indemnification covers certain events and shall be no greater than the amount
  of coverage available to the Companys applicable liability insurance policy
  in effect at the time.                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Note 6    | Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Share capital                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                
|           | Composed as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                          |  |                   |                  |                   |                  |            |  |        |            |             |  |            |  |  |            |  |  |            | 
| | ---------------------------------------- |  | ----------------- | ---------------- | ----------------- | ---------------- | ---------- |  | ------ | ---------- | ----------- |  | ---------- |  |  | ---------- |  |  | ---------- | 
| |                                          |  | December 31, 2006 |                  | December 31, 2005 |                 
| |                                          |  |                   |                  |                   |                 
| |                                          |  | Issued            |                  | Outstanding       |                  | Authorized |  | Issued |            | Outstanding |  | Authorized | 
| |                                          |  |                   |                  |                   |                  |            |  |        |            |             |  |            | 
| |                                          |  |                   | Number of shares |                   | Number of shares |           
| |                                          |  |                   |                  |                   |                  |           
| | Ordinary Shares of NIS 0.1 par value (1) |  |                   | 14,658,573       |                   |                  | 14,641,573 |  |        | 39,979,770 |             |  | 14,427,074 |  |  | 14,410,074 |  |  | 39,979,770 | 
| |                                          |  |                   |                  |                   |                  |            |  |        |            |             |  |            |  |  |            |  |  |            | 
| |                                          |  |                   |                  |                   |                  |            |  |        |            |             |  |            |  |  |            |  |  |            | 
| | Deferred Shares of NIS 0.1 par value (2) |  |                   | 17,030           |                   |                  | -          |  |        | 20,230     |             |  | 17,030     |  |  | -          |  |  | 20,230     | 
| |                                          |  |                   |                  |                   |                  |            |  |        |            |             |  |            |  |  |            |  |  |            | 

| |                                                                                                                                                 |     |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------------------------------------------------------------
| | The
  Companys Ordinary shares are traded in the United States on the over the
  counter market and are listed on the NASDAQ Small Cap Market.
| |                                                                                                                                                
| | (1)                                                                                                                                             | (a) | Ordinary
  shares confer all rights to their holders.                                                                             
| |                                                                                                                                                 |     |                                                                                                                                   
| |                                                                                                                                                 | (b) | Including
  17,000 of which are held by a subsidiary, and classified as Treasury Stock.                                           
| |                                                                                                                                                 |     |                                                                                                                                   
| | (2)                                                                                                                                             |     | Deferred
  shares confer only the right to par value upon liquidation. The deferred
  shares are non-voting and non-participatory.

F  19

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd. and Subsidiaries                                  
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                 
|---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------
|Note 6    | Shareholders Equity (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Share options                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                 
|           | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | RiT Technologies Ltd. 2003 Option Plan          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                 
|           | On July 20,
  2003, the Board of Directors of the Company adopted the RiT Technologies Ltd.
  2003 Share Option Plan (The 2003 Plan), pursuant to which an aggregate of
  2,736,666 Ordinary shares of the Company have been reserved for the grant of
  options under the 2003 Plan together with the former Key Employee Share
  Incentive Plan (1996) and the Directors Share Incentive Plan.                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | On October
  19, 2003, the Board of Directors approved the grant of 30,000 options to a
  director at an exercise price of US$ 1.85 vesting in equal amounts over three
  years. The grant of these options was ratified by the shareholders at the
  Annual shareholders Meeting on December 1, 2003.                                                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | On November
  4, 2004, the Board of Directors approved the grant of 210,000 options to the
  Companys directors at an exercise price of US$ 2.82 and vested one third on
  February 2, 2005 and one third every year thereafter. The grant of these
  options was ratified by the shareholders at the Annual Meeting in December
  2004.                                                                                                                                                                     
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | On February
  1, 2006, the Board of Directors of the Company resolved to reserve 500,000
  additional shares for the grant of options under the 2003 Plan. The
  resolution was ratified by the shareholders at the Annual Shareholders
  Meeting on April 5, 2006.                                                                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | As of
  December 31, 2006, the number of options granted under the 2003 Plan is
  2,320,675 options and the number of options outstanding under the 2003 Plan
  1,462,104 options.                                                                                                                                                                                                                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | RiT Technologies Inc. Employee Stock Option Plan
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                 
|           | In May 1999,
  the Board of Directors of the Company adopted RiT Technologies Inc. Employee
  Stock Option Plan (the RiT Inc. Plan) pursuant to which 86,000 options to
  purchase shares of nominal value of New Israeli Shekels (NIS) 0.1 of the
  parent were allocated for the employee share option plan.                                                                                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | The plan is
  administered by the Board of Directors which designates the optionees, dates
  of grant and the exercise price of the options.                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | The exercise
  price of each stock option is one hundred percent (100%) of the fair market
  value of the underlying share on the day of grant, however the exercise price
  of an incentive stock option granted to an individual who owns stock
  possessing more than ten percent (10%) of the total combined voting power of
  all classes of stock of the Company or the parent shall be one hundred and
  ten percent (110%) of the fair market value of the share of the Company on the
  day of grant.

F  20

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd. and Subsidiaries                                  
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                                                                                                                                                                                                                                                                                                                             |                                                          
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------
|Note 6    | Shareholders Equity (contd)                                                                                                                                                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                                                                            
|           | B.                                                                                                                                                                                                                                                                                                                                                          | Share options (contd)                                   
|           |                                                                                                                                                                                                                                                                                                                                                             |                                                          
|           | 2.                                                                                                                                                                                                                                                                                                                                                          | RiT Technologies Inc. Employee Stock Option Plan (contd)
|           |                                                                                                                                                                                                                                                                                                                                                             |                                                          
|           | The RiT Inc.
  plan shall expire after 10 years from the date of grant or five years from
  the date of grant for individuals who own stock possessing more than ten
  percent (10%) of the total combined voting power of all classes of stock of
  the Company or the parent. These options vests annually in equal amounts over
  a period of 3-4 years.
|           |                                                                                                                                                                                                                                                                                                                                                            
|           | In January
  and October 2001, the Board of Directors resolved to reserve additional
  options to purchase ordinary shares in the amount of 50,000 and 80,000
  respectively, for use in the RiT Technologies Inc. Employee Stock Plan.                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                            
|           | As of
  December 31, 2006, the number of options granted under the RiT Inc. Plan is
  319,000 options and the number of options outstanding under the RiT Inc. is
  108,829 options.                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                                                                            
|           | 3.                                                                                                                                                                                                                                                                                                                                                          | RiT Directors Share Incentive Plan (1997)               
|           |                                                                                                                                                                                                                                                                                                                                                             |                                                          
|           | In June
  1997, the RiT Directors Share Incentive Plan (1997) (the Directors Plan)
  was adopted by the Board.                                                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                                                                            
|           | On October
  10, 2001, the Board of Directors of the Company resolved to reserve 110,000
  additional shares. At that date, 210,000 options were granted to certain
  directors at an exercise price of US$ 1.15 and vested in equal amounts over
  three years.                                                                                           
|           |                                                                                                                                                                                                                                                                                                                                                            
|           | Commencing
  the adoption the Companys 2003 Plan, the Company ceased to grant options
  under the Directors Plan. As of December 31, 2006 the number of options
  outstanding under the Directors plan is 60,000 options.                                                                                                                                 

F  21

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                               |                                                                                                     
|---------- | ----------------------------- | ----------------------------------------------------------------------------------------------------
|Note 6    | Shareholders Equity (contd)
|           |                              
|           | B.                            | Share options (contd)                                                                              
|           |                               |                                                                                                     
|           | 4.                            | Stock
  Options granted under the Employees and Non-employees Share Option Plans
  are as follows:

|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|--------------------------------------------- |  | ------------------- | --------- | ----------------------------------- |  | ------------------------------------------ |  |  | ---- | 
|                                              |  | Number of
  options |           | Weighted
  average
  exercise price |  | Weighted
  average grant date
  fair value | 
|                                              |  |                     |           |                                     |  |                                            | 
|                                              |  |                     |           | US$                                 |  | US$                                        | 
|                                              |  |                     |           |                                     |  |                                            | 
|                                             
|Options unexercised as of
  January 1, 2004   |  |                     | 2,407,991 |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|Granted                                       |  |                     | 461,000   |                                     |  | 2.12                                       |  |  | 1.21 | 
|Exercised                                     |  |                     | (2,000    | )                                   |  | 1.12                                       |  |  | 0.74 | 
|Expired                                       |  |                     | (333,000  | )                                   |  | 2.52                                       |  |  | 1.70 | 
|Forfeited                                     |  |                     | (336,958  | )                                   |  | 2.31                                       |  |  | 1.56 | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|Options unexercised as of
  December 31, 2004 |  |                     | 2,197,033 |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|Granted                                       |  |                     | 323,000   |                                     |  | 2.66                                       |  |  | 1.27 | 
|Exercised                                     |  |                     | (283,592  | )                                   |  | 1.85                                       |  |  | 1.31 | 
|Expired                                       |  |                     | (60,000   | )                                   |  | 7.06                                       |  |  | 5.13 | 
|Forfeited                                     |  |                     | (71,742   | )                                   |  | 2.53                                       |  |  | 1.42 | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|Options unexercised as of
  December 31, 2005 |  |                     | 2,104,699 |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|Granted                                       |  |                     | 563,300   |                                     |  | 1.56                                       |  |  | 0.81 | 
|Exercised                                     |  |                     | (231,499  | )                                   |  | 1.28                                       |  |  | 0.89 | 
|Expired                                       |  |                     | (456,691  | )                                   |  | 2.03                                       |  |  | 0.86 | 
|Forfeited                                     |  |                     | (348,876  | )                                   |  | 2.19                                       |  |  | 0.81 | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 
|Options
  unexercised as of December 31, 2006 |  |                     | 1,630,933 |                                     |  |                                            |  |  |      | 
|                                              |  |                     |           |                                     |  |                                            |  |  |      | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | The exercise price of the options
  under the various stock option plans were granted at or greater than market
  value. Accordingly, no compensation expense was previously recognized under
  APB 25. As a result of adopting SFAS 123(R) on January 1, 2006, compensation
  expense was recorded for periods subsequent thereto. Total cost of
  share-based payments in the amount of approximately $ 500 thousand was
  recognized in the statement of operation in 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Total
  compensation cost related to option awards not yet recognized amount to $ 673
  thousand and will be recognized in the statement of operations during fiscal
  years 2007  2009.                                                                                                                                                                                                                                                                                     

F  22

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                         |                                                                                                              
|------------ | ------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------
|Note
  6    | Shareholders
  Equity (contd)                                                                        
|             |                                                                                                        
|             | B.                                                                                                      | Share options (contd)                                                                                       
|             |                                                                                                         |                                                                                                              
|             | 4.                                                                                                      | Stock
  Options granted under the Employees and Non-employees Share Option Plans
  are as follows: (contd)
|             |                                                                                                        
|             | The
  following table summarizes information about stock options outstanding as of
  December 31, 2006:

|                                    |  |                                                            |           |                                                     |     |                            |  |                                                              |      |                            |  |         |  |  |      | 
|----------------------------------- |  | ---------------------------------------------------------- | --------- | --------------------------------------------------- | --- | -------------------------- |  | ------------------------------------------------------------ | ---- | -------------------------- |  | ------- |  |  | ---- | 
|                                    |  | Options outstanding                                        |           | Option exercisable                                  |    
|                                    |  |                                                            |           |                                                     |    
|Rates of
  exercise   prices in US$ |  | Number of
  shares
  unexercised asof
  December 31
  2006 |           | Weighted
  average
  remaining
  contractual
  life |     | Average
  exercise
  price |  | Number of
  exercisable 
  shares as of
  December 31
  2006 |      | Average
  exercise
  price | 
|                                    |  |                                                            |           |                                                     |     |                            |  |                                                              |      |                           
|                                    |  |                                                            | In years  |                                                     | US$ |                            |  |                                                              | US$  |                           
|                                    |  |                                                            |           |                                                     |     |                            |  |                                                              |      |                            | 
|                                   
|1.11 - 1.60                         |  |                                                            | 695,533   |                                                     |     | 5.8                        |  |                                                              | 1.26 |                            |  | 573,200 |  |  | 1.27 | 
|1.61 - 1.88                         |  |                                                            | 457,400   |                                                     |     | 8.78                       |  |                                                              | 1.85 |                            |  | 49,000  |  |  | 1.77 | 
|2.05 - 2.75                         |  |                                                            | 290,000   |                                                     |     | 7.84                       |  |                                                              | 2.57 |                            |  | 108,666 |  |  | 2.54 | 
|2.82                                |  |                                                            | 150,000   |                                                     |     | 7.88                       |  |                                                              | 2.82 |                            |  | 100,000 |  |  | 2.82 | 
|3.15                                |  |                                                            | 28,000    |                                                     |     | 8.49                       |  |                                                              | 3.15 |                            |  | 9,334   |  |  | 3.15 | 
|3.69                                |  |                                                            | 6,000     |                                                     |     | 4.21                       |  |                                                              | 3.69 |                            |  | 6,000   |  |  | 3.69 | 
|7.38                                |  |                                                            | 4,000     |                                                     |     | 3.25                       |  |                                                              | 7.38 |                            |  | 4,000   |  |  | 7.38 | 
|                                    |  |                                                            |           |                                                     |     |                            |  |                                                              |      |                            |  |         |  |  |      | 
|                                    |  |                                                            |           |                                                     |     |                            |  |                                                              |      |                            |  |         |  |  |      | 
|                                    |  |                                                            | 1,630,933 |                                                     |     |                            |  |                                                              |      |                            |  | 850,200 |  |  |      | 
|                                    |  |                                                            |           |                                                     |     |                            |  |                                                              |      |                            |  |         |  |  |      | 

| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At year-end
  2006, options with an average exercise price of US$ 2.56 were exercisable for
  850,200 shares (at year-end 2005, options with an average exercise price of
  US$ 1.92 were exercisable for 1,205,533 shares).
| |                                                                                                                                                                                                                             
| | Weighted
  average exercise price for the options outstanding in 2006 and 2005 was
  US$ 1.86 and US$ 1.87, respectively.                                                                                                   
| |                                                                                                                                                                                                                             
| | Weighted
  average of the remaining contractual life for the outstanding options in 2006
  was 7.2 in years and the intrinsic value as of December 31, 2006 is 0.                                                           
| |                                                                                                                                                                                                                             
| | A summary of
  the status of the Company nonvested shares as of December 31, 2005 and
  changes during the year ended December 31, 2006 is presented below:                                                                 

|                               |  |  |         |   |                                              |      |  | 
|------------------------------ |  |  | ------- | - | -------------------------------------------- | ---- |  | 
|Nonvested
  shares             |  |  | Shares  |   | Weighted
  Average grant
  Date
  Fair value |     
|                               |  |  |         |   |                                              |     
|                              
|Nonvested at January 1, 2006   |  |  | 899,166 |   |                                              | 1.91 | 
|Granted                        |  |  | 563,300 |   |                                              | 0.81 | 
|Vested                         |  |  | 589,833 |   |                                              | 1.90 | 
|Forfeited                      |  |  | (91,900 | ) |                                              | 2.20 | 
|                               |  |  |         |   |                                              |      | 
|Nonvested at December 31, 2006 |  |  | 780,733 |   |                                              |      | 
|                               |  |  |         |   |                                              |      | 

F  23

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------
|Note
  6    | Shareholders
  Equity (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Share options (contd)  
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Options to non-employees
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | The Company
  applies the fair value-based method of accounting set forth in SFAS 123R to
  account for stock-based compensation to non-employees. Using the fair value
  method, the total compensation expense is computed based on the fair value of
  the options on the date the options are granted to the non-employees since
  the options are fully vested. The Company granted total of 14,500 options
  during the years 2003-2006. Such options granted to non-employees were
  granted as part of the 2003 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Warrants to investors   
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | As part of
  an agreement for a private placement signed on June 21, 2004, the Company
  issued to the investors warrants to purchase up to 1,266,032 Ordinary shares
  at an exercise price of US$ 1.75 per share. The warrants are exercisable for
  five years from the date of closing of the Private Placement. As of December
  31, 2006, 150,001 of these warrants had been exercised.
  The Companys agreement with the investors calls for registration of the
  shares and keeping a registration statement effective through July 2009. If
  sales cannot be made pursuant to the registration statement, the Company will
  be required to pay liquidation charges equal to 1.5% of the aggregate amount
  invested per month. There is no limitation to the maximum potential
  consideration to be transferred.                                                                                                                                                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | The Company
  accounted for the issuance of warrants as an equity transaction, and
  separately evaluated the potential for liability for liquidated damages under
  the free standing registration right agreement (RRA) based on the guidance
  in SFAS No. 5. At the date of issuance, the Company believed that the
  likelihood of achieving effectiveness of a registration statement, and
  maintaining its effectiveness in accordance with the RRA, was and would
  continue to be highly probable. The Company believes it is highly probable it
  will maintain effectiveness of the registration statement as required under
  the RRA, and that no penalties for non-performance under the RRA (i.e.
  liquidated damages) will arise. Accordingly, no accrual for such is recorded.
  The Companys treatment is consistent with the guidance in FSP EITF 00-19-2 Accounting for Registration Payment
Arrangements.                                                                                                                                                                                                             
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Dividends               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                         
|             | Dividends
  may be paid by the Company only out of the Israeli Companys earnings and
  other surpluses as calculated in Israeli currency and as defined in the
  Israeli Companies Law as at the end of the most recent fiscal year or as
  accrued over a period of the last two years whichever is higher. Such
  dividends will be declared and paid in NIS. There are no restrictions on the
  ability of the US subsidiary to transfer funds to its parent, and there are
  no restrictions on the transfer of funds to foreign shareholders for the
  payment of dividends.
  The distribution of cash dividends out of retained earnings as of December
  31, 2006, would subject the Company to a 25% tax in respect of the income
  from which it was distributed, according to the terms of the tax exemption
  due to its approved enterprise status, as explained in Note 7B.
  The Company has decided not to distribute the said tax exempt income as
  dividends. In the event of dividend distribution as above, the said tax
  amount would be charged as an expense in the statement of operations.
  See also Note 7B1(b).

F  24

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
  7    | Taxes on
  Income                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                             
|             | A.                                                                                                                                                                                                                                                                                                                           | Israel tax reform                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | As of
  January 1, 2003, tax reform legislation was enacted, which significantly
  changed the taxation basis of corporate and individual taxpayers from a
  territorial basis to a worldwide basis. From such date an Israeli resident
  taxpayer will be taxed on income produced and derived both in and out of
  Israel.
|             |                                                                                                                                                                                                                                                                                                                             
|             | B.                                                                                                                                                                                                                                                                                                                           | Tax benefits under the Law for the Encouragement of Capital Investments,
  1959 (hereafter - the Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | 1.                                                                                                                                                                                                                                                                                                                           | Rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | (a)                                                                                                                                                                                                                                                                                                                          | Pursuant to
  the above Law the Company is entitled to tax benefits relating to investments
  in Approved Enterprises in accordance with letters of approval received.                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                              | A major part
  of the production facilities of the Company has been granted the status of an
  Approved Enterprise under the above law.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                              | Income
  arising from the Companys Approved Enterprise is subject to zero tax rates
  under the Alternative Benefit Method and reduced tax rates based on the
  level of direct or indirect ownership for specific period. The period of
  benefits in respect of most of the Companys production facilities will
  terminate in the years 2007  2011 (the period of benefits in respect of the first
  approval was terminated in 2005). No new approvals have been received since
  1997.                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                              | The duration
  of tax benefits, for each of the programs is subject to limitations of the
  earlier of 12 years from commencement of investment, or 14 years from receipt
  of approval, as an Approved Enterprise under the Law.                                                                                                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | (b)                                                                                                                                                                                                                                                                                                                          | In the event
  of distribution by the Company of a cash dividend out of retained earnings
  which were taxed at a zero rate due to the Approved Enterprise status, the
  Company would be subjected to 25% corporate tax on the amount distributed,
  and the recipients would have to pay 15% tax (to be withheld at source) on
  the amounts of such distribution received by them.                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                              | The Company
  has no intention to pay a dividend in the foreseeable future and, additionally,
  there is a tax strategy available whereby a distribution in liquidation will
  not create additional taxes for the Company.                                                                                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | (c)                                                                                                                                                                                                                                                                                                                          | Should the
  Company derive income from sources other than the Approved Enterprise
  during the relevant period of benefits, such income will be taxable at the
  regular corporate tax rate - 31% for the tax year ended December
  31, 2006. Due to carryforwards tax loss the Company does not anticipate any
  taxable income from such sources.                                                                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             | (d)                                                                                                                                                                                                                                                                                                                          | On July 25,
  2005 the Israeli Parliament passed the Law for the Amendment of the Income
  Tax Ordinance (No. 147 and Temporary Order)  2005 (hereinafter  Amendment
  147). The Amendment provides for a gradual reduction in the company tax rate
  in the following manner: in 2006 the tax rate will be 31%, in 2007 the tax
  rate will be 29%, in 2008 the tax rate will be 27%, in 2009 the tax rate will
  be 26% and from 2010 onward the tax rate will be 25%. Real capital gains are
  subject to tax of 25%. These rates are used in the computation of the gross
  deferred tax assets.

F  25

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                         
|------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
  7    | Taxes on
  Income (contd)                                                                                                                                                                                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                                    
|             | B.                                                                                                                                                                                                                                                                                                                                  | Tax benefits under the Law for the Encouragement of Capital
  Investments, 1959 (hereafter - the Law) (contd)                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                     
|             | 2.                                                                                                                                                                                                                                                                                                                                  | Accelerated depreciation                                                                                                                                                                                                                                                                                                                                                                            
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                     
|             | The Company
  is entitled to claim accelerated depreciation for a period of five years, in
  respect of property and equipment of an Approved Enterprise. The Company
  has not utilized this benefit to date.                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                                    
|             | 3.                                                                                                                                                                                                                                                                                                                                  | Conditions for entitlement to the benefits                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                     
|             | Entitlement
  to the benefits of the Companys Approved Enterprise status is dependent
  upon the Company complying with the conditions stipulated by the Law and the
  regulations published thereunder, as well as the criteria set forth in the
  approval for the specific investment in the Companys Approved Enterprise.
|             |                                                                                                                                                                                                                                                                                                                                    
|             | In the event
  of failure to comply with these conditions, the tax benefits may be canceled
  and the Company may be required to refund the amount of the canceled
  benefits, with the addition of linkage differences and interest.                                                                                              
|             |                                                                                                                                                                                                                                                                                                                                    
|             | As of the
  date of these financial statements the Company believes it is in compliance
  with these conditions, although no benefits have been utilized by the Company
  to date.                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                    
|             | 4.                                                                                                                                                                                                                                                                                                                                  | Changes to the Law                                                                                                                                                                                                                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                     
|             | On March 30,
  2005, the Israeli Parliament approved a reform of the above Law. The primary
  changes are as follows:                                                                                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                                    
|             | (a)                                                                                                                                                                                                                                                                                                                                 | 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. Audit of such
  eligibility will be the responsibility of the Income Tax Authorities and
  would occur as part of the income tax audit. Request for pre-ruling is
  possible.
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                     
|             | (b)                                                                                                                                                                                                                                                                                                                                 | Tax benefits
  of the Alternate Path include lower tax rates or no tax depending on area and
  the path chosen, lower tax rates on dividends and accelerated depreciation.                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                         
|             | (c)                                                                                                                                                                                                                                                                                                                                 | In order to
  receive benefits in the Grant Path or the Alternate Path, the Industrial
  enterprise must contribute to the economic independence of the Country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 market of at least 12 million
  residents.                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                         
|             | (d)                                                                                                                                                                                                                                                                                                                                 | Upon the
  establishment of an enterprise, an investment of at least NIS 300 thousand in
  production machinery and equipment within three years is required.                                                                                                                                                                                                                                       

F  26

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
  7    | Taxes on
  Income (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Tax benefits under the Law for the Encouragement of Capital Investments,
  1959 (hereafter - the Law) (contd)                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|             | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Changes to the Law (contd)                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|             | (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | For an
  expansion, a company is required to invest within three years the higher of
  NIS 300 thousand in production machinery and equipment or a certain
  percentage of its existing production machinery and equipment.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|             | 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. Therefore, the amendments do not impact an
  existing Approved Enterprise which received written approval. The new tax
  regime shall apply for a new Approved Enterprise and for an Approved
  Enterprise expansion for which the first year of benefits is 2004 and
  thereafter. The Company has not applied for approvals pursuant to the amended
  law.       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Measurement of results for tax purposes under the Income Tax
  Inflationary Adjustments Law (the Inflationary Adjustments Law)                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|             | Under the
  Inflationary Adjustments Law, the Companys results for tax purposes are
  measured in real terms, in accordance with the changes in the Israeli
  Consumer Price Index.                                                                                                                                                                                                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Tax benefits under the Law for Encouragement of Industry (Taxation),
  1969                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|             | The Company
  believes that it currently qualifies as an Industrial Company under the
  above Law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | As such it
  is entitled to certain tax benefits, mainly the right to deduct share
  issuance costs for tax purposes in the event of a public offering, and the
  amortization of know-how acquired from a third party. The Company
  utilizes certain such provisions in its tax filings.                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Tax assessment and carryforwards tax loss                                                                                                                                                                                  
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            
|             | The Company
  has not received final tax assessments since incorporation. In accordance
  with the provisions of the Income Tax Ordinance, tax returns submitted up to
  and including the 2001 tax year can be regarded as final. No final tax
  assessments have been received by the subsidiary company.                                                                                                                                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | The
  Companys Israeli tax loss carryforwards are approximately US$ 20,445 thousand
  as of December 31, 2006. The Companys Israeli tax loss carryforwards may be
  utilized indefinitely against future taxable income.The US subsidiary is
  taxed under the United States Federal and State tax rules. The US
  subsidiarys tax loss carryforwards amounted to approximately US$ 4,765
  thousand as of December 31, 2006. Such losses are available to offset any
  future US taxable income of the US subsidiary and will expire in the years
  2008 - 2025.

F  27

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                       |               
|------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|Note
  7    | Taxes on
  Income (contd)                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                       |               
|             | F.                                                                                                                                                                                                                                                                                                    | Deferred taxes
|             |                                                                                                                                                                                                                                                                                                       |               
|             | Deferred
  Taxes reflect the tax effects of temporary differences between the carrying
  amounts of assets and liabilities for financial reporting purposes and such
  amounts for income tax purposes. Significant components of the Companys
  deferred tax liabilities and assets are as follows:

|                                  |  |                    |        |                    |  |           |  
|--------------------------------- |  | ------------------ | ------ | ------------------ |  | --------- | -
|                                  |  | December
  31      |       
|                                  |  |                    |       
|                                  |  | 2006               |        | 2005               | 
|                                  |  |                    |        |                    | 
|                                  |  | US$ (in thousands) |        | US$ (in thousands) | 
|                                  |  |                    |        |                    | 
|                                 
|Deferred tax assets:              |  |                    |        |                    | 
|Allowance
  for doubtful accounts |  |                    | 90     |                    |  | 131       |  
|Severance
  pay                   |  |                    | 119    |                    |  | 126       |  
|Vacation pay                      |  |                    | 177    |                    |  | 189       |  
|Research and
  development        |  |                    | 126    |                    |  | *** 122   |  
|Losses
  carried forward          |  |                    | 6,614  |                    |  | *** 6,398 |  
|                                  |  |                    |        |                    |  |           |  
|Total gross
  deferred tax assets |  |                    | 7,126  |                    |  | *** 6,966 |  
|                                  |  |                    |        |                    |  |           |  
|Valuation
  allowance             |  |                    | (7,126 | )                  |  | ***(6,966 | )
|                                  |  |                    |        |                    |  |           |  
|                                  |  |                    |        |                    |  |           |  
|Net deferred
  tax assets         |  |                    | -      |                    |  | -         |  
|                                  |  |                    |        |                    |  |           |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ***      Prior year amounts have been revised due to corrections of immaterial errors
The net
  change in valuation allowance for each of the years ended December 31, 2006
  and 2005, was an increase of $ 160 thousand and decrease of $ 450 thousand,
  respectively.                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Deferred   tax  assets  for  future  benefits  are
included where their realization is more likely than not.
Because of history of taxable  losses,  management  believes that it is more likely than not that
the results of future  operations  will not  generate  sufficient  taxable  income to realize the
deferred tax assets.  As such, the Company has recorded a full  valuation  allowance in regard of
all  its tax  loss  carryforwards  as  well as for  other  deductible  temporary  differences  at
December 31, 2006 and 2005.

F  28

---

---



|                                                                         |                                            
|------------------------------------------------------------------------ | -------------------------------------------
|                                                                         | RiT Technologies Ltd.
  
  and Subsidiaries
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006 |                                            
|                                                                        

|           |                         
|---------- | ------------------------
|Note 7    | Taxes on Income (contd)

| |                                                                  |                                                                           
| | ---------------------------------------------------------------- | --------------------------------------------------------------------------
| | G.                                                               | Reconciliation of the theoretical tax expense and the actual tax
  expense
| | The
  components of net income/loss before taxes are as follows:

| |                                  |  |                        |        |                    |  |                    |  |  |        |  
| | -------------------------------- |  | ---------------------- | ------ | ------------------ |  | ------------------ |  |  | ------ | -
| |                                  |  | Year ended December 31 |       
| |                                  |  |                       
| |                                  |  | 2006                   |        | 2005               |  | 2004               | 
| |                                  |  |                        |        |                    |  |                   
| |                                  |  | US$ (in thousands)     |        | US$ (in thousands) |  | US$ (in thousands) | 
| |                                  |  |                        |        |                    |  |                    |  |  |        |  
| | Israel                           |  |                        | (2,312 | )                  |  | 1,326              |  |  | (3,287 | )
| | Other                            |  |                        | 590    |                    |  | 77                 |  |  | 312    |  
| |                                  |  |                        |        |                    |  |                    |  |  |        |  
| |                                  |  |                        |        |                    |  |                    |  |  |        |  
| | Net income
  (loss) before taxes |  |                        | (1,722 | )                  |  | 1,403              |  |  | (2,975 | )
| |                                  |  |                        |        |                    |  |                    |  |  |        |  

| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A
  reconciliation of the theoretical tax expense, assuming all income is taxed
  at the statutory rate of 31% for the year ended December 31, 2006, 34% for
  the year ended December 31, 2005 and 35% for the year ended December 31,
  2004, applicable to income of companies in Israel, and the actual tax
  expense, is as follows:

| |                                                                                                                                        |  |                        |        |                    |  |                    |   |  |        |  
| | -------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ------------------ |  | ------------------ | - |  | ------ | -
| |                                                                                                                                        |  | Year ended December 31 |       
| |                                                                                                                                        |  |                        |       
| |                                                                                                                                        |  | 2006                   |        | 2005               |  | 2004               |  
| |                                                                                                                                        |  |                        |        |                    |  |                    |  
| |                                                                                                                                        |  | US$ (in thousands)     |        | US$ (in thousands) |  | US$ (in thousands) |  
| |                                                                                                                                        |  |                        |        |                    |  |                    |  
| |                                                                                                                                        |  |                        |        |                    |  |                    |   |  |        |  
| | Net income (loss) before taxes, as reported
  in the statements of operations                                                          |  |                        | (1,722 | )                  |  | 1,403              |   |  | (2,975 | )
| |                                                                                                                                        |  |                        |        |                    |  |                    |   |  |        |  
|
| | Theoretical taxes on income*                                                                                                           |  |                        | (534   | )                  |  | 477                |   |  | (1,041 | )
| | Non-deductible expenses                                                                                                                |  |                        | 34     |                    |  | 41                 |   |  | 39     |  
| | Stock compensation expenses                                                                                                            |  |                        | 155    |                    |  | -                  |   |  | -      |  
| | Valuation allowance***                                                                                                                 |  |                        | 160    |                    |  | (450               | ) |  | 980    |  
| | Adjustments arising from differences on the
  basis of measurement for tax purposes and for financial reporting purposes
  and other** |  |                        | 185    |                    |  | (68                | ) |  | 22     |  
| |                                                                                                                                        |  |                        |        |                    |  |                    |   |  |        |  
| | Taxes on income for the reported year                                                                                                  |  |                        | -      |                    |  | -                  |   |  | -      |  
| |                                                                                                                                        |  |                        |        |                    |  |                    |   |  |        |  
|
| | *         Applicable
  tax rate                                                                                                        |  |                        | 31     | %                  |  | 34                 | % |  | 35     | %
| |                                                                                                                                        |  |                        |        |                    |  |                    |   |  |        |  

| |     |                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | **  | Resulting
  from the difference between the changes in the Israeli CPI, which forms the
  basis for computation of taxable income of the Company, and the exchange rate
  of Israeli currency relative to the dollar.
| |     |                                                                                                                                                                                                                      
| | *** | Prior year
  amounts have been revised due to corrections of immaterial errors                                                                                                                                       

F  29

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                                
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       |  | 
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ------------------ | ----- |  | 
|Note
  8      | Supplementary
  Financial Statements Information                                                                                                                                                                                   
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       |  | 
|               | A.                                                                                                                                                                                                                                  | Balance Sheets                                                                                                                        |  |                    |  |                    |       |  | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       |  | 
|               | 1.                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                             |  |                    |  |                    |       |  | 
|               | Comprised
  of:                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  | December 31        | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  | 2006               |  | 2005               |      
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |      
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  | US$ (in thousands) |  | US$ (in thousands) |      
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |      
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       |  | 
|               | Cash and
  deposits (1)                                                                                                                                                                                                             |                                                                                                                                       |  | 6,515              |  |                    | 7,222 | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       |  | 
|               |                                                                                                                                                                                                                                     |                                                                                                                                       |  |                    |  |                    |       |  | 
|               | (1)                                                                                                                                                                                                                                 | The deposits
  are in US dollars and bearing an average annual interest of 5.1% per annum
  (2005  3.4% per annum).                 
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | Line of
  credit                                                                                                                                                                                                                   
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | On February
  19, 2006 the Company signed a credit line agreement with a bank for an amount
  of up to US$ 1,000,000. The interest rate for each amount withdrawn from the
  credit line will be determined on the withdrawal date.
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | The line of
  credit is conditional upon the Companys compliance with the following
  requirements:                                                                                                                               
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | (1)                                                                                                                                                                                                                                 | a floating
  charge on all assets                                                                                                    
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | (2)                                                                                                                                                                                                                                 | total
  shareholders equity will not be less than $3 million and not less than 35%
  of the Companys total balance sheet assets and
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | (3)                                                                                                                                                                                                                                 | total
  working capital, calculated as trade receivables and inventory less accounts
  payables, will not be less than $3 million    
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | The credit
  line expires on January 31, 2007 and subsequent to balance sheet date the
  credit line was extended until January 31, 2008.                                                                                          
|               |                                                                                                                                                                                                                                     |                                                                                                                                      
|               | 2.                                                                                                                                                                                                                                  | Marketable securities                                                                                                                

| |                                                                                                                                                                                 |  |  |               |  |                    |      |                    |      |     |  | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- |  | ------------------ | ---- | ------------------ | ---- | --- |  | 
| |                                                                                                                                                                                 |  |  | Interest rate |  | December 31        |     
| |                                                                                                                                                                                 |  |  |               |  |                    |     
| |                                                                                                                                                                                 |  |  |               |  |                    | 2006 |                    | 2005 |    
| |                                                                                                                                                                                 |  |  |               |  |                    |      |                    |      |    
| |                                                                                                                                                                                 |  |  | %             |  | US$ (in thousands) |      | US$ (in thousands) |     
| |                                                                                                                                                                                 |  |  |               |  |                    |      |                    |     
| |                                                                                                                                                                                 |  |  |               |  |                    |      |                    |      |     |  | 
| | Corporate
  bonds in US dollars                                                                                                                                                 |  |  | 7.75          |  |                    |     |                    |      | 506 | 
| |                                                                                                                                                                                 |  |  |               |  |                    |      |                    |      |     |  | 
| |                                                                                                                                                                                 |  |  |               |  |                    |      |                    |      |     |  | 
| |                                                                                                                                                                                 | 
| | The fair
  market value, cost and unrealized holding losses of such securities December
  31, 2005 were US$ 506 thousand, US$ 545 thousand and US$ 39 thousand,
  respectively.
| |                                                                                                                                                                                
| | All of the
  Companys marketable securities have matured in June 2006. A net realized
  loss in the amount of $ 26 thousand has been recorded in Financing
  expenses.      

F    30

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.                                                   
|and Subsidiaries                                                        
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|            |                                                          
|----------- | ---------------------------------------------------------
|Note 8     | Supplementary Financial Statements
  Information (contd)

| |                                                     |                        
| | --------------------------------------------------- | -----------------------
| | A.                                                  | Balance Sheets (contd)
| |                                                     |                        
| | 3.                                                  | Trade receivables, net 
| |                                                     |                        
| | Trade
  receivables, net, consist of the following:

| |                                          |  |                    |       |                    |  |       |  
| | ---------------------------------------- |  | ------------------ | ----- | ------------------ |  | ----- | -
| |                                          |  | December 31        |      
| |                                          |  |                    |      
| |                                          |  | 2006               |       | 2005               | 
| |                                          |  |                    |       |                    | 
| |                                          |  | US$ (in thousands) |       | US$ (in thousands) | 
| |                                          |  |                    |       |                    | 
| |                                          |  |                    |       |                    |  |       |  
| | Trade receivables                        |  |                    | 4,795 |                    |  | 5,151 |  
| | Less allowance for doubtful accounts (a) |  |                    | (310  | )                  |  | (426  | )
| |                                          |  |                    |       |                    |  |       |  
| |                                          |  |                    | 4,485 |                    |  | 4,725 |  
| |                                          |  |                    |       |                    |  |       |  

| |     |                                                                        
| | --- | -----------------------------------------------------------------------
| | (a) | The
  following are the changes in the allowance for doubtful accounts:

| |                                           |  |                    |      |  
| | ----------------------------------------- |  | ------------------ | ---- | -
| |                                           |  | US$ (in thousands) |     
| |                                           |  |                    |     
| |                                           |  |                    |      |  
| | Balance as of January 1, 2004             |  |                    | 702  |  
| | Additions                                 |  |                    | -    |  
| | Deductions                                |  |                    | (230 | )
| | Write-downs charged against the allowance |  |                    | (42  | )
| |                                           |  |                    |      |  
|
| | Balance as of December 31, 2004           |  |                    | 430  |  
| | Additions                                 |  |                    | 9    |  
| | Deductions                                |  |                    | (13  | )
| | Write-downs charged against the allowance |  |                    | -    |  
| |                                           |  |                    |      |  
|
| | Balance as of December 31, 2005           |  |                    | 426  |  
| | Additions                                 |  |                    | 50   |  
| | Deductions                                |  |                    | (13  | )
| | Write-downs charged against the allowance |  |                    | (153 | )
| |                                           |  |                    |      |  
|
| | Balance as of December 31, 2006           |  |                    | 310  |  
| |                                           |  |                    |      |  

| |                                                  |                     
| | ------------------------------------------------ | --------------------
| | 4.                                               | Other current assets
| |                                                  |                     
| | Other
  current assets consist of the following:

| |                                            |  |                    |     |                    |  |     | 
| | ------------------------------------------ |  | ------------------ | --- | ------------------ |  | --- | 
| |                                            |  | December 31        |    
| |                                            |  |                    |    
| |                                            |  | 2006               |     | 2005               | 
| |                                            |  |                    |     |                    | 
| |                                            |  | US$ (in thousands) |     | US$ (in thousands) | 
| |                                            |  |                    |     |                    | 
| |                                            |  |                    |     |                    |  |     | 
| | Receivables from the Government of Israel: |  |                    |     |                    |  |     | 
| | OCS                                        |  |                    | 116 |                    |  | -   | 
| | Value added tax authorities                |  |                    | 179 |                    |  | 109 | 
| | Tax authorities (Note 2T)                  |  |                    | -   |                    |  | 485 | 
| | Prepaid expenses                           |  |                    | 65  |                    |  | 98  | 
| | Other                                      |  |                    | 114 |                    |  | 49  | 
| |                                            |  |                    |     |                    |  |     | 
| |                                            |  |                    | 474 |                    |  | 741 | 
| |                                            |  |                    |     |                    |  |     | 

F  31

---

---



|RiT Technologies Ltdand Subsidiaries.                                   
|------------------------------------------------------------------------
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                          
|---------- | ---------------------------------------------------------
|Note 8    | Supplementary Financial Statements
  Information (contd)

| |                                         |                        
| | --------------------------------------- | -----------------------
| | A.                                      | Balance Sheets (contd)
| |                                         |                        
| | 5.                                      | Inventories            
| |                                         |                        
| | Inventories
  consist of the following:

| |                                   |  |                    |       |                    |  |       | 
| | --------------------------------- |  | ------------------ | ----- | ------------------ |  | ----- | 
| |                                   |  | December 31        |      
| |                                   |  |                    |      
| |                                   |  | 2006               |       | 2005               | 
| |                                   |  |                    |       |                    | 
| |                                   |  | US$ (in thousands) |       | US$ (in thousands) | 
| |                                   |  |                    |       |                    | 
|
| | Raw
  materials and subassemblies |  |                    | 2,510 |                    |  | 1,817 | 
| | Work in
  process                 |  |                    | 621   |                    |  | 786   | 
| | Finished
  products               |  |                    | 4,436 |                    |  | 2,498 | 
| |                                   |  |                    |       |                    |  |       | 
|
| |                                   |  |                    | 7,567 |                    |  | 5,101 | 
| |                                   |  |                    |       |                    |  |       | 

| |                                                                    |                                       
| | ------------------------------------------------------------------ | --------------------------------------
| | 6.                                                                 | Other payables and accrued liabilities
| |                                                                    |                                       
| | Other
  payables and accrued liabilities consist of the following:

| |                                       |  |                    |       |                    |  |       | 
| | ------------------------------------- |  | ------------------ | ----- | ------------------ |  | ----- | 
| |                                       |  | December 31        |      
| |                                       |  |                    |      
| |                                       |  | 2006               |       | 2005               | 
| |                                       |  |                    |       |                    | 
| |                                       |  | US$ (in thousands) |       | US$ (in thousands) | 
| |                                       |  |                    |       |                    | 
|
| | Employees
  and employee institutions |  |                    | 1,302 |                    |  | 1,247 | 
| | Government
  of Israel:               |  |                    |       |                    |  |       | 
| | OCS in
  respect of royalty payments  |  |                    | 20    |                    |  | 133   | 
| | Accrued
  expenses                    |  |                    | 687   |                    |  | 977   | 
| | Provision
  for product warranty      |  |                    | 60    |                    |  | 88    | 
| | Other                                 |  |                    | 19    |                    |  | 235   | 
| |                                       |  |                    |       |                    |  |       | 
| |                                       |  |                    |       |                    |  |       | 
| |                                       |  |                    | 2,088 |                    |  | 2,680 | 
| |                                       |  |                    |       |                    |  |       | 

| |    |                                           
| | -- | ------------------------------------------
| | 7. | Monetary balances in non-dollar currencies

| |                     |  |                    |       |                                 |  |     | 
| | ------------------- |  | ------------------ | ----- | ------------------------------- |  | --- | 
| |                     |  | December 31, 2006  |      
| |                     |  |                    |      
| |                     |  | Israeli currency   |       | Other
  non-dollar
  currencies | 
| |                     |  |                    |       |                                 | 
| |                     |  | US$ (in thousands) |       | US$ (in thousands)              | 
| |                     |  |                    |       |                                 | 
|
| | Current assets      |  |                    | 872   |                                 |  | 437 | 
| | Current liabilities |  |                    | 1,510 |                                 |  | 282 | 

| |                                                                                                                                                                                                                                                               |  |                    |       |                                 |  |     | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ------------------------------- |  | --- | 
| |                                                                                                                                                                                                                                                               |  | December 31, 2005  |      
| |                                                                                                                                                                                                                                                               |  |                    |      
| |                                                                                                                                                                                                                                                               |  | Israeli currency   |       | Other
  non-dollar
  currencies | 
| |                                                                                                                                                                                                                                                               |  |                    |       |                                 | 
| |                                                                                                                                                                                                                                                               |  | US$ (in thousands) |       | US$ (in thousands)              | 
| |                                                                                                                                                                                                                                                               |  |                    |       |                                 | 
|
| | Current assets                                                                                                                                                                                                                                                |  |                    | 985   |                                 |  | 710 | 
| | Current liabilities                                                                                                                                                                                                                                           |  |                    | 1,538 |                                 |  | 292 | 
| |                                                                                                                                                                                                                                                               |  |                    |       |                                 |  |     | 
| |                                                                                                                                                                                                                                                               |  |                    |       |                                 |  |     | 
| | The
  preceding tables reflect the exposure of the Companys monetary balances in
  non-dollar currencies to the effect of changes in the rate of exchange of the
  NIS or other non-dollar currencies, to the dollar at the indicated balance
  sheet dates. | 

F    32

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd. and Subsidiaries                                  
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|           |                                                        
|---------- | -------------------------------------------------------
|Note 8    | Supplementary Financial Statements Information (contd)

| |                                                                                                                                                                           |                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------
| | A.                                                                                                                                                                        | Balance Sheets (contd)                               
| |                                                                                                                                                                           |                                                       
| | 8.                                                                                                                                                                        | Fair value of financial instruments                   
| |                                                                                                                                                                           |                                                       
| | The
  financial instruments of the Company consist mainly of cash and cash
  equivalents, marketable securities, accounts receivable and accounts payable
  and accruals.
| |                                                                                                                                                                           |                                                       
| | In view of
  their short-term nature, the fair value of financial instruments is
  approximate to their carrying value.                                                  
| |                                                                                                                                                                          
| | B.                                                                                                                                                                        | Statements of operations                              
| |                                                                                                                                                                           |                                                       
| | 1.                                                                                                                                                                        | Sales (1)                                             
| |                                                                                                                                                                           |                                                       
| | (a)                                                                                                                                                                       | Classification
  of sales by geographical destination:

| |  |                   |  |                        |        |                    |  |                    |  |  |        | 
| |  | ----------------- |  | ---------------------- | ------ | ------------------ |  | ------------------ |  |  | ------ | 
| |  |                   |  | Year ended December 31 |       
| |  |                   |  |                        |       
| |  |                   |  | 2006                   |        | 2005               |  | 2004               | 
| |  |                   |  |                        |        |                    |  |                    | 
| |  |                   |  | US$ (in thousands)     |        | US$ (in thousands) |  | US$ (in thousands) | 
| |  |                   |  |                        |        |                    |  |                    | 
| |  |                   |  |                        |        |                    |  |                    | 
| |  | United States     |  |                        | 10,292 |                    |  | 6,888              |  |  | 7,605  | 
| |  | Europe            |  |                        | 12,280 |                    |  | 18,143             |  |  | 8,330  | 
| |  | Israel            |  |                        | 1,318  |                    |  | 1,699              |  |  | 1,529  | 
| |  | Rest of the world |  |                        | 1,202  |                    |  | 1,122              |  |  | 963    | 
| |  |                   |  |                        |        |                    |  |                    |  |  |        | 
| |  |                   |  |                        |        |                    |  |                    |  |  |        | 
| |  |                   |  |                        | 25,092 |                    |  | 27,852             |  |  | 18,427 | 
| |  |                   |  |                        |        |                    |  |                    |  |  |        | 

| |     |                                                                                   
| | --- | ----------------------------------------------------------------------------------
| |     | (1)     Sales are attributed to geographical areas based on location of customers.
| |     |                                                                                   
| | (b) | Sales by
  major product lines:                                                   

| |  |                     |  |                        |        |                    |  |                    |  |  |        | 
| |  | ------------------- |  | ---------------------- | ------ | ------------------ |  | ------------------ |  |  | ------ | 
| |  |                     |  | Year ended December 31 |       
| |  |                     |  |                        |       
| |  |                     |  | 2006                   |        | 2005               |  | 2004               | 
| |  |                     |  |                        |        |                    |  |                    | 
| |  |                     |  | US$ (in thousands)     |        | US$ (in thousands) |  | US$ (in thousands) | 
| |  |                     |  |                        |        |                    |  |                    | 
| |  |                     |  |                        |        |                    |  |                    |  |  |        | 
| |  | Enterprise Solution |  |                        | 23,388 |                    |  | 18,083             |  |  | 16,132 | 
| |  | Carrier Solution    |  |                        | 1,704  |                    |  | 9,769              |  |  | 2,295  | 
| |  |                     |  |                        |        |                    |  |                    |  |  |        | 
| |  |                     |  |                        |        |                    |  |                    |  |  |        | 
| |  |                     |  |                        | 25,092 |                    |  | 27,852             |  |  | 18,427 | 
| |  |                     |  |                        |        |                    |  |                    |  |  |        | 

| |     |                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | Principal
  customers:                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                        
| |     | During
  fiscal year 2006, Companys sales to two customers exceeding 10% of total
  sales were: US$ 6,944 thousand (during fiscal year 2005 - US$ 5,295 thousand;
  and during fiscal year 2004  US$ 2,546 thousand).

F  33

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                                
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                          
|------------ | ---------------------------------------------------------
|Note
  8    | Supplementary
  Financial Statements Information (contd)

| |     |                                                                          
| | --- | -------------------------------------------------------------------------
| | B.  | Statements of operations (contd)                                        
| |     |                                                                          
| | (d) | Customers who
  accounted for over 10% of the total consolidated revenue:

| |          |  |                        |       |      |  |       |  |  |       | 
| | -------- |  | ---------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |          |  | Year ended December 31 |      
| |          |  |                        |      
| |          |  | 2006                   |       | 2005 |  | 2004  | 
| |          |  |                        |       |      |  |       | 
| | Customer |  | %                      |       | %    |  | %     | 
| |          |  |                        |       |      |  |       | 
| |          |  |                        |       |      |  |       | 
| | A        |  |                        | 12.53 |      |  | -     |  |  | -     | 
| | B        |  |                        | 15.15 |      |  | -     |  |  | -     | 
| | C        |  |                        | -     |      |  | 19.01 |  |  | -     | 
| | D        |  |                        | -     |      |  | -     |  |  | 13.82 | 

| |                                            |              
| | ------------------------------------------ | -------------
| | 2.                                         | Cost of sales
| |                                            |              
| | Cost of
  sales consists of the following:

| |                                      |  |                        |        |                    |  |                    |  |  |        |  
| | ------------------------------------ |  | ---------------------- | ------ | ------------------ |  | ------------------ |  |  | ------ | -
| |                                      |  | Year ended December 31 |       
| |                                      |  |                        |       
| |                                      |  | 2006                   |        | 2005               |  | 2004               | 
| |                                      |  |                        |        |                    |  |                    | 
| |                                      |  | US$ (in thousands)     |        | US$ (in thousands) |  | US$ (in thousands) | 
| |                                      |  |                        |        |                    |  |                    | 
| |                                      |  |                        |        |                    |  |                    |  |  |        |  
| | Payroll and
  related benefits       |  |                        | 1,303  |                    |  | 1,211              |  |  | 1,155  |  
| | Materials
  consumed                 |  |                        | 9,683  |                    |  | 7,229              |  |  | 7,865  |  
| | Subcontracted
  work                 |  |                        | 3,102  |                    |  | 1,599              |  |  | 1,666  |  
| | Royalties to
  the OCS               |  |                        | 168    |                    |  | 688                |  |  | 409    |  
| | Write-down
  of inventories          |  |                        | 1,028  |                    |  | 1,187              |  |  | 374    |  
| | Other
  production costs             |  |                        | 541    |                    |  | 408                |  |  | 476    |  
| |                                      |  |                        |        |                    |  |                    |  |  |        |  
| |                                      |  |                        |        |                    |  |                    |  |  |        |  
| |                                      |  |                        | 15,825 |                    |  | 12,322             |  |  | 11,945 |  
| | Decrease
  (increase) in inventories |  |                        | (2,883 | )                  |  | 601                |  |  | (1,879 | )
| |                                      |  |                        |        |                    |  |                    |  |  |        |  
| |                                      |  |                        |        |                    |  |                    |  |  |        |  
| |                                      |  |                        | 12,942 |                    |  | 12,923             |  |  | 10,066 |  
| |                                      |  |                        |        |                    |  |                    |  |  |        |  

| |                                                     |                      
| | --------------------------------------------------- | ---------------------
| | 3.                                                  | Financing income, net
| |                                                     |                      
| | Financing
  income, net, consists of the following:

| |                                                   |  |                        |     |                    |  |                    |   |  |     |  
| | ------------------------------------------------- |  | ---------------------- | --- | ------------------ |  | ------------------ | - |  | --- | -
| |                                                   |  | Year ended December 31 |    
| |                                                   |  |                        |    
| |                                                   |  | 2006                   |     | 2005               |  | 2004               |  
| |                                                   |  |                        |     |                    |  |                    |  
| |                                                   |  | US$ (in thousands)     |     | US$ (in thousands) |  | US$ (in thousands) |  
| |                                                   |  |                        |     |                    |  |                    |  
| |                                                   |  |                        |     |                    |  |                    |   |  |     |  
| | Expenses:                                         |  |                        |     |                    |  |                    |   |  |     |  
| | Realized
  loss on marketable securities, net     |  |                        | (26 | )                  |  | -                  |   |  | -   |  
| | Interest on
  short-term credits and bank charges |  |                        | (30 | )                  |  | (34                | ) |  | (94 | )
| | Exchange
  translation (expenses) income, net     |  |                        | 56  |                    |  | (35                | ) |  | 25  |  
| |                                                   |  |                        |     |                    |  |                    |   |  |     |  
| |                                                   |  |                        | -   |                    |  | (69                | ) |  | (69 | )
| | Income:                                           |  |                        |     |                    |  |                    |   |  |     |  
| | Interest
  from banks and others                  |  |                        | 237 |                    |  | 267                |   |  | 98  |  
| |                                                   |  |                        |     |                    |  |                    |   |  |     |  
| |                                                   |  |                        |     |                    |  |                    |   |  |     |  
| | Financing
  income, net                           |  |                        | 237 |                    |  | 198                |   |  | 29  |  
| |                                                   |  |                        |     |                    |  |                    |   |  |     |  

F  34

---

---



|                                                                        
|------------------------------------------------------------------------
|RiT Technologies Ltd.
  and Subsidiaries                                
|                                                                        
|Notes to the Consolidated Financial Statements as of December 31,
  2006
|                                                                        

|             |                                                                                                                                                                                                                                                                                                                                                                                                       |                              
|------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|Note
  9    | Related
  Parties Balances and Transactions                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                      
|             | Related
  parties are comprised of companies held by common shareholders.                                                                                                                                                                                                                                                                                                                            
|             |                                                                                                                                                                                                                                                                                                                                                                                                      
|             | All
  transactions with related parties were in the ordinary course of business and
  at terms comparable to those applied to transactions with other customers or
  suppliers and are mainly sales of the Companys products, purchases from
  related parties, human resource and administrative services received and
  leasing of premises occupied by the US subsidiary in the US (See Note 5B).
|             |                                                                                                                                                                                                                                                                                                                                                                                                       |                              
|             | A.                                                                                                                                                                                                                                                                                                                                                                                                    | Balances with related parties

| |                        |  |                    |     |                    |  |     | 
| | ---------------------- |  | ------------------ | --- | ------------------ |  | --- | 
| |                        |  | December 31        |    
| |                        |  |                    |    
| |                        |  | 2006               |     | 2005               | 
| |                        |  |                    |     |                    | 
| |                        |  | US$ (in thousands) |     | US$ (in thousands) | 
| |                        |  |                    |     |                    | 
| |                        |  |                    |     |                    |  |     | 
| | Accounts
  receivable: |  |                    |     |                    |  |     | 
| | Trade                  |  |                    | 418 |                    |  | 397 | 
| |                        |  |                    |     |                    |  |     | 
| | Accounts
  payable:    |  |                    |     |                    |  |     | 
| | Trade                  |  |                    | 4   |                    |  | 53  | 
| | Other                  |  |                    | 11  |                    |  | 20  | 

| |    |                                           
| | -- | ------------------------------------------
| | B. | Income from or expenses to related parties

| |                                                         |                                     |  |                        |    |                    |       |                    |  |     |    | 
| | ------------------------------------------------------- | ----------------------------------- |  | ---------------------- | -- | ------------------ | ----- | ------------------ |  | --- | -- | 
| |                                                         |                                     |  | Year ended December 31 |   
| |                                                         |                                     |  |                        |   
| |                                                         |                                     |  | 2006                   |    | 2005               |       | 2004               | 
| |                                                         |                                     |  |                        |    |                    |       |                    | 
| |                                                         |                                     |  | US$ (in thousands)     |    | US$ (in thousands) |       | US$ (in thousands) | 
| |                                                         |                                     |  |                        |    |                    |       |                    | 
| |                                                         |                                     |  |                        |    |                    |       |                    |  |     |   
| | Income:                                                 |                                     |  |                        |    |                    |       |                    |  |     |   
| | Sales                                                   |                                     |  | 976                    |    |                    | 1,262 |                    |  | 909 |   
| | Costs and
  expenses:                                   |                                     |  |                        |    |                    |       |                    |  |     |   
| | Purchases                                               |                                     |  | 16                     |    |                    | 43    |                    |  | 37  |   
| | Services                                                |                                     |  | 204                    |    |                    | 49    |                    |  | 76  |   
| | Research and
  development costs                        |                                     |  | 362                    |    |                    | 238   |                    |  | 183 |   
| | Sales,
  marketing, general and administrative expenses |                                     |  | 519                    |    |                    | 561   |                    |  | 437 |   
| |                                                         |                                     |  |                        |    |                    |       |                    |  |     |   
| | C.                                                      | Purchases of property and equipment |  |                        | 40 |                    |       | 5                  |  |     | 17 | 

F  35

---

---

# Exhibit Index

|ExhibitNumber |  | Document Name
|------------- |  | -------------

|1.1 |  | Memorandum
of Association.*
|--- |  | ---------------------------

|1.2 |  | Articles
of Association.*******
|--- |  | -------------------------------

|2.1 |  | Form
of Share Certificate Representing Ordinary Shares.**
|--- |  | ---------------------------------------------------------

|4.1 |  | Lease
agreements with related parties and executive summaries thereof.***
|--- |  | -------------------------------------------------------------------------

|4.2 |  | RiT
Technologies Ltd. 2003 Share Option Plan ****and Amendment No. 1 thereto.
|--- |  | -----------------------------------------------------------------------------

|4.3 |  | Purchase
Agreement, dated as of June 16, 2004, by and among the Registrant and
                                    the investors set forth on the signature pages
thereto.*****
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Registration
Rights Agreement, dated as of July 26, 2004, by and among the
                                    Registrant and the investors named in the Purchase
Agreement dated as of June                                     16, 2004.*****
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Form
of Warrant issued on July 26, 2004.*****
|--- |  | ---------------------------------------------

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

|12.1 |  | Certification
of the Chief Executive Officer pursuant to Section 302 of the
                                    Sarbanes-Oxley Act of 2002.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Vice President Finance pursuant to Section 302 of the
                                    Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section
                                    1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of the Vice President Finance pursuant to 18 U.S.C. Section 1350,
                                    as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Somekh, Chaikin, Independent Registered Public Accounting
                                    Firm.
|---- |  | --------------------------------------------------------------------------------------------------------------

---

*Incorporated by reference to the
Annual Report on Form 20-F for the year ended December 31, 2002.** Incorporated by reference to
Exhibit 4.1 to the Registrants Registration Statement on Form 8-A filed on July 26,
1997.***Incorporated by reference to the
Annual Report on Form 20-F for the year ended December 31, 2001.****Incorporated by reference to
Exhibit 99.1 to the Registrants Registration Statement on Form S-8 filed on July
26, 2004 (File No. 333-117646).*****Incorporated by reference to
Exhibit 10.1 to the Registrants Report of Foreign Private Issuer on Form 6-K
submitted on June 29, 2004 (File No. 0-29360).****** Incorporated by reference to
Exhibit 8.1 to the Annual Report on Form 20-F for the year ended December 31, 2004.******* Incorporated by reference to
the Registrants Registration Statement on Form 6-K filed on March 8, 2006 (File No.
0-29360).



---

---