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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, 2005.

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                                          | 24 Raoul Wallenberg Street, Tel Aviv, Israel
|(Jurisdiction of incorporation or organization) | (Address of principal executive offices)    

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

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

Ordinary Shares, par value NIS 0.1 per share(Title of class)

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, 2005, the
issuer had 14,410,074 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    oAccelerated filer    oNon-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



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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 enterprise and
carrier relate to the sectors we formerly identified as
datacom and telecom.

Part I

|        |                                                         |   
|------- | ------------------------------------------------------- | --
|
|
|
|
|Item 1  | Identity of Directors, Senior Management and Advisors   | 4 
|       
|Item 2  | Offer Statistics and Expected Timetable                 | 4 
|       
|Item 3  | Key Information                                         | 5 
|A       | Selected Financial Data                                 | 5 
|B       | Capitalization and Indebtedness                         | 6 
|C       | Reasons for the Offer and Use of Proceeds               | 6 
|D       | Risk Factors                                            | 6 
|       
|Item 4  | Information on the Company                              | 16
|A       | History and Development of the Company                  | 16
|B       | Business Overview                                       | 16
|C       | Organizational Structure                                | 23
|D       | Property, Plants and Equipment                          | 24
|       
|Item 4A | Unresolved Staff Comments                               | 24
|       
|Item 5  | Operating and Financial Review and Prospects            | 24
|A       | Operating Results                                       | 24
|B       | Liquidity and Capital Resources                         | 32
|C       | Research and Development, Patents and Licenses          | 33
|D       | Trend Information                                       | 35
|E       | Off-Balance Sheet Arrangements                          | 35
|F       | Tabular Disclosure of Contractual Obligations           | 35
|       
|Item 6  | Directors, Senior Management and Employees              | 35
|A       | Directors and Senior Management                         | 35
|B       | Compensation                                            | 38
|C       | Board Practices                                         | 39
|D       | Employees                                               | 41
|E       | Share Ownership                                         | 42
|       
|Item 7  | Major Shareholders and Related Party Transactions       | 43
|A       | Major Shareholders                                      | 43
|B       | Related Party Transactions                              | 44
|C       | Interests of Experts and Counsel                        | 45
|       
|Item 8  | Financial Information                                   | 45
|A       | Consolidated Statements and Other Financial Information | 45
|B       | Significant Changes                                     | 45
|       
|Item 9  | The Offer And Listing                                   | 46
|A       | Share History                                           | 46
|B       | Plan of Distribution                                    | 46
|C       | Markets                                                 | 46
|D       | Selling Shareholders                                    | 46
|E       | Dilution                                                | 46
|F       | Expenses of the Issue                                   | 46



---

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|         |                                                                              |   
|-------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|Item 10  | Additional Information                                                       | 47
|A        | Share Capital                                                                | 47
|B        | Memorandum and Articles of Association                                       | 47
|C        | Material Contracts                                                           | 52
|D        | Exchange Controls                                                            | 52
|E        | Taxation                                                                     | 52
|F        | Dividends and Paying Agents                                                  | 61
|G        | Statements by Experts                                                        | 61
|H        | Documents on Display                                                         | 61
|I        | Subsidiary Information                                                       | 61
|        
|Item 11  | Quantitative and Qualitative Disclosures about Market Risk                   | 61
|        
|Item 12  | Description of Securities Other Than Equity Securities                       | 62
|        
|         | Part II                                                                      |   
|        
|Item 13  | Defaults, Dividend Averages and Delinquencies                                | 62
|        
|Item 14  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 62
|        
|Item 15  | Controls and Procedures                                                      | 62
|        
|Item 16A | Audit Committee Financial Expert                                             | 63
|        
|Item 16B | Code of Ethics                                                               | 63
|        
|Item 16C | Principal Accounting Fees and Services                                       | 63
|        
|Item 16D | Exemptions from Listing Requirements and Standards for Audit Committee       | 63
|        
|Item 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 63
|        
|         | Part III                                                                     |   
|        
|Item 17  | Financial Statements                                                         | 63
|        
|Item 18  | Financial Statements                                                         | 63
|        
|Item 19  | Exhibits                                                                     | 64



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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 continue to 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.

# PART I

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

Not applicable.

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

Not applicable.

4

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

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

We have derived the following
selected consolidated balance sheet data as of December 31, 2004 and 2005, and the
selected consolidated operating data for the years ended December 31, 2003, 2004, and 2005
from our audited consolidated financial statements and notes included elsewhere in this
annual report. We have derived the selected consolidated balance sheet data as of December
31, 2001, 2002, and 2003 and the selected consolidated operating data for the years ended
December 31, 2001 and 2002 from our audited consolidated financial statements not included
in this annual report. Beginning with the year 2002, our financial results have been
reported in accordance with generally accepted accounting principles in the United States
(U.S. GAAP). For comparison purposes, all information for previous periods has been
restated according to U.S. GAAP.

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.

# 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  |                        
|                                |                        
|                                |                        
|Earnings (Loss) Per Share       |                        
|                                |                        
|Basic net income (loss) per     |                        
|ordinary share                  |                        
|                                |                        
|Diluted net income (loss) per   |                        
|ordinary share                  |                        
|                                |                        
|                                |                        
|Weighted average number of      |                        
|shares used to compute basic    |                        
|net income (loss) per ordinary  |                        
|share                           |                        
|                                |                        
|                                |                        
|Weighted average number of      |                        
|shares used to compute diluted  |                        
|net income (loss) per ordinary  |                        
|share                           |                        
|                                |                        

5

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

Risks Related to Our
Business

We have incurred losses in the
past, and may incur losses in the futureWhile we were profitable in 2005, we incurred
losses in 2004 and 2003. In 2005, we had net income of approximately $1.4 million. We
incurred net losses of approximately $3 million in 2004 and $6.8 million in 2003. We will
need to generate revenues as well as manage our costs to maintain and increase
profitability. We cannot assure you that we will be able to maintain and/or increase
profitability. Our gross margin is currently 53.6%. As a result, any decrease in sales
will have a significant effect on our profitability.

Our revenues may not grow or continue
at their current level. In addition, our operating expenses may increase. Our decision to
increase operating expenses and the scope of such increase will depend upon several
factors, including the market situation. If our revenues do not increase as anticipated,
or if our expenses increase at a greater pace than our revenues, we may not be profitable
or, if we are profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis.

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, 2005, we had
cash, cash equivalents and marketable securities of approximately $7.7 million. In 2005,
we generated approximately $1.9 million in cash, mainly from 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 profitability and, as a result, we may need to raise additional financing to
support our operations and our growth strategy.

In 2006, we arranged for a line of
credit from Bank Hapoalim in the amount of $1 million, which will expire on January 31,
2007. Prior to its expiration, we intend to renew this line of credit for an additional
term of at least 12 months. However, we cannot assure you that we will be successful in
our efforts to do so. On March 15, 2006, we did not have any outstanding amount under this
line of credit. 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 demand payment of the outstanding amount of the line of credit and may
refuse to grant us further credit.

6

---

---



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.

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

Although our carrier and enterprise sales
solutions increased in 2005 as compared with 2004 and 2003, there is no assurance that
this growth will continue.

The enterprise solutions market
experienced a slow-down since the latter part of 2000 up to the beginning of 2004. This
slowdown negatively affected our enterprise solutions sales beginning in 2002. Although
sales of our enterprise solutions have increased since 2004, there is no assurance that
this growth will continue.

Our carrier solutions have been
designed for sale to telephone companies, or telcos, which traditionally have made a
relatively large portion of their equipment purchases during the fourth quarter of each
year. Due to the telecommunications market slow-down, which began in the latter part of
2000, some telcos instituted budgetary freezes or postponements, which have deferred
potential orders. This affected our financial results for 2002 and 2003. Although the
telecommunications market began recovering and our carrier sales showed signs of
improvement beginning in 2004, there is no assurance that this trend will continue in the
future or that we will be able to achieve the same levels of sales.

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.

Outside the United States, we sell
our enterprise solutions primarily to independent distributors, for resale to integrators,
to strategic alliance partners or directly to end-users. In the United States, we sell
such products and solutions primarily through integrators and distributors engaged by our
wholly-owned subsidiary, RiT Technologies, Inc. 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. Except for one affiliated distributor in Israel, the distributors to whom we
sell our products and solutions are independent of us. 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.

7

---

---



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 (recently 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 a major customer for
a significant portion of our revenues.

In 2005, more than 19% of our
revenues was generated from orders placed by one major customer. In 2004, 13.8% of our
revenues was generated from orders placed by another major customer. See Note 8B.1(c) to
our Consolidated Financial Statements. If our largest customer does 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 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. The failure of our marketing efforts to bring in new
customers could result in a material adverse effect on our business, financial condition
and results of operations.

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. For example, the successful development and widespread deployment of wireless
communications systems could have a material adverse effect upon our ability to sell our
enterprise solutions or carrier solutions. 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.

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.

8

---

---



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, 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, we increased our operational expenses as a result of a significant increase in our
revenues. 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.

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.

9

---

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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 PatchViewand 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.

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

We are subject to new
telecommunications industry regulations requiring the use of environmentally
friendly materials in equipment. For example, commencing July 1, 2006, pursuant to a
European Community directive, 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 will be dependent on our suppliers for components and
sub-system modules to comply with these requirements.

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Compliance with this directive,
especially with respect to the requirement that products be lead free, will require us to
undertake significant expenses with respect to the re-design of our products. In addition,
we may be required to pay higher prices for components that comply with this directive. We
may not be able to pass these higher component costs on to our customers. We cannot at
this point estimate the expense that will be required to redesign our products in order to
include environmentally friendly components. We cannot be sure that we will be
able to timely comply with these regulations, that we will be able to comply on a cost
effective basis or that a sufficient supply of compliant components will be available to
us. Compliance with these regulations could increase our product design costs. 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. In addition, manufacturers of components that we use in our
products that do not comply with these regulations may decide to stop manufacturing these
components prior to the July 2006 compliance date. These actions by manufacturers of
components could result in a shortage of components that could adversely affect our
business and results of operations.

# 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 for periods ranging from 12 to 36 months. This policy does not apply to
the SMART CablingSystem, 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.

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. 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
2005, there was an increase in value of the dollar in relation to the NIS of 7% and there
was an increase in the value of the dollar in relation to the Euro of 15%. 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.

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

We are engaged 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 conducted upon terms, which are no
less favorable to us than would be available to us from unaffiliated third parties. We may
continue to engage in transactions with such affiliates on such bases and terms. 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 more stable during 2003, 2004
and 2005, 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 (formerly known as the Nasdaq SmallCap Market) requirements for
continued listing. If we cannot satisfy these requirements, Nasdaq could delist our
ordinary shares.

We became a publicly traded company
and began trading on the Nasdaq National Market upon our initial public offering in July
1997. In November 2003, we received notice from Nasdaq that we were not in compliance with
the requirement to have stockholders equity of at least $10 million in order to be
listed in the Nasdaq National Market. As a result, in December 2003, we elected to apply
to transfer the listing of our ordinary shares to the Nasdaq Capital Market. The transfer
took effect in January 2004.

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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. For
details of the high and low market price of our shares over recent years see Item 9
 Offer and Listing under the caption Share Price History. 

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, 2005, 150,001 of these warrants had been exercised. In
addition, as of December 31, 2005, options to purchase a total of 2,104,699 ordinary
shares were outstanding, and an additional 384,333 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 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.

Following the implementation of
SFAS No. 123R, we will be required to record a compensation expense in connection with
share based compensation, and, as a result, our profitability may be reduced
significantly.

In December 2004, the Financial
Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-BasedPayments (SFAS 123R), which is a revision of SFAS No. 123. While
SFAS No. 123 permitted, but did not require, sharebased payments to employees to be
recognized based on their fair value, SFAS 123R requires, as of the beginning of the first
annual reporting period that begins after June 15, 2005, that all share-based payments to
employees be recognized as a compensation expense based on their fair values. SFAS No.
123R also revises, clarifies and expands guidance in several areas, including measuring
fair value, classifying an award as equity or as a liability and attributing compensation
cost to reporting periods. Accordingly, we adopted SFAS 123R on January 1, 2006. We will
implement SFAS 123R using the modified prospective method. Under this method, we will
begin recognizing compensation cost for equity-based compensation for all new awards and
to awards modified, repurchased or cancelled after January 1, 2006. Furthermore, we will
recognize compensation cost attributable to the unvested portion of outstanding options as
of January 1, 2006, based on the grant date fair value of those awards, as previously
calculated and reported for pro forma disclosure purposes. The impact of the adoption of
SFAS No. 123R cannot be predicted at this time because it will depend also on levels of
share-based compensation granted in the future. However, if we adopted this standard in a
prior period, we would have recorded a material amount as compensation expense, which
would have had a material effect on our profitability. The adoption of this standard could
materially adversely affect our profitability in the future. In addition, if as a result
of SFAS No. 123R, we 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.

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Yehuda, Zohar and Roy Zisapel
beneficially own approximately 32% of our ordinary shares and may therefore be able
influence the outcome of matters requiring shareholder approval.

As of February 15, 2005, Yehuda and
Zohar Zisapel (who are brothers) and Roy Zisapel (who is Yehudas son) beneficially
owned, in the aggregate, approximately 31.7% 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 stockholders to approve transactions that
they may deem to be in their best interest.

# 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. The hostilities between Israel
and the Palestinians intensified in mid-2002 and led to a crisis in the entire peace
process and have strained Israels relationship with its Arab citizens, Arab
countries and, to some extent, with other countries around the world. In January 2006,
Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority
of the seats in the Parliament of the Palestinian Authority. The election of a majority of
Hamas-supported candidates is expected to be a major obstacle to relations between Israel
and the Palestinian Authority, as well as to stability in the Middle East as a whole.

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 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. 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.

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We may be required to pay stamp
duty on agreements executed by us on or after June 1, 2003. This would increase our taxes.

The Israeli Stamp Duty on Documents
Law, 1961 (the Stamp Duty Law), provides that any document (or part thereof)
that is signed in Israel or that is signed outside of Israel and refers to an asset or
other thing in Israel or to an action that is executed or will be executed in Israel, is
subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of the
subject matter of such document. De facto, it has been common practice in Israel not to
pay such stamp duty unless a document is filed with a governmental authority. An amendment
to the Stamp Duty Law that came into effect on June 1, 2003, determines the party liable
for payment of stamp duty with respect to each type of document subject to such law.
Following such amendment, Section 15(5) of the Stamp Duty Law generally provides that
stamp duty on most agreements shall be paid by the parties that signed such agreement,
jointly or severally, or by the party that undertook under such agreement to pay the stamp
duty. The Stamp Duty Law also provides that the failure to pay stamp duty could result in
certain fines prescribed in such law.

Following such amendment, in July
2004, a large number of Israeli companies received a request from the Customs and VAT
Department of the Israel Ministry of Finance to disclose agreements (including memoranda)
that were signed after June 1, 2003 with the aim of collecting stamp duty with respect to
such agreements. We have not received such a request. Based on the advice of our Israeli
legal counsel, we may only be required to pay stamp duty on documents signed on or after
August 2004. If such is the case, we believe that the amount, if any, that we would be
required to pay if we did receive such a request would be immaterial. However, we cannot
assure you that the tax authorities or the courts will accept such view. Although at this
stage it is not yet possible to evaluate the effect, if any, on us of the amendment to the
Stamp Duty Law, the same could adversely affect our results of operations.

Under an order published in December
2005, this requirement to pay stamp duty was cancelled with respect to any documents
signed on or after January 1, 2006.

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, we are prohibited from transferring
the technology developed with these grants to third parties in Israel without the prior
approval of a governmental committee. 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 Israeli  auditors,  or to
assert U.S. securities laws claims in Israel.

Service of process upon us, our
Israeli subsidiaries and affiliates, and upon our directors and officers and our Israeli
auditors, substantially all of whom reside outside the United States, may be difficult to
obtain within the United States. Because a substantial portion of our assets and the
assets of these persons 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. In addition, there is doubt as to the enforceability of civil liabilities under
the Securities Act of 1933 and the Securities Exchange Act of 1934 in original actions
instituted in Israel. However, subject to specified time limitations, Israeli courts may
enforce a U.S. final executory judgment in a civil matter, provided that:

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

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

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

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

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

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

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

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 law
may have the effect of delaying, preventing or making more difficult a merger with, or
acquisition of, us. The Israeli Companies Law generally provides that a merger be approved
by the board of directors and a majority of the shares present and voting on the proposed
merger. For purposes of the shareholder vote, 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 or its general manager) have voted against the merger.
Upon the request of any creditor of a party to the proposed merger, a court may delay or
prevent the merger if it concludes that there is a reasonable concern that, as a result of
the merger, the surviving company will be unable to satisfy the obligations of the
surviving company. Finally, a merger may generally not be completed unless at least (i) 50
days have passed since the filing of a merger proposal signed by both parties with the
Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved
by the shareholders of each of the parties to the merger.

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, unless there is already another 25% or greater shareholder of the company.
Similarly, an acquisition of shares 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. 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, Israel tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign
company, less favorably than U.S. tax laws. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his ordinary shares for shares
in another corporation, to taxation prior to the sale of the shares received in such
stock-for-stock swap.

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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 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 on January 12, 2004, and we are still traded under the symbol RITT. We have not
undergone any material business changes, such as mergers, acquisitions, dispositions or
bankruptcy.

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, 2005, 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 2005, our capital expenditures
totaled approximately $0.4 million (compared to $0.25 million during 2004 and $0.07
million during 2003), 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 2005, 2004 and 2003, we did not make any significant divestitures nor are any such
divestitures in progress.

There have been no public takeover
offers by third parties in respect of our shares or by us in respect of other
companies shares.

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

|4.B.1. | Operations
and Principal Activities
|------ | -----------------------------------

We are the innovators of intelligent
physical layer solutions for improved control, utilization and maintenance of networks.
The physical layer of a network is the part of the network which defines the physical
means of sending data and voice over network devices, interfaces between network media
(such as cables) and devices, and defines the optical, electrical and mechanical
characteristics of the network. Our extended line of intelligent physical layer solutions
addresses the needs and demands of enterprises and carriers in the rapidly evolving and
changing communications networks markets.

In the enterprise market, our
intelligent physical layer management solutions (IPLMS) address the need to
maximize control and maintenance efficiency and reduce an enterprises network
infrastructure ownership costs by adding a new dimension to conventional network
management: intelligent physical layer management capability. The increasing demand for
bandwidth in local area networks, or LANs, has led to a continuing evolution in
requirements and standards for high performance structured cabling, the backbone of
enterprise data networks. 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.

16

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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. Building upon our foundation in structured
cabling products, we developed and introduced PatchView, our intelligent physical
layer 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 physical network 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. The launch followed a
successful six-month beta trial during which PVMax, together with the latest
version of PV4E, was used to manage more than 80,000 ports in one communication
room at a customer site. 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 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, a new product line which addresses the requirements of the market of
digital subscriber line, or DSL services, which enable 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 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 new solution, like its predecessor, 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.

Our strategy is to utilize our
expertise, innovative products and continued research and development activities to
strengthen our position as innovators of intelligent physical layer solutions for improved
control, utilization and maintenance of networks. While we expect that our structured
cabling products will contribute to future revenue growth and profitability, we believe
that the major contributor to our revenue and profitability growth will be our intelligent
physical layer solutions, PatchView, PairView, PairViewPro and PairQ.
We will seek to expand our markets and product lines by enhancing existing systems,
introducing new systems and expanding into new markets to capitalize on our expertise in
intelligent physical layer network solutions.

We market our products in numerous
countries, including through our wholly-owned subsidiary in the United States, RiT
Technologies, Inc., and representative offices in Germany, Russia and China.

|4.B.2. | Principal
Markets
|------ | -----------------

Enterprise Solutions:
Intelligent Physical Layer Management and Structured Cabling Solutions

The rapid growth in computer
networking has resulted from the rising number of computers 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.

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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 by repatching patch cords at the communications center. Over time, the
communications center becomes characterized by patch cord chaos, which makes it difficult
to change or trace connections, resulting in unnecessary waste of network resources and
assets, increased network downtime, as well as a waste of staff time. When changes become
necessary, the network administrator must verify current connections, plan modifications
and issue work orders. The technician 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 connectivity records
and the challenge of effectively maintaining physical 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.
Although existing network management software packages ease the record-keeping burden by
maintaining computerized databases of physical layer records, this software operates
off-line and changes must still be manually traced, recorded and entered into the system.
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 physical layer network management system for the
enterprise. It provides real-time information on the status of connections between
equipment in the network, reports all connectivity changes to the Network Management
System (NMS) running our PV4E software, and guides the system administrator in
planning and implementing network changes. Together with our PatchView Scanners and
SMART Patch Panel technology, PV4E monitors the networks physical layer. 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 ability to pinpoint the precise physical location of end
devices is also useful for other software products, such as intrusion detection systems,
asset management or help desk software.

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, industry, 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
complete redundancy and security of information.

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 world, the
telcos most valuable weapon 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. 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 main distribution
frames (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. 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.

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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.

In 2005, Europe was the dominant
market for our sales. See Item 3.D.  Risk Factors. Nevertheless, the
general slowdown in the carrier and enterprise solutions markets, as described in
Item 3.D  Risk Factors, has affected and may continue to affect our
sales in the future, and European markets may not remain dominant in the same manner.

Sales

The manufacturing process for our
Enterprise and Carrier products is nearly identical, with slight adjustments for the
varying nature of the products, and comprises one production line.

Our operating expenses are not
segmented between the two product lines.

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 2003,
2004 and 2005, 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    |                        
|                     |                        
|                     |                        
|                     |                        
|                     |                        

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|4.B.3. | Seasonality
|------ | -----------

We have consistently experienced
seasonality in the sales of our products. Typically, the purchasing patterns of our
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.

|4.B.4. | 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. To date, we have not experienced significant volatility in prices for raw
materials and components.

|4.B.5. | Marketing
Channels
|------ | ------------------

Enterprise Solutions

In some territories, we have made a
strategic decision to encourage sales via Original Equipment Manufacturers
(OEMs) 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 is 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, a representative office in
Düsseldorf, Germany and a representative office in Beijing, China. Certain risks are
related to international sales and dependence upon distributors and resellers, as
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 focus the majority of our
sales and marketing resources on our distributors, providing them with ongoing training,
communications and support. Distributors visit our Israeli headquarters, and 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 2005, our three largest distributors accounted for approximately
12%, 11.5% and 7.8%, respectively, of our enterprise 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 2005, our strategic partners together accounted for approximately 15.5% of our
enterprise sales.

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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.

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.

In addition to our direct service and
support activities, our worldwide OEMs, distributors and representatives provide sales,
service and technical support functions 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 have also conducted several 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 and software, except for the SMART Cabling System, which, when
installed by a Certified Cabling Installer, and registered by us, is granted a 15-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.

Upon termination of the warranty
period for carrier solutions, we offer a Maintenance and Support Program to our customers.
In addition, we offer support agreements for the software of our enterprise products to
our OEMs, distributors and customers.

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|4.B.6. | Dependence
on Patents, Licenses and Material Contracts
|------ | ------------------------------------------------------

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 PatchViewand 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. 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.

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.

There are no customers who have a
contractual obligation to order additional products from us. See Item 3.D. 
Risk Factors. We have no individual contracts with customers or suppliers which are
material to our business or profitability. We have an agreement with a major customer that
generated more than 19% of our revenues in 2005.

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|4.B.7. | 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 system
produced by the iTRACS Corporation and the SYSTIMAX iPatch System produced by Commscope.
Although these systems are competitive with our PatchViewsystem, we believe that
their entry into the market reflects the growing acceptance of the IPLMS concept. 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 PatchViewsystem. 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 PatchViewsystem. Although we expect the arrangements with these leading vendors to contribute
to establishing PatchViewas a leading technology, these vendors also will compete
with us for intelligent physical layer management customers. Moreover, as the popularity
of the IPLMS 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, there is only one global
competitor to PairView in the market, which is the DaVaR Loop Management System of
Fluke Corporation. However, there are several local solutions that compete with
PairView, such as Vara of SPE S.r.l. in Italy, Sapla of Inelcom in Spain and SiVar
of OSP in South America, which offer local and less comprehensive solutions.  With
respect to PairQ, Fluke Corporation has recently announced their NetDSL product,
which incorporates capabilities similar to PairQ, as a derivative of its 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 materially 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.

|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 May 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, 2005, RiT Tech (1997) Ltd.
held 0.1178% of our outstanding shares.

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Yehuda and Zohar Zisapel are our
founders and principal shareholders. Yehuda Zisapel is also a director. See Item 6
 Directors, Senior Management and Employees and Item 7  Major
Shareholders and Related Party Transactions. 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., AXERRA Ltd.,
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., Commex Technologies Inc., Infogate On Line
Ltd. Modules Inc., RADLive Inc, 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.

|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 25,758 square feet
of office and manufacturing premises in Tel Aviv, Israel and we lease 6,545 square feet of
warehousing premises in Rosh Haayin, Israel. Aggregate annual lease payments in 2005
for the Tel Aviv and Rosh Haayin premises were approximately $453,000. 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 $54,000. 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 $19,000. See Item 7  Major Shareholders and
Related Party Transactions and Notes 5B and 9 to our Consolidated Financial
Statements included 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.

|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, 2005

Sales in 2005 were approximately
$27.9 million, an increase of approximately 51% compared with sales of approximately $18.4
million in 2004. This significant increase in our 2005 sales was mainly due to the
substantial increase 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 decreased by approximately 8% compared with 2004. This decrease resulted mainly
from higher proportions of carrier sales in 2005, 35% compared with 13% in 2004. Our
carrier solutions sales usually have higher margins than our enterprise sales solutions.
See Note 8B1 to our Consolidated Financials Statements.

Research and development expenses,
net, were approximately $4.1 million in 2005, an increase of 17% compared with research
and development expenses of approximately $3.5 million in 2004. The increase is primarily
due to hiring of new R&D personnel in order to support the development of new
products.

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 promoting efforts, which
we implemented in order to increase our sales.

24

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We had a net income of approximately
$1.4 million in 2005, compared with net loss of approximately $3 million in 2004. Our
cash, cash equivalents and marketable securities increased from $5.8 million as of
December 31, 2004 to approximately $7.7 million as of December 31, 2005. The improvement
in the results in 2005 in comparison with 2004 is attributable mainly to the increase in
the proportion of carrier revenues as a percentage of total revenue, from 13% in 2004 to
35% in 2005, which resulted in higher margins. See Note 8B1 to our Consolidated Financials
Statements.

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, 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 financials
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.

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 from such distribution
channels at the time of shipment.

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

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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, 2005 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 on Form 20-F. 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
of systems;
| | - | ------------------

| |  | Systems
cost;
| | - | -------------

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

| |  | Elements
related to the customers history, including sales region, number of systems bought,
past experience and failures on previous sales.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

To determine the probability of
warranty expense, our carrier customer support engineers qualify customers in advance to
estimate the relevant factors such as professionalism of their work force, environmental
conditions and working conditions in the field. On the enterprise side, the probability is
fixed and based on past experience.

# 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, 2005, 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.

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# 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 2005, our inventory
write-down charge was $1.2 million compared with $0.4 million in 2004.

# Accounting for
Stock-based Compensation

SFAS 123 Accounting for
Stock-based Compensation establishes financial accounting and reporting standards
for stock-based compensation plans. The statement defines a fair value based method of
accounting for an employee stock option. As required by SFAS 123, we have determined the
weighted average fair value of stock-based arrangements grants. The fair values of stock
based compensation awards granted were estimated using the Black 
Scholes option pricing model with certain assumptions that are significant inputs.

The critical assumptions relate to
determining the expected life of the option-considering the outcome of service-related
conditions (i.e., vesting requirements and forfeitures), expected volatility of the
underlying stock-an estimate of the future price fluctuation of the underlying stock for a
term commensurate with the expected life of the option, expected dividend yield on the
underlying stock-reflecting a reasonable expectation of dividend yield commensurate with
the expected life of the option, and risk-free interest rate during the expected term of
the option-the rate currently available for zero-coupon U.S. government issues with a
remaining term equal to the expected life of the options.

SFAS 123 requires that the option
pricing model used consider managements expectations about the life of the option,
future dividends, and stock price volatility. Both the volatility and dividend yield
components should reflect reasonable expectations commensurate with the expected life of
the option. To determine the expected volatility of 85.6% for the year ended December 31,
2005 (87.2% and 89.2% for the years ended December 31, 2004 and 2003, respectively), we
generally begin with calculating historical volatility over the most recent period equal
to the expected life of the options.

The expected dividend yield on the
underlying for all relevant periods is zero since there is no history of paying dividends.
The expected life of an employee stock option award of 1-4 years (mainly 4 years as of the
date of the grant) was estimated based on reasonable facts and assumptions on the grant
date. The following factors have been considered: (1) the vesting period of the grant, (2)
the average length of time similar grants have remained outstanding, and (3) historical
and expected volatility of the underlying stock. These estimates introduce significant
judgment into determining the value of stock-based compensation awards.

In December 2004, the Financial
Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based
Payments (SFAS 123R), which is a revision of SFAS No. 123. Generally,
the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS
No. 123 permitted, but did not require, sharebased payments to employees to be
recognized based on their fair value, while SFAS 123R requires, as of the beginning of the
first annual reporting period that begins after June 15, 2005, that all share-based
payments to employees to be recognized as a compensation expense based on their fair
values. SFAS No. 123R also revises, clarifies and expands guidance in several areas,
including measuring fair value, classifying an award as equity or as a liability and
attributing compensation cost to reporting periods. Accordingly, we adopted SFAS 123R on
January 1, 2006. We will implement FAS 123R using the modified prospective method. Under
this method, we will begin recognizing compensation cost for equity-based compensation for
all new awards and to awards modified, repurchased or cancelled after January 1, 2006.
Furthermore, we will recognize compensation cost attributable to the unvested portion of
outstanding options as of January 1, 2006, based on the grant date fair value of those
awards, as previously calculated and reported for pro forma disclosure purposes. The
impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will
depend also on levels of share-based compensation granted in the future. If we adopted
this standard in a prior period, however, we would have recorded a material amount as
compensation expense, which would have had a material effect on our profitability. The
adoption of this standard, could materially adversely affect our profitability in the
future. In addition, if as a result of SFAS No. 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.

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# 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 $7.8 million as of December 31, 2005, 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, 2005, 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.

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

Sales.
          Sales consist of gross sales of products less discounts and refunds. 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 have been
designed for sale to telcos, which traditionally have made a relatively large portion of
their equipment purchases during the fourth quarter of each year. Due to the
telecommunications market slowdown, which began in the latter part of 2000, some telcos
instituted budgetary freezes or postponements, which have deferred potential orders. This
affected our financial results for 2002 and 2003. Although the telecommunications market
began recovering and our carrier sales significantly increased during 2004, there is no
assurance that this trend will continue or that the telecommunication market will fully
recover.

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 have also increased since 2004 mainly due to the increase in
the market acceptance of the IPLMS concept. However, there is no assurance that this
growth will continue.

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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 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 Financials
Statements. 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.

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 $4.2 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. 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 $7.6 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.

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 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.

Year Ended
December 31, 2004 Compared with Year Ended December 31, 2003

Sales.
          Sales increased to approximately $18.4 million in 2004 compared with
          approximately $15.2 million in 2003, primarily due to an increase in our
          enterprise solutions revenues in North America.

Cost of Sales. Cost of sales
was approximately $10.1 million in 2004 compared with $10.8 million in 2003. This decrease
was primarily attributable to the decrease in our inventory write-downs and from the
changes in our inventory levels. Cost of sales as a percentage of sales was 54.6% in 2004,
compared with 71% in 2003. This decrease resulted from (a) a decrease in our inventory
write-downs to approximately $0.4 million in the fourth quarter of 2004 from approximately
$1.9 million in the third quarter of year 2003 and (b) a different distribution of
revenues by geographic areas in 2004 which provided us with higher margins. See Note 8A5
and Note 8B2 to our Consolidated Financials Statements. Our inventory writedown
charge in 2003 resulted from our long sales cycles during 2002 and 2003. These long sales
cycles, especially on the carrier side, meant that certain products became outdated before
we could sell them. Therefore, we wrote down the value of these inventories as of December
31, 2003, recording an inventory write-down charge of $1.9 million. Since both the carrier
solutions and the enterprise solutions markets showed indications of the beginning of
recovery in 2004, especially on the carrier side, our inventory write-down charge
decreased significantly in 2004.

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Research and Development
Expenses. Research and development expenses were approximately $3.8 million in 2004
compared with $4.0 million in 2003. As a percentage of sales, research and development
expenses decreased to 20.4% of sales in 2004 from 26.2% of sales in 2003, due to the
higher level of revenues and a decrease in our research and development activities in
2004.

Grants from the Chief Scientist were
approximately $0.1 million in 2004 and $0.3 million in 2003.

Sales and Marketing Expenses. Sales
and marketing expenses were approximately $6.2 million in 2004, compared with
approximately $5.9 million in 2003. The increase was primarily due to the increase in our
local marketing efforts, which we implemented to increase our sales.

General and Administrative
Expenses. General and administrative expenses were approximately $1.7 million in 2004,
compared with approximately $1.6 million in 2003. This 6.3% increase was primarily related
to salary increases implemented at the end of the year.

Financial Income, Net. Net
financial income was approximately $0.03 million in 2004, compared with financial income,
net, of approximately $0.08 million in 2003. This decrease was due to the decrease in our
cash and cash equivalents during the first half of 2004.

Net Loss. We had a net loss of
approximately $3 million in 2004, compared with a net loss of approximately $6.8 million
in 2003. The improvement in net loss in 2004 in comparison with 2003 was attributable to
the increase in our revenues and margins, as well as a result of the decrease in inventory
write-downs during 2004.

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 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. 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 Benefiting
Enterprise. A company wishing to receive the tax benefits afforded to a Benefiting
Enterprise is required to select the tax year from which the period of benefits under the
Investment Law are to commence by notifying the Israeli Tax Authority within 12 months of
the end of that year. In order to be recognized as owning a Benefiting 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 Benefiting Enterprise and
having completed a cooling-off period of no less than three years from the companys
previous year of commencement of benefits under the Investments Law. 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 the
financial statements.

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

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# Recently Enacted
Accounting Pronouncements

|1. | SFAS
Statement 123R  Share-Based Payment
|-- | -----------------------------------------

| | In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), Share-Based Payments (SFAS 123R). SFAS 123R requires
entities to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award and recognize the cost
over the period during which an employee is required to provide service in exchange for
the award. SFAS 123R does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in FAS 123 as originally issued
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.
SFAS 123R is effective for public entities as of the beginning of the first annual
reporting period that begins after June 15, 2005. Accordingly, we adopted SFAS 123R on
January 1, 2006. We will implement SFAS 123R using the modified prospective method. Under
this method, we will begin recognizing compensation cost for equity-based compensation
for all new awards and to awards modified, repurchased or cancelled after January 1,
2006. Furthermore, we will recognize compensation cost attributable to the unvested
portion of outstanding options as of January 1, 2006, based on the grant date fair value
of those awards, as previously calculated and reported for pro forma disclosure purposes.
We expect stock-based compensation expense under SFAS 123R, related to stock-based awards
issued through fiscal year 2005, to be approximately $164,000 and $44,000 in 2006 and
2007, respectively. In addition, we expect to grant additional stock-based awards in 2006
which will result in additional stock-based compensation expense.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | SFAS
151  Inventory Costs, an amendment of Accounting Research Bulletin           (ARB)
No. 43
|-- | -------------------------------------------------------------------------------------------------

In November 2004, the Financial
Accounting Standards Board issued SFAS No. 151, Inventory Costs  an amendment
of Accounting Research Bulletin No. 43, Chapter 4 (SFAS 151). The
amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management has not yet determined the impact, if any, the adoption of this standard will
have on our financial position and results of operations.

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|3. | SFAS
153  Exchanges of Nonmonetary Assets, an amendment of Accounting
          Principles Bulletin (APB) Opinion No. 29, Accounting for Nonmonetary
          Transaction
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December 2004, the Financial
Accounting Standards Board issued SFAS No. 153, Exchanges of Nonmonetary Assets
 an Amendment of Accounting Principles Bulletin (APB) Opinion No. 29, Accounting for
Nonmonetary Transactions (SFAS 153). The guidance in APB Opinion No. 29
is based on the principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however,
included certain exceptions to that principle. SFAS 153 amends Opinion No. 29 to eliminate
the exception for nonmonetary assets exchanges of similar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the exchange. SFAS
153 is effective for fiscal periods beginning after June 15, 2005 and shall be applied
prospectively. The adoption of this statement is not expected to result in a material
impact on our financial position and results of operations.

|4. | SFAS
154 Accounting Changes and Errors Corrections
|-- | ---------------------------------------------------

In May 2005, the Financial Accounting
Standards Board issued SFAS No. 154, Accounting Changes and Errors Corrections
(SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, although it carries forward some of their provisions. SFAS 154
requires retrospective application to prior periods financial statements of changes
in accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. A change in depreciation,
amortization, or depletion method for long-lived, nonfinancial assets will be accounted
for as a change in accounting estimate affected by a change in accounting principle. SFAS
154 is effective for changes in accounting principle made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of SFAS 154 will have a material impact
on our financial position and results of operations.

|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. As of December 31, 2005, 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.

Capital expenditures were
approximately $0.07 million in 2003, $0.25 million in 2004, and $0.44 million in 2005.
These expenditures were principally for machinery, computers and research and development
equipment purchases. During 2006, we expect to invest additional resources for capital
equipment. We did not have any material commitments for capital expenditures as of
December 31, 2005.

On December 31, 2005, we had
cash, cash equivalents and marketable securities of approximately $7.7 million, compared
with $5.8 million, net of short-term credits, on December 31, 2004. This increase resulted
from the significant increase 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 during 2006. 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.

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In 2006, we arranged for a line of
credit from Bank Hapoalim in the amount of $1 million, which will expire on January 31,
2007. Prior to its expiration, we intend to renew this line of credit for an additional
term of at least 12 months. However, we cannot assure you that we will be successful in
our efforts to do so. On March 15, 2006, we did not have any outstanding amount under this
line of credit. 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 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.
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 provided by operating
activities was $1.6 million in 2005. Net cash used in operating activities was $4 million
in 2004, and $3.4 million in 2003. Net cash used in operating activities decreased during
2005 primarily as a result of the significant increase in our revenues and margins. Net
cash used in investing activities was $0.44 million in 2005, $0.25 million in 2004, and
$0.07 million in 2003. Investments were primarily in fixed assets. Our principal investing
activity in 2005, 2004 and 2003 was the purchase of equipment in the amounts of $0.44
million, $0.25 million and $0.07 million, respectively.

Our contractual and contingent
obligations and commitments on December 31, 2005 primarily consisted of obligations
associated with our future operating lease obligations and a contingent liability to the
Chief Scientist. See Note 5 to the Consolidated Financial Statements. 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.

|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 physical layer solutions and, more specifically, enterprise IPLMS 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.

Grants from the Office of the
Chief Scientist of the Israeli Ministry of Trade

From time to time we file
applications for grants under programs of the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, known as the Chief Scientist. Grants received under
such programs are usually repaid through a mandatory royalty based on revenues from
products (and ancillary services) incorporating know-how developed with the grants or
derived therefrom. This government support is conditioned upon our ability to comply with
certain requirements and conditions specified in the Chief Scientists program and
with the provisions of the Law for the Encouragement of Research and Development in
Industry, 1984, and the regulations promulgated thereunder, or the Research and
Development Law. In June 2005, an amendment to the Research and Development Law came into
effect, which intends to make the Research and Development Law more compatible with the
global business environment by, among other things, relaxing restrictions on the transfer
of manufacturing rights outside Israel and on the transfer of Chief Scientist-funded
know-how outside of Israel, as described below.

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

In exchange, the recipient of such
grants is required to pay to the Chief Scientist royalties from the revenues derived from
products incorporating know-how developed within the framework of each such program or
derived from such program (including ancillary services in connection with such program),
usually up to an aggregate of 100% of the dollar-linked value of the total grants received
in respect of such program, 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 Research and Development 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.

33

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The Research and Development 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 recent amendment to the Research and Development 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 Research and Development 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. This declaration will be a significant factor in the decision of the Chief
Scientist to approve a program and the amount and other terms of benefits to be granted.
For example, an increased royalty rate and repayment amount will be required in such
cases.

The Research and Development 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 Research and Development 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.

The Research and Development 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 Research and Development 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 Research and Development 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 Research and Development
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, 2005, our contingent liability to the Chief Scientist in
respect of grants received was approximately $0.8 million.

Our gross research and development
expenses were approximately $4.0 million in 2003, $3.8 million in 2004 and $4.2 million in
2005 (26.2%, 20.4% and 15.1%, 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 2003, $0.3 million in 2004 and $0.1 million in 2005.

Patents

We hold patents on our PatchViewand PairView technologies and some of our cabling products. These patents
expire in 2012 and 2015 and 2020, respectively. We also have several patents and design
patents pending on our new products.

34

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|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.

As described in Item 4.B  Competitive
Position, two products which directly compete with our PatchViewsystems
have entered the enterprise IPLMS market: the iTRACS system produced by the iTRACS
Corporation, and the SYSTIMAX iPatch System produced by Commscope. We believe that their
entry into the market indicates growing acceptance of the IPLMS concept. Such increased
acceptance is also corroborated by the fact that most of the major vendors (constituting
approximately 11) are proposing IPLMS systems based on one of the three technologies
above. Of these 11 vendors, five are using our PatchViewtechnology.

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 ensure timely delivery to our
customers, 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, 2005:

|                                   | Payments due by Period(dollars in millions)
|---------------------------------- | -------------------------------------------
|
|
|
|
|Contractual Obligations            |                                            
|Leases on Premises                 |                                            
|Operating Lease Obligations        |                                            
|Purchase Obligations               |                                            
|Cash Compensation to be Paid       |                                            
|to Management                      |                                            
|Other Liabilities Reflected on Our |                                            
|Balance Sheet                      |                                            
|Total                              |                                            

On December 31, 2005, our contingent
liability to the Chief Scientist in respect of grants received was approximately $0.8
million. 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, 2006, the name, age and position of each of our directors and executive officers:

|Name               | Age | Position                               
|------------------ | --- | ---------------------------------------
|
|
|
|
|Yehuda Zisapel     | 63  | Chairman of the Board of Directors     
|Doron Zinger       | 52  | President and Chief Executive Officer  
|Simona Green       | 38  | Vice President Finance                 
|Avi Kovarsky       | 49  | Senior Vice President Sales            
|Guy Shapira        | 36  | Vice President Research and Development
|Rafi Ben-Asher     | 62  | Vice President Operations              
|Galit Sholder      | 34  | Vice President Human Resources         
|Shelagh Hammer     | 55  | Vice President Corporate Marketing     
|Hila Hubsch        | 38  | General Counsel and Corporate Secretary
|Oded Nachmoni      | 39  | Senior Director of Product Management  
|Ely Cohen          | 47  | Senior Director of Business Development
|Zohar Gilon        | 58  | Director                               
|Liora Katzenstein  | 50  | Director                               
|Dr. Hagen Hultzsch | 65  | Director                               
|Israel Frieder     | 56  | Director                               
|Dr. Meir Barel     | 55  | Director                               

35

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Mr. Yehuda Zisapelis 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.  Mr. Zinger holds an M.B.A. from
          Tel Aviv University and a B.Sc. in Electrical Engineering from the Technion.

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, independent registered public accounting firm.Ms. Green holds a BBA in business administration and accounting from the
          School of Business Administration of the College of Management.

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.

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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.
          Galit Sholder joined us in August 2005 as Vice President Human Resources.
          Prior to joining us, Ms. Sholder held the position of Human Resources Manager at
          Schering Plough Corporation for four years and prior to that served as Director
          of Human Resources in VManage Ltd. Ms. Sholder has a bachelors degree in
          Business Management & Communication from the School of Business
          Administration of the College of Management, M.A. degree in Public Management
          from Tel Aviv University and an M.A. degree in Organizational Consulting &
          Development from the College of Management.

Ms.
          Shelagh Hammerjoined us as director of Corporate Marketing in July 2003 and
          was appointed Vice President Corporate Marketing in 2004. Prior to joining us,
          Ms. Hammer held the position of V.P. Marketing at Emblaze Systems Ltd.
          Previously, she served as Vice President of Information and Marketing Services
          at CreoScitex Ltd. Prior to that, Ms. Hammer filled a number of marketing
          positions at Scitex. Ms. Hammer holds a B.A. (Hons) in French and a Cert. Ed,
          both from the University of Wales.

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.

Mr. Zohar Gilon has
served as a director since September 1995.  He serves as Managing General Partner and
Managing Director of Tamar Technologies Ventures, a venture capital fund investing in
Israel and the U.S.  From 1993 until August 1995, he served as President of
W.S.P. Capital Holdings Ltd., which provides investment banking and underwriting services
in Israel and invests in real estate and high-technology investments in Israel and
abroad.  Mr. Gilon serves as a director of other public companies, namely
Ceragon Ltd., Radcom Ltd. and several private companies.  Mr. Gilon is also a
private investor in numerous high-technology companies, including affiliates of ours in
Israel. He holds a B.Sc. degree in electrical engineering from the Technion and an M.B.A.
degree from Tel Aviv University.

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), a private international business school in Tel Aviv, 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. 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. In addition,
          Prof. Katzenstein is a member of the Board of Directors of several companies
          including Polysac (Israel), On Track Innovations (Nasdaq: OTIV), RADWare and
          RADVision (the latter two companies are part of the RAD BYNET Group),Clal Insurance, Degem Ltd. Polysac Ltd.Among others, her past
          directorships include: Clal Industries & Investments, Discount Issuers Ltd.,
          Bezeq Globe and Amanet.

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 Voice Objects AG and T-Systems Solutions for Research, a member of the
          boards of SCM-Microsystems, TranSwitch Corporation, Radware Ltd. and ICANN and
          as a member of the Supervisory Boards of Authentidate International AG and
          XTraMind GmbH. Dr. Hultzsch received his Ph.D. in physics from Johannes
          Gutenberg University in Mainz, Germany.

37

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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 President 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.

|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, 2005 was approximately $1,341,000. 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 $244,000 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 2005, 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.

In 2005, we granted options to
purchase an aggregate amount of 288,000 ordinary shares to our officers and directors
under the 2003 Plan at exercise prices ranging between $2.58 and $3.15 per share. 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, 2006:

|          | Options unexercised
|--------- | -------------------
|
|
|
|
|1.12-1.60 |                    
|1.61-1.88 |                    
|2.05-2.75 |                    
|2.81      |                    
|2.82      |                    
|3.15      |                    
|3.69      |                    
|7.38      |                    
|          |                    
|          |                    

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The aggregate number of options
outstanding and exercisable within 60 days held by all our directors and officers as a
group as of March 15, 2006, was 481,501 at exercise prices that range between $1.12 to
$3.15 per ordinary share and expiration dates that range between August 2006 and August
2015.

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 6 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.

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:

39

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| |  | 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 may be extended for an additional three year period. 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.

Under the Companies Law, an external
director cannot be dismissed from office unless:

| |  | the
board of directors determines that the external director no longer meets one of the
requirements for qualifying as an external director, as set forth in the Companies Law,
or that the external director is in breach of his or her fiduciary duties to the company,
and the shareholders of the company vote (with the same majority required for the
appointment) to remove the external director, after giving the external director the
opportunity to present his or her position before the general meeting;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
Israeli court determines, upon a request of a director or a shareholder, that the
director no longer meets the requirements for holding such office, as set forth in the
Companies Law, or that the director is in breach of his or her fiduciary duties to the
company; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
court determines, upon a request of the company, a director, a shareholder or a creditor
of the company, that the external director is unable to fulfill his or her office on a
permanent basis or has been convicted by a court outside of Israel of certain crimes as
specified in the Companies Law.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, Zohar
Gilon, Prof. Liora Katzenstein and Dr. Meir Barel are independent directors under
Nasdaqs rules.

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

40

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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, Zohar Gilon and Dr. Hagen Hultzsch and satisfies the
requirements of the Companies Law and the SEC and 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 Zohar Gilon, 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. Under Section 112 of 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 is carried out by the Board of
Directors.

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.

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, 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, fiveemployees 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 sevenemployees were based at our
wholly-owned United States subsidiary, RiT Technologies, Inc.

As of December 31, 2003, we had 128
employees worldwide, of which 45 were employed in sales and marketing, 41 in research and
development, 27 in operations and 15 in management. As of December 31, 2003, 116 of our
employees were based in Israel, four 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.

41

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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.

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. We contribute
approximately 8.3% of the employees salary as far as it relates to certain of our
employees, by contributing funds on a monthly basis to the managers insurance. 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, 2006:

|Name                  | Title/Office                            | As a % of OutstandingOrdinary Shares
|--------------------- | --------------------------------------- | ------------------------------------
|
|
|
|
|Yehuda Zisapel        | Chairman of the Board of Directors      | 18.74 %                             
|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               | *                                   
|Galit Sholder         | Vice President Human Resources          | *                                   
|Shelagh Hammer        | Vice President Corporate Marketing      | *                                   
|Hila Hubsch           | General Counsel and Corporate Secretary | *                                   
|Oded Nachmoni         | Senior Director of Product Management   | *                                   
|Ely Cohen             | Senior Director of Business Development | *                                   
|Zohar Gilon           | Director                                | *                                   
|Dr. Liora Katzenstein | Director                                | *                                   
|Hagen Hultzsch        | Director                                | *                                   
|Israel Frieder        | Director                                | *                                   
|Meir Barel            | Director                                | 6.25%                               

---

* Less than 1%

Note:As of March 15, 2006,
the total number of outstanding shares owned by all directors and officers as a group (16
persons, including Yehuda Zisapel), excluding options and warrants, was 23.24%.

42

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The aggregate number of options
outstanding and exercisable within 60 days that are held by Yehuda Zisapel as of March 15,
2006 was 90,000 at exercise prices that range between $1.15 to $2.82 per ordinary share
and expiration dates that range between August 2006 and December 2014.

The aggregate number of options
outstanding and exercisable within 60 days that are held by Meir Barel as of March 15,
2006 was 20,000 with an exercise price of $2.82 per ordinary share with an expiration date
of December 2014.

Share Option Plans

All option grants to Israeli
employees are now made under the RiT Technologies Ltd. 2003 Share Option Plan (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 2,736,666 ordinary shares for the grant of options under the 2003 Plan, of which
we have as of March 1, 2006 outstanding 1,410,100 options to purchase ordinary shares at a
weighted exercise price of $1.83 per ordinary share. On February 1, 2006, our Share
Incentive Committee, Audit Committee and Board of Directors approved the increase of the
number of ordinary shares reserved under the 2003 Plan by an additional 500,000 ordinary
shares. The said increase is subject to shareholder approval at our Annual General Meeting
scheduled for April 5, 2006.

On November 25, 2003, our Board of
Directors 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, our Board
of Directors adopted the RiT Technologies, Inc. Employee Stock Option Plan (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 1, 2006,
66,833 options to purchase ordinary shares at a weighted exercise price of $2.34 per
ordinary share.

|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,
2006 (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.

43

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|Name                      | Number of Ordinary SharesOwned Excluding Options andWarrants | Number of OrdinaryShares BeneficiallyOwned | Number of Ordinary SharesBeneficially Owned as Percentof Total Shares1
|------------------------- | ------------------------------------------------------------ | ------------------------------------------ | ----------------------------------------------------------------------
|
|
|
|
|Yehuda Zisapel2           |                                                              |                                            |                                                                       
|                          |                                                              |                                           
|Zohar Zisapel3            |                                                              |                                            |                                                                       
|                          |                                                              |                                           
|Dr. Meir Barel            |                                                              |                                            |                                                                       
|                          |                                                              |                                           
|Austin W. Marxe and David |                                                              |                                           
|M. Greenhouse5            |                                                              |                                            |                                                                       

---

|(1) | Based
on 14,639,907 ordinary shares outstanding as of March 15, 2006, excluding
                    any options and warrants granted and exercisable within 60 days.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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, 2005, based on a Schedule 13G/A filed by Dr. Meir Barel with
                    the U.S. Securities and Exchange Commission on January 23, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | As
of December 31, 2005, based on a Schedule 13G/A filed by Austin W. Marxe and
                    David M. Greenhouse with the U.S. Securities and Exchange Commission
on February                     15, 2006. The Schedule 13G/A indicates that Messrs. Marxe
and Greenhouse share                     voting and dispositive power as to (i) 1,107,200
ordinary shares and                     276,800 warrants owned by Special Situations
Private Equity Fund, L.P.,                     (ii) 930,000 ordinary shares and
232,500 warrants owned by Special                     Situations Technology Fund II, L.P.
and (iii) 177,100 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of March 15, 2006, there were 11
holders of record in the United States, who collectively held an aggregate
of 9,938,206 ordinary shares, constituting approximately 67.85% of our ordinary
shares as of that date.

Between December 31, 2005 and
February 28, 2006, Kern Capital Management, LLC sold 956,300 ordinary shares.
Consequently, Kern Capital Management, LLC now holds less than 5% of our ordinary shares.
This information is based upon the information contained in an amendment to a Schedule 13G
filed with the U.S. Securities and Exchange Commission on March 10, 2006.

We are not aware of any arrangements
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.

44

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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.

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 2005, 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 2005 to these related parties
were approximately $417,000. A United States subsidiary of RAD provides administrative
services and leases premises in Mahwah, New Jersey, to RiT Technologies, Inc. The annual
payments in 2005 were approximately $19,000.

We have a non-exclusive distribution
arrangement with Bynet Applications for the distribution of our enterprise solutions in
Israel. In 2005, sales through this arrangement were approximately $1.3 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.

45

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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
|----------------------------------- | ---- | ---
|
|
|
|
|2001 Full Year                      |      |    
|2002 Full Year                      |      |    
|2003 Full Year                      |      |    
|2004 Full Year                      |      |    
|First Quarter 2004                  |      |    
|Second Quarter 2004                 |      |    
|Third Quarter 2004                  |      |    
|Fourth Quarter 2004                 |      |    
|2005 Full Year                      |      |    
|First Quarter 2005                  |      |    
|Second Quarter 2005                 |      |    
|Third Quarter 2005                  |      |    
|Fourth Quarter 2005                 |      |    
|September 2005                      |      |    
|October 2005                        |      |    
|November 2005                       |      |    
|December 2005                       |      |    
|January 2006                        |      |    
|February 2006                       |      |    
|March 2006 (through March 24, 2006) |      |    

Effective January 2004, our ordinary
shares were transferred from the Nasdaq National Market to the Nasdaq Capital Market. Our
ordinary shares are currently traded on the Nasdaq Capital Market, under the symbol
RITT.  To continue to be listed on the Nasdaq Capital Market, we need to satisfy a
number of conditions, including a minimum bid price of at least $1.00 per share and a
minimum 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 Nasdaq in the future. See Item 3.D.Risk
Factors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.

As of March 1, 2006, we had
14,639,907 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.

46

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

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

Not applicable.

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

47

---

---



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;
| | - | ---------------------------------------------------------------

| |  | 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.

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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 against:

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

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

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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 2006. At our 2006 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 and other surplus, 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.

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.

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.

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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.

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, 2005, 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 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.

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We have entered into lease
agreements, as described in Item 4.D  Property, Plants and Equipment,
and contracts with related parties, as described in Item 7.B  Related Party
Transactions above.

|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.

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 35% for the 2005 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: 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. 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.

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

| |  | Capital
gains on specific traded securities are normally subject to reduced tax rates for
individuals and are taxable at corporate tax rates for companies. As of January 1, 2006,
the relevant provisions governing taxation of companies on capital gains derived from the
sale of traded securities are included in the Tax Ordinance, and the Adjustments Law no
longer includes provisions in this regard.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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

The Law for Encouragement of Capital
Investments, 1959 (the Investments Law), provides 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. See discussion below regarding an amendment to
the Investment Law that came into effect in 2005.

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.

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%.

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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
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 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.

The Investment Center bases its
decision as to whether or not to approve an application, on the criteria set forth in the
Investments Law and regulations, the prevailing policy of the Investment Center, and the
specific objectives and financial criteria of the applicant. Accordingly, there can be no
assurance that any such future application will be approved. In addition, the 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 Benefiting Enterprise. A company wishing
to receive the tax benefits afforded to a Benefiting 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 Benefiting 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 Benefiting 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.

Pursuant to the amendment, a company
with a Benefiting Enterprise is entitled, in each tax year, to accelerated depreciation
for the manufacturing assets used by the Benefiting 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 Benefiting
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 Benefiting 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 Benefiting 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 Benefiting Enterprise; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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 will take effect retroactively from
2003.

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

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

| | deduction
over a three-year period of expenses involved with the issuance and listing of shares on
the Tel Aviv Stock Exchange or, on or after January 1, 2003, on a recognized stock market
outside of Israel.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
both residents and non-residents of Israel, unless a specific exemption is available or
unless a tax treaty between Israel and the shareholders country of residence
provides otherwise. The law distinguishes between 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.

If our shares were sold by Israeli
residents, then for the period ending December 31, 2002, their sale would be tax exempt so
long as (1) the shares are listed on a recognized stock exchange, such as the Nasdaq
Capital Market, and (2) we qualified as an industrial company or industrial holding
company under the law for Encouragement of Industry (Taxes) 1969. We believe that in 2005
we qualified as an Industrial Company under the law for Encouragement of Industry (Taxes)
1969. We cannot provide any assurance that the Israeli tax authorities will agree with the
determination that we qualified as an industrial company in the past or that we will
maintain this qualification or our status as an industrial company.

56

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

However, as of January 1, 2006, 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) at the time of publication of the aforementioned amendment to the Tax
Ordinance, 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.

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

Non-Israeli residents are 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.

57

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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, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, income tax is withheld at the source at the following rates:
(i) for dividends distributed prior to January 1, 2006  25%; (ii) for dividends
distributed on or after January 1, 2006  20%, or 25% for a shareholder that is
considered a significant shareholder at any time during the 12-month period preceding such
distribution; If the income out of which the dividend is being paid is attributable to an
Approved Enterprise (or Benefiting Enterprise); the rate is 15%. 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 are U.S. corporations holding at least 10% of 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 the Israeli
companys gross income consists of interest or dividends.

# U.S. 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 herby 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.

58

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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.

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.

59

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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.

We were not a PFIC for the fiscal
year ended December 31, 2005. 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.

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

Not applicable.

|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
Securities and Exchange Commission. You may read and copy any document we file with the
Securities and Exchange Commission without charge at the Securities and Exchange
Commission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 Securities and Exchange Commission at such address, at prescribed
rates. Please call the Securities and Exchange Commission 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 Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are registered under
the Exchange Act. However, we intend to file with the Securities and Exchange Commission,
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.

We do not presently engage in any
hedging or other transactions intended to manage risks relating to foreign currency
exchange rate or interest rate fluctuations. We may in the future undertake hedging or
other similar transactions if our management determines that it is necessary to offset
these risks.

Equity price risk

Marketable securities at December 31,
2005, included corporate bonds at a fair value of $506,000. Market risk was estimated as
the potential decrease in fair value resulting from a hypothetical 20% decrease in the
value of the marketable securities. Assuming such decrease, the fair value of the
remaining marketable securities would decrease by approximately $101,000.

61

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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.

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,
2005. Based upon this evaluation, our Chief Executive Officer and Vice President Finance
have concluded that, as of December 31, 2005, 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
Securities and Exchange Commissions rules and forms.

There were no changes in our internal
control over financial reporting during the year ended December 31, 2005, that have
materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

62

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

Our board of directors has determined
that Zohar Gilon and Israel Frieder are audit committee financial experts, as defined by
applicable SEC regulations. Messrs. Gilon and Frieder are 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 | 2004
|------------------ | ---- | ----
|
|
|
|
|Audit Fees billed  |      |     
|Audit-Related Fees |      |     
|Tax Fees           |      |     
|All Other Fees     |      |     
|                   |      |     
|                   |      |     
|Total              |      |     
|                   |      |     

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

Not applicable.

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

See Item 19(a) incorporated herein by
reference.

63

---

---



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

|(a) | Index
to Financial Statements
|--- | -----------------------------

|                                                             | Page
|------------------------------------------------------------ | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm      | 2   
|                                                            
|Consolidated Balance Sheets as of December 31, 2004 and 2005 | 3   
|                                                            
|Consolidated Statements of Operations for the Years         
|ended December 31, 2003, 2004 and 2005                       | 4   
|                                                            
|Statements of Changes in Shareholders' Equity for the Years 
|ended December 31, 2003, 2004 and 2005                       | 5   
|                                                            
|Consolidated Statements of Cash Flows for the Years         
|ended December 31, 2003, 2004 and 2005                       | 6   
|                                                            
|Notes to the Consolidated Financial Statements               | 7   

|(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.****
|--- |  | -------------------------------------------------

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

64

---

---



---

*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.



---

---



# 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 31, 2006



---

---



# RiT Technologies Ltd.
and its 
Consolidated Subsidiaries

# Financial Statements

# December 31, 2005



---

---



|RiT Technologies Ltd.                                    
|---------------------------------------------------------
|and its Consolidated Subsidiaries                        
|Consolidated Financial Statements as of December 31, 2005
|                                                         
|                                                         

Contents

|                                                                                           | Page
|------------------------------------------------------------------------------------------ | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm                                    | F-2 
|                                                                                          
|Consolidated Balance Sheets                                                               
|as of December 31, 2005 and 2004                                                           | F-3 
|                                                                                          
|Consolidated Statements of Operations for the years                                       
|ended December 31, 2005, 2004 and 2003                                                     | F-4 
|                                                                                          
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)
|for the years ended December 31, 2005, 2004 and 2003                                       | F-5 
|                                                                                          
|Consolidated Statements of Cash Flows for the years                                       
|ended December 31, 2005, 2004 and 2003                                                     | F-6 
|                                                                                          
|Notes to the Consolidated Financial Statements                                             | F-7 



---

---



# Report of Independent
Registered Public Accounting Firm

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, 2005 and 2004 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,
2005. 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 the Company and its subsidiaries as of December 31, 2005 and 2004,
and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.

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

Tel-Aviv, Israel,
February 1, 2006



---

---



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

|                                                               | December 31
|-------------------------------------------------------------- | -----------
|
|
|
|
|Assets                                                         |            
|Current Assets                                                 |            
|Cash and cash equivalents (Note 8A1)                           |            
|Marketable securities (Note 8A2)                               |            
|Trade receivables, net (Note 8A3)                              |            
|Other current assets (Note 8A4)                                |            
|Inventories (Note 8A5)                                         |            
|                                                               |            
|Total Current Assets                                           |            
|                                                               |            
|Assets held for severance benefits (Note 4)                    |            
|                                                               |            
|                                                               |            
|Property and Equipment (Note 3)                                |            
|Cost                                                           |            
|Less - accumulated depreciation                                |            
|                                                               |            
|                                                               |            
|                                                               |            
|Total Assets                                                   |            
|                                                               |            
|                                                               |            
|Liabilities and Shareholders' Equity                           |            
|Current Liabilities                                            |            
|Short-term bank credits (Note 8A6)                             |            
|Trade payables                                                 |            
|Other payables and accrued expenses (Note 8A7)                 |            
|                                                               |            
|Total Current Liabilities                                      |            
|                                                               |            
|Long-Term Liability                                            |            
|Liability in respect of employees' severance benefits (Note 4) |            
|                                                               |            
|Total Liabilities                                              |            
|                                                               |            
|Commitments and Contingencies (Note 5)                         |            
|                                                               |            
|Shareholders' Equity (Note 6)                                  |            
|Share capital*                                                 |            
|Treasury Stock                                                 |            
|Additional paid-in capital                                     |            
|Accumulated other comprehensive loss                           |            
|Accumulated deficit                                            |            
|                                                               |            
|Total Shareholders' Equity                                     |            
|                                                               |            
|Total Liabilities and Shareholders' Equity                     |            
|                                                               |            

|* | Ordinary
Shares NIS 0.1 par value
|- | ----------------------------------

| | Authorized
shares: 39,979,770 as of December 31, 2005 and 2004; issued and outstanding 14,427,074
and 14,098,188 as of December 31, 2005 and 2004, respectively (including 17,000 of which
held by a subsidiary). Deferred Shares  NIS 0.1 par value
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Authorized
shares:  20,230, issued and outstanding 17,030 shares as of December 31, 2005 and 2004.
| | --------------------------------------------------------------------------------------------------

|/s/ Yehuda Zisapel
Director |  | /s/ Doron Zinger
President and Chief Executive Officer
|----------------------------------------- |  | --------------------------------------------------------------------

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

F - 3

---

---



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

|                                                     | Year ended December 31
|---------------------------------------------------- | ----------------------
|
|
|
|
|Sales (Notes 8B1)                                    |                       
|                                                     |                       
|Cost of sales (Note 5A and 8B2)                      |                       
|                                                     |                       
|                                                     |                       
|Gross profit                                         |                       
|                                                     |                       
|                                                     |                       
|Operating expenses:                                  |                       
|                                                     |                       
|Research and development, gross                      |                       
|Less - royalty-bearing participation (Note 5A)       |                       
|                                                     |                       
|Research and development, net                        |                       
|                                                     |                       
|Sales and marketing                                  |                       
|                                                     |                       
|General and administrative                           |                       
|                                                     |                       
|                                                     |                       
|Total operating expenses                             |                       
|                                                     |                       
|                                                     |                       
|Operating income (loss)                              |                       
|                                                     |                       
|                                                     |                       
|Financing income, net (Note 8B3)                     |                       
|                                                     |                       
|Taxes on income (Note 7)                             |                       
|                                                     |                       
|                                                     |                       
|Net income (loss) for the year                       |                       
|                                                     |                       
|                                                     |                       
|Net income (loss) per share (Note 2Q):               |                       
|Basic net income (loss) per ordinary share (US$)     |                       
|                                                     |                       
|                                                     |                       
|Diluted net income (loss) per ordinary share (US$)   |                       
|                                                     |                       
|                                                     |                       
|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 |                       
|                                                     |                       

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

F - 4

---

---



|RiT Technologies Ltd.                                                                     
|------------------------------------------------------------------------------------------
|and its Consolidated Subsidiaries                                                         
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)
|                                                                                          
|                                                                                          

|                                            | Share capital | Treasury
Stock | Additional
paid-in
capital | Accumulated
other
comprehensive
income
(loss) | Accumulated
deficit | Total
|------------------------------------------- | ------------- | -------------- | -------------------------- | --------------------------------------------- | ------------------- | -----
|
|
|
|
|Balance as of January 1, 2003               |               |                |                            | 17,030                                        |                     |      
|                                            |               |               
|Changes during 2003                         |               |               
|Net loss for the year                       |               |                |                            | -                                             |                     |      
|Net unrealized change on available for sale |               |               
|securities                                  |               |                |                            | -                                             |                     |      
|                                            |               |                |                            |                                               |                     |      
|Comprehensive loss                          |               |                |                            | -                                             |                     |      
|                                            |               |                |                            |                                               |                     |      
|Balance as of December 31, 2003             |               |                |                            | 17,030                                        |                     |      
|                                            |               |               
|Changes during 2004                         |               |               
|Issuance of shares and warrants,            |               |               
|net of US$ 372 thousand issue expenses      |               |                |                            | -                                             |                     |      
|Exercise of options                         |               |                |                            | -                                             |                     |      
|Exercise of warrants                        |               |                |                            | -                                             |                     |      
|                                            |               |               
|Net loss for the year                       |               |                |                            | -                                             |                     |      
|Net unrealized change on available for sale |               |               
|securities                                  |               |                |                            | -                                             |                     |      
|                                            |               |                |                            |                                               |                     |      
|Comprehensive loss                          |               |                |                            | -                                             |                     |      
|                                            |               |                |                            |                                               |                     |      
|                                            |               |               
|Balance as of December 31, 2004             |               |                |                            | 17,030                                        |                     |      
|                                            |               |               
|Changes during 2005                         |               |               
|Exercise of options                         |               |                |                            | -                                             |                     |      
|Exercise of warrants                        |               |                |                            | -                                             |                     |      
|                                            |               |               
|Net income for the year                     |               |                |                            | -                                             |                     |      
|Net unrealized change on available for sale |               |               
|securities                                  |               |                |                            | -                                             |                     |      
|                                            |               |                |                            |                                               |                     |      
|Comprehensive income                        |               |                |                            | -                                             |                     |      
|                                            |               |                |                            |                                               |                     |      
|                                            |               |               
|Balance as of December 31, 2005             |               |                |                            | 17,030                                        |                     |      
|                                            |               |                |                            |                                               |                     |      

*  An amount less than US$ 1 thousand

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

F - 5

---

---



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

|                                                         | Year ended December 31
|-------------------------------------------------------- | ----------------------
|
|
|
|
|Cash flows from operating activities:                    |                       
|Net income (loss) for the year                           |                       
|Adjustments to reconcile net income (loss) to net cash   |                       
|provided by (used in) operating activities:              |                       
|Allowance for doubtful accounts                          |                       
|Depreciation                                             |                       
|Severance pay benefits, net                              |                       
|Capital loss                                             |                       
|                                                         |                       
|Changes in operating assets and liabilities:             |                       
|Decrease (increase) in trade receivables                 |                       
|Decrease (increase) in other current assets              |                       
|Decrease (increase) in inventories                       |                       
|Increase (decrease) in accounts payable and accruals:    |                       
|Trade                                                    |                       
|Other                                                    |                       
|                                                         |                       
|Net cash provided by (used in) operating activities      |                       
|                                                         |                       
|                                                         |                       
|Cash flows from investing activities:                    |                       
|Proceeds from sale of property and equipment             |                       
|Purchase of property and equipment                       |                       
|                                                         |                       
|Net cash used in investing activities                    |                       
|                                                         |                       
|                                                         |                       
|Cash flows from financing activities:                    |                       
|Short-term bank credits, net                             |                       
|Proceeds from issuance of shares and warrants, net       |                       
|of share issue expenses in the amount of US$372 thousand |                       
|Proceeds from exercise of options                        |                       
|Proceeds from exercise of warrants                       |                       
|                                                         |                       
|Net cash provided by (used in) financing activities      |                       
|                                                         |                       
|                                                         |                       
|Increase (decrease) in cash and cash equivalents         |                       
|Cash and cash equivalents at beginning of year           |                       
|                                                         |                       
|                                                         |                       
|Cash and cash equivalents at end of year                 |                       
|                                                         |                       
|                                                         |                       
|Supplemental disclosures:                                |                       
|Income tax paid in cash                                  |                       
|                                                         |                       
|Cash paid for interest                                   |                       
|                                                         |                       

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

F - 6

---

---



|RiT Technologies Ltd.                                                 
|----------------------------------------------------------------------
|and its Consolidated Subsidiaries                                     
|Notes to the Consolidated Financial Statements as of December 31, 2005
|                                                                      
|                                                                      

|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 innovative solutions
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
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 exchange rate current as of date of recognition of
those items (excluding depreciation and other items deriving from non-monetary items).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 7

---

---



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

| | A. | Financial
Statements in US dollars (dollars) (contd)
| | -- | -------------------------------------------------------

| | 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 in dollars,
and they may not necessarily be exchangeable for dollars.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | These
are managements best estimates based on experience and historical data, however,
actual results may vary from these estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | C. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include those of the Company and its wholly-owned
subsidiaries. All intercompany transactions and balances were eliminated in
consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Cash
and cash equivalents
| | -- | -------------------------

| | The
Company considers all highly liquid deposit instruments purchased 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 No. 115, Accounting
for Certain Investmentsin 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

---

---



|Not 2 |  | Significant
Accounting Policies (contd)
|----- | - | ----------------------------------------

| | E. | Marketable
securities (contd)
| | -- | ------------------------------

| | 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
fair value | Total
unrealized
losses
|-------------------------- | ------------------- | -------------------- | ---------------- | -----------------------
|
|
|
|
|Corporate fixed rate bonds |                     |                      |                  | -                      
|                           |                     |                      |                  |                        
|Total                      |                     |                      |                  | -                      
|                           |                     |                      |                  |                        

| | As
of December 31, 2004:
| | ------------------------

|                           | Less than 12 months | 12 months or Greater | Total
fair value | Total
unrealized
losses
|-------------------------- | ------------------- | -------------------- | ---------------- | -----------------------
|
|
|
|
|
|Corporate fixed rate bonds |                     |                      |                  | 531                    
|                           |                     |                      |                  |                        
|Total                      |                     |                      |                  | 531                    
|                           |                     |                      |                  |                        

| | The
unrealized losses on the Companys investments in corporate fixed rate bonds were
caused by interest rate increases. Because the Company has the ability and intent to hold
these investments until a recovery of fair value, which may be maturity, the Company does
not consider these investments to be other-than-temporarily impaired as of December 31,
2005 and 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Trade
receivables
| | -- | -----------------

| | Accounts
receivable are recorded at cost, less the related allowance for doubtful accounts
receivable. Management considers current information and events regarding the customers ability
to repay their obligations and judges accounts receivable to be impaired when it is
probable that the Company will be unable to collect all amounts due.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance sheet allowance for doubtful accounts for all the periods through December 31,
2005 is determined as a specific amount for those accounts the collection of which is
uncertain.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---



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

| | 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:  
Labor
and overhead  on the basis of actual manufacturing costs. Costs in inventory
include direct materials, labor and overhead incurred
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Obsolete
and slow inventory are written down according to managements estimation. See also
Note 8B2.
| | -----------------------------------------------------------------------------------------------------

| | H. | Assets
held for severance benefits
| | -- | ----------------------------------

| | Assets
held for employees severance benefits represent contributions to severance pay funds and
cash surrender life 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 repairs
are charged to operations as incurred.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
is calculated on the straight-line method over the useful lives of the assets, as
estimated by the Company.
| | ------------------------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

| |                                    | %
| | ---------------------------------- | -
|
|
|
|
| | Research and development equipment |  
| | Manufacturing equipment            |  
| | Office furniture and equipment     |  
| | 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 amount is fixed or determinable, and collection of the resulting receivable is
probable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 10

---

---



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

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

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

| | 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 recorded.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
grants are reflected as a reduction of research and development expenses.
| | -----------------------------------------------------------------------------

| | M. | Allowance
for product warranty
| | -- | ------------------------------

| | It
is the Companys policy to grant a warranty for periods of 12 to 36 months, except
for the SMART Cabling System, SMART GIGA Cabling System and CLASSIX Cabling Systems
which, when installed by a certified cabling installer and registered by the Company, are
granted 15-year and 20-year warranties respectively, for system performance. The balance
sheet provision for warranties for all periods through December 31, 2005 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, 2003 |                   
|Warranties for products sold |                   
|Lapsed warranties            |                   
|Warranty costs incurred      |                   
|                             |                   
|Balance at December 31, 2004 |                   
|Warranties for products sold |                   
|Lapsed warranties            |                   
|Warranty costs incurred      |                   
|                             |                   
|Balance at December 31, 2005 |                   
|                             |                   

| | N. | Stock
option plans
| | -- | ------------------

| | The
Company applies the intrinsic value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations including Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation(FIN
44), in accounting for its stock option plans for employees and directors. SFAS No.
123, Accounting forStock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of accounting for
stock-based employee stock compensation plans and as a measurement basis for transactions
involving the acquisition of goods or services from non-employees. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based method of
accounting for employee stock options and has adopted the disclosure requirements of SFAS
No. 123. See also Note 2U1.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---



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

| | N. | Stock
option plans (contd)
| | -- | ---------------------------

| | Had
compensation expenses for stock options granted been determined based on the fair value
at the grant dates, consistent with the method of SFAS 123, the effect on the results of
operation for the years ended December 31, 2005, 2004 and 2003 would have been as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      | Year ended December 31
|----------------------------------------------------- | ----------------------
|
|
|
|
|Net income (loss) as reported                         |                       
|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 method for all awards, net of related             |                       
|tax effects                                           |                       
|                                                      |                       
|Net income (loss) - pro forma                         |                       
|                                                      |                       
|                                                      |                       
|Basic net income (loss) per share as reported (US$)   |                       
|                                                      |                       
|                                                      |                       
|Diluted net income (loss) per share as reported (US$) |                       
|                                                      |                       
|                                                      |                       
|Pro forma basic and diluted net income (loss) per     |                       
|share (US$)                                           |                       
|                                                      |                       

| | The
fair value of each option grant is estimated on the date of the grant using the Black and
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 | %
|---------------------- | -
|
|
|
|
|2005                   |  
|2004                   |  
|2003                   |  

| | 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 85.6% for the year ended December 31, 2005 (87.2% and                89.2%
for the years ended December 31, 2004 and 2003, respectively).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



|Not 2 |  | Significant
Accounting Policies (contd)
|----- | - | ----------------------------------------

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

| | 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. | Earnings
(loss) per share
| | -- | -------------------------

| | Basic
earnings (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 earnings (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, 2004  2,197,033 stock options and 1,223,174
warrants; as of December 31, 2003  2,407,991 stock options) 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.
| | ----------------------------------------------------------------------------------------------

F - 13

---

---



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

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

| | U. | Recently
Enacted Accounting Pronouncements
| | -- | ------------------------------------------

| | 1. | SFAS
123R  Share-Based Payments
| | -- | --------------------------------

| | In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), Share-Based Payments (SFAS 123R). SFAS 123R
requires entities to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award and recognize
the cost over the period during which an employee is required to provide service in
exchange for the award. SFAS 123R does not change the accounting guidance for share-based
payment transactions with parties other than employees provided in FAS 123 as originally
issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued toOther Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.SFAS 123R is effective for public entities as of the
beginning of the first annual reporting period that begins after June 15, 2005.
Accordingly, the Company is required to adopt SFAS 123R on January 1, 2006. As a result,
the Company will implement FAS 123R using the modified prospective method. Under this
method, the Company will begin recognizing compensation cost for equity-based
compensation for all new awards and to awards modified, repurchased or cancelled after
January 1, 2006. Furthermore, the Company will be required to recognize compensation cost
attributable to the unvested portion of outstanding options as of January 1, 2006, based
on the grant date fair value of those awards, as previously calculated and reported for
pro-forma disclosure purposes. The Company expects stock-based compensation expense under
SFAS 123R, related to stock-based awards issued through fiscal 2005, to be approximately
US$ 164 thousand and US$ 44 thousand in fiscal 2006 and 2007, respectively. In addition,
the Company expects to grant additional stock-based awards in fiscal 2006 which will
result in additional stock-based compensation expense.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | SFAS
151  Inventory Costs, an amendment of Accounting Research           Bulletin (ARB)
No. 43
| | -- | -------------------------------------------------------------------------------------------------

| | In
November 2004, the Financial Accounting Standards Board issued SFAS No. 151, Inventory
Costs an amendment of Accounting Research Bulletin No. 43, Chapter 4 (SFAS
151). The amendments made by SFAS 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current-period charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. Management has not yet determined the impact, if any, the adoption of this
standard will have on its financial position and results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---



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

| | U. | Recently
Enacted Accounting Pronouncements (contd)
| | -- | ---------------------------------------------------

| | 3. | SFAS
153 Exchanges of Nonmonetary Assets, an amendment of
                    Accounting PrinciplesBulletin(APB)
                    Opinion No. 29, Accounting for Nonmonetary Transaction
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the Financial Accounting Standards Board issued SFAS No. 153, Exchanges
ofNonmonetary Assets  an amendment of Accounting Principles Bulletin (APB)
Opinion No. 29,Accounting for Nonmonetary Transactions(SFAS 153).The guidance in APB Opinion No. 29 is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets exchanged.
The guidance in Opinion No. 29, however, included certain exceptions to that principle.
SFAS 153 amends Opinion No. 29 to eliminate the exception for nonmonetary assets
exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for fiscal
periods beginning after June 15, 2005 and shall be applied prospectively. The adoption of
this statement is not expected to result in a material impact on the Companys
financial position and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | SFAS
154  Accounting Changes and Errors Corrections
| | -- | ----------------------------------------------------

| | In
May 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting
Changes andErrors Corrections(SFAS 154). SFAS 154 replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, although it carries forward
some of their provisions. SFAS 154 requires retrospective application to prior periods financial
statements of changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. A change in
depreciation, amortization, or depletion method for long-lived, nonfinancial assets will
be accounted for as a change in accounting estimate effected by a change in accounting
principle. SFAS 154 is effective for changes in accounting principle made in fiscal years
beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154
will have a material impact on its financial position and results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---



|Note 3 |  | Property
and Equipment
|------ | - | ----------------------

|                                   | December 31
|---------------------------------- | -----------
|
|
|
|
|Cost                               |            
|Research and development equipment |            
|Manufacturing equipment            |            
|Office furniture and equipment     |            
|Leasehold improvements             |            
|                                   |            
|                                   |            
|                                   |            
|                                   |            
|                                   |            
|Accumulated depreciation           |            
|Research and development equipment |            
|Manufacturing equipment            |            
|Office furniture and equipment     |            
|Leasehold improvements             |            
|                                   |            
|                                   |            
|                                   |            
|                                   |            
|                                   |            
|                                   |            
|                                   |            

|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 funded partially by the purchase of insurance policies in the name of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expenses for the years ended December 31, 2005, 2004 and 2003 amounted to US$ 479
thousand, US$ 462 thousand and US$ 492 thousand, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 16

---

---



|Note 5 |  | Commitments
and Contingencies (contd)
|------ | - | --------------------------------------

| | A. | Royalty
commitments (contd)
| | -- | ----------------------------

| | 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%  150% of the dollar-linked amounts of the
grants received, plus interest at the LIBOR rate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, total grants received, net of royalties paid or accrued, amounted
to approximately US$ 815 thousand.
| | -----------------------------------------------------------------------------------------------------------------------------

| | Royalties
payable 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 2007 and June 2006, respectively. The lease agreement for the premises in New
Jersey is open ended and can be terminated upon 30 days notice. The lease agreement for
the premises in Shanghai, China, expires in March 2006. The lease agreement for the
representative office in Beijing, China, expires in December 2006. The lease agreement
for the representative office in Moscow expires in March 2006. Minimum future rental
payments due under the above leases, at rates in effect on December 31, 2005, assuming no
options are exercised, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31 | US$ (in thousands)
| | ----------------------- | ------------------
|
|
|
|
| | 2006                    |                   
| | 2007                    |                   
| | Thereafter              |                   
| |                         |                   
| |                         |                   
| |                         |                   
| |                         |                   

| | Part
of the lease agreements in Israel are secured by a bank guarantee in the amount of US$ 22
thousand.
| | --------------------------------------------------------------------------------------------------------

| | Rental
expenses amounted to US$ 543 thousand, US$ 565 thousand and US$ 1,005 thousand for the
years ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



|Note 5 |  | Commitments
and Contingencies (contd)
|------ | - | --------------------------------------

| | B. | Lease
commitments (contd)
| | -- | --------------------------

| | 2. | The
Company has entered into several operating leases in respect of motor
               vehicles since June 1998. These lease agreements expire on various dates
from                2006 to 2008. Minimum future lease payments due under the above
leases on                December 31, 2005, assuming no options are exercised, are as
follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31 | US$ (in thousands)
| | ----------------------- | ------------------
|
|
|
|
| | 2006                    |                   
| | 2007                    |                   
| | 2008                    |                   
| |                         |                   
| |                         |                   
| |                         |                   
| |                         |                   

| | Part
of these lease commitments are secured by a bank guarantee in the amount of US$ 28
thousand.
| | -------------------------------------------------------------------------------------------------

| | Rental
expenses amounted to US$ 379 thousand, US$ 359 thousand and US$ 347 thousand for the
years ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Other
commitments
| | -- | -----------------

| | As
of December 31, 2005, bank guarantees in the amount of US$ 47 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 consist of corporate bonds in US dollars.
| | ---------------------------------------------------------------

| | 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
large number and geographical dispersion of the Companys customer base.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
also Note 8B1 for concentration of sale risks.
| | --------------------------------------------------

F - 18

---

---



|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, 2005 | December 31, 2004
|------------------------------ | ----------------- | -----------------
|
|
|
|
|Ordinary Shares of NIS 0.1 par |                   |                  
|value (1)                      |                   |                  
|                               |                   |                  
|                               |                   |                  
|Deferred Shares of NIS 0.1 par |                   |                  
|value (2)                      |                   |                  
|                               |                   |                  

| | 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

---

---



|Note 6 |  | Shareholders Equity
(contd)
|------ | - | -----------------------------

| | B. | Share
options
| | -- | -------------

| | 1. | RiT Technologies Ltd. and its consolidated subsidiaries Key
               Employees Share Incentive Option Plan (1996)
| | -- | -------------------------------------------------------------------------------------------------------------------------

| | In
November 1995, the Board of Directors of the Company adopted the Companys Key
Employee Share Incentive Plan (1996) (the Employee Share Option Plan),
pursuant to which options to purchase 517,850 Ordinary Shares were reserved for issuance
upon the exercise of such options. The Employee Share Option Plan is administered by the
Share Incentive Committee of the Board of Directors, which designates the optionees,
dates of grant and the exercise price of the options.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 1997, the Board of Directors adopted a resolution reserving 200,000 additional
options to purchase 200,000 ordinary shares upon the exercise of such options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 1999, the Board of Directors adopted a resolution reserving 300,000 additional
options to purchase 300,000 ordinary shares upon the exercise of such options.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 1999, the Board of Directors adopted a resolution reserving 300,000 additional
options to purchase 300,000 ordinary shares upon the exercise of such options.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 3, 2001, the Board of Directors of the Company resolved to reserve 350,000 shares
for use in the Key Employee Share Option Plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 5, 2001, the Board of Directors of the Company resolved that with respect to
participants in the Key Employee Share Option Plan to whom options were granted on June
24, 1996 and who remain employees of the Company on August 24, 2001 and have not given
notice nor been given notice of termination, the exercise period shall be extended for an
additional year to August 24, 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 10, 2001, the Board of Directors of the Company resolved to amend the Key
Employee Share Incentive Option Plan and reserve 506,000 options for use in the amended
Key Employee Share Incentive Option Plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | RiT
Technologies Inc. Employee Stock Option Plan
| | -- | ------------------------------------------------

| | In
May 1999, the Board of Directors of the Company adopted the 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

---

---



|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 of the parent.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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
August 5, 1999, the Board of Directors of the Company resolved to reserve 200,000
additional shares for use in the Directors plan, of which 200,000 options were
granted at the date of this resolution at an exercise price of US$ 2.8125. 100,000
options vested immediately and the remaining 100,000 options vested annually in two equal
shares of 50,000 each.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4. | RiT
Technologies Ltd. 2004 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 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---



|Note 6 |  | Shareholders Equity
(contd)
|------ | - | -----------------------------

| | B. | Share
options (contd)
| | -- | ----------------------

| | 5. | Options
Exchange Plan
| | -- | ---------------------

| | On
November 25, 2003, the Board of Directors of the Company adopted the Option Exchange Plan
pursuant to which employees and consultants of the Company and its subsidiaries who agree
thereto, will be eligible to waive their rights to all outstanding options granted and
which are not yet vested and exercisable on the date of exchange, and to receive in their
place new options pursuant to the Companys 2003 Plan at a uniform ratio of 1:1.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
vesting schedule of the new options will remain unchanged and will take into account the
vesting schedule that was set with respect to the exchangeable options that area to be
cancelled in exchange for such new options, the exercise price will be equal to the
exercise price per share of the exchangeable options and the expiration date of the new
option will take into account the expiration date that was set with respect to the
exchangeable options. The number of the options that were exchanged is 452,625.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | 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
|------------------------------------------- | ----------------- | ------------------------------- | --------------------------------------
|
|
|
|
|Options unexercised as of January 1, 2003   |                   |                                 |                                       
|Granted during 2003                         |                   |                                 |                                       
|Exercised during 2003                       |                   |                                 |                                       
|Expired during 2003                         |                   |                                 |                                       
|Forfeited during 2003                       |                   |                                 |                                       
|                                            |                   |                                 |                                       
|                                            |                   |                                
|Options unexercised as of December 31, 2003 |                   |                                 |                                       
|Granted during 2004                         |                   |                                 |                                       
|Exercised during 2004                       |                   |                                 |                                       
|Expired during 2004                         |                   |                                 |                                       
|Forfeited during 2004                       |                   |                                 |                                       
|                                            |                   |                                 |                                       
|                                            |                   |                                
|Options unexercised as of December 31, 2004 |                   |                                 |                                       
|                                            |                   |                                
|Granted during 2005                         |                   |                                 |                                       
|Exercised during 2005                       |                   |                                 |                                       
|Expired during 2005                         |                   |                                 |                                       
|Forfeited during 2005                       |                   |                                 |                                       
|                                            |                   |                                 |                                       
|                                            |                   |                                
|Options unexercised as of December 31, 2005 |                   |                                 |                                       
|                                            |                   |                                 |                                       

| | The
options under the various stock option plans were granted at market value. Accordingly,
no compensation expenses were recorded.
| | -----------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



|Note 6 |  | Shareholders Equity
(contd)
|------ | - | -----------------------------

| | B. | Share
options (contd)
| | -- | ----------------------

| | 6. | 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,
2005:
| | ---------------------------------------------------------------------------------------------------

|            | Options outstanding | Option exercisable
|----------- | ------------------- | ------------------
|
|
|
|
|1.12 - 1.60 |                     |                   
|1.61 - 1.88 |                     |                   
|2.05 - 2.75 |                     |                   
|2.81        |                     |                   
|2.82        |                     |                   
|3.15        |                     |                   
|3.69        |                     |                   
|6.00        |                     |                   
|7.38        |                     |                   
|            |                     |                   
|            |                     |                   
|            |                     |                   

| | At
year-end 2005, options with an average exercise price of US$ 1.92 were exercisable for
1,205,533 shares (at year-end 2004, options with an average exercise price of US$ 2.46
were exercisable for 1,054,116 shares).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Weighted
average exercise price for the options outstanding in 2005 and 2004 was US$ 1.87 and US$
2.02, respectively.
| | ---------------------------------------------------------------------------------------------------------------------

F  - 23

---

---



|Note 6 |  | Shareholders Equity
(contd)
|------ | - | -----------------------------

| | B. | Share
options (contd)
| | -- | ----------------------

| | 7. | Options
to non-employees
| | -- | ------------------------

| | The
Company applies the fair value-based method of accounting set forth in SFAS 123 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2005, 150,001 of these warrants had
been exercised.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Dividends
| | -- | ---------

| | Dividends
may be paid by the Company only out of the Israeli Companys earnings and other
surpluses in Israeli currency 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, 2005, 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).
| | ---------------------

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

F - 24

---

---



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

| | 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 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, in any event,
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 - 34% for the tax year ended
               December 31, 2005.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 25

---

---



# 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)
| | -- | -----------------------------------------------------------------------------------------------------------------------------

| | 3. | Conditions
for entitlement to the benefits
| | -- | ------------------------------------------

| | Entitlement
to the benefits of the Companys Approved Enterprise 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 will take
place                via the Income Tax Authorities as part of the tax audits. 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---



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

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

| | E. | Tax
assessment and carryforward tax losses
| | -- | ------------------------------------------

| | 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 carryforward tax losses are
approximately US$ 14,856 thousand as of December 31, 2005. The amount of the Companys
carryforward tax losses will be reduced by any future income of the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
US subsidiary is taxed under the United States Federal and State tax rules. The US
subsidiarys carryforward tax losses amounted to approximately US$ 5,121 thousand as
of December 31, 2005. Such losses are available to offset any future US taxable income of
the US subsidiary and will expire in the years 2008-2024.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Changes
in the Corporate Tax Rate
| | -- | ---------------------------------

| | 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%. Furthermore, as from 2010, upon reduction of the company tax rate to 25%,
real capital gains will be subject to tax of 25%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---



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

| | G. | 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
|---------------------------- | -----------
|
|
|
|
|Tax asset in respect of:     |            
|Allowance for doubtful debts |            
|Severance pay                |            
|Vacation pay                 |            
|Research and development     |            
|Losses carried forward       |            
|                             |            
|                             |            
|                             |            
|Valuation allowance          |            
|                             |            
|                             |            
|                             |            
|                             |            

| | Deferred
tax assets for future benefits are included where their realization is more likely than
not. As such, the Company has recorded a valuation allowance in regard of all its tax
loss carryforwards as well as for other temporary differences.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Reconciliation
of the theoretical tax expense and the actual tax expense
| | -- | ------------------------------------------------------------------------

| | A
reconciliation of the theoretical tax expense, assuming all income is taxed at the
statutory rate of 34% for the year ended December 31, 2005, 35% for the year ended
December 31, 2004 and 36% for the year ended December 31, 2003, applicable to income of
companies in Israel, and the actual tax expense, is as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Year ended December 31
|---------------------------------------------------- | ----------------------
|
|
|
|
|Net income (loss) before taxes, as reported in the   |                       
|statements of operations                             |                       
|                                                     |                       
|Theoretical taxes on income*                         |                       
|Non-deductible expenses                              |                       
|Valuation allowance                                  |                       
|Tax exempt income                                    |                       
|Adjustments arising from differences on the basis of |                       
|measurement for tax purposes and for                 |                       
|financial reporting purposes and other**             |                       
|                                                     |                       
|Taxes on income for the reported year                |                       
|                                                     |                       
|                                                     |                       
|*               Applicable tax rate                  |                       
|                                                     |                       

|** | 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.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



|Note 8 |  | Supplementary
Financial Statements Information
|------ | - | ----------------------------------------------

| | A. | Balance
Sheets
| | -- | --------------

| | 1. | Cash
and cash equivalents
| | -- | -------------------------

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

|                      | December 31
|--------------------- | -----------
|
|
|
|
|Cash and deposits (1) |            
|                      |            

| | (1) | The deposits are in US dollars and bearing an average annual interest of 3.4%
               per annum (2004  1.8% per annum).
| | --- | -------------------------------------------------------------------------------------------------------------------------------

| | 2. | Marketable
securities
| | -- | ---------------------

|                              | Interest rate | December 31
|----------------------------- | ------------- | -----------
|
|
|
|
|Corporate bonds in US dollars |               |            
|                              |               |            

| | The
fair market value, cost and unrealized holding losses of such securities at December 31,
2005 were US$ 506 thousand, US$ 545 thousand and US$ 39 thousand, respectively (December
31, 2004  US$ 531 thousand, US$ 545 thousand and US$ 14 thousand,
respectively.)
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
of the Companys securities mature in June 2006.
| | ----------------------------------------------------

F - 29

---

---



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

| | A. | Balance
Sheets (contd)
| | -- | -----------------------

| | 3. | Trade
receivables, net
| | -- | ----------------------

| | As
of December 31, 2004 and 2005, trade accounts receivable are presented net of allowance
for doubtful accounts.
| | -----------------------------------------------------------------------------------------------------------------

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

|                                          | US$ (in thousands)
|----------------------------------------- | ------------------
|
|
|
|
|Balance as of January 1, 2003             |                   
|Additions during 2003                     |                   
|Deductions                                |                   
|Write-downs charged against the allowance |                   
|                                          |                   
|                                          |                   
|Balance as of December 31, 2003           |                   
|Additions during 2004                     |                   
|Deductions                                |                   
|Write-downs charged against the allowance |                   
|                                          |                   
|                                          |                   
|Balance as of December 31, 2004           |                   
|Additions during 2005                     |                   
|Deductions                                |                   
|Write-downs charged against the allowance |                   
|                                          |                   
|                                          |                   
|Balance as of December 31, 2005           |                   
|                                          |                   

| | 4. | Other
current assets
| | -- | --------------------

|                                           | December 31
|------------------------------------------ | -----------
|
|
|
|
|Receivables from the Government of Israel: |            
|OCS                                        |            
|Value added tax authorities                |            
|Tax authorities                            |            
|Prepaid expenses                           |            
|Other                                      |            
|                                           |            
|                                           |            
|                                           |            
|                                           |            

F - 30

---

---



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

| | A. | Balance
Sheets (contd)
| | -- | -----------------------

| | 5. | Inventories
| | -- | -----------

|                                | December 31
|------------------------------- | -----------
|
|
|
|
|Raw materials and subassemblies |            
|Work in process                 |            
|Finished products               |            
|                                |            
|                                |            
|                                |            
|                                |            

| | 6. | Short-term
bank credits
| | -- | -----------------------

| | a. | Comprised
of:
| | -- | -------------

|            | December 31
|----------- | -----------
|
|
|
|
|In NIS (1)  |            
|In Euro (2) |            
|            |            
|            |            
|            |            
|            |            

| | (1) | As
of December 31, 2004, the relative amounts are unlinked and bear an           annual
interest of 5.4% for year 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------

| | (2) | As
of December 31, 2004, bear an annual interest of 2.75%.
| | --- | ----------------------------------------------------------

| | b. | Line
of credit
| | -- | --------------

| | On
April 28, 2004 the Company signed a credit line agreement with a bank for an amount of up
to US$ 2,000 thousand. The interest rate for each amount withdrawn from the credit line
will be determined on the withdrawal date. As part of the agreement, a first degree
floating charge has been registered over all the assets of the Company. The credit line
expired on June 30, 2005 and amounts due thereunder were repaid.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | Other
payables and accrued expenses
| | -- | -----------------------------------

|                                    | December 31
|----------------------------------- | -----------
|
|
|
|
|Employees and employee institutions |            
|Government of Israel:               |            
|OCS                                 |            
|Accrued expenses                    |            
|Provision for products trade-in     |            
|Provision for product warranty      |            
|Other                               |            
|                                    |            
|                                    |            
|                                    |            

F - 31

---

---



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

| | A. | Balance
Sheets (contd)
| | -- | -----------------------

| | 8. | Monetary
balances in non-dollar currencies
| | -- | ------------------------------------------

|                    | December 31, 2005
|------------------- | -----------------
|
|
|
|
|Current assets      |                  
|Current liabilities |                  

|                    | December 31, 2004
|------------------- | -----------------
|
|
|
|
|Current assets      |                  
|Current liabilities |                  

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

| | 9. | 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.
| | -------------------------------------------------------------------------------------------------------------------

F - 32

---

---



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

| | B. | Statements
of Operations
| | -- | ------------------------

| | 1. | Sales
(1)
| | -- | ---------

| | (a) | Classification
of sales by geographical destination:
| | --- | ----------------------------------------------------

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

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

| | (b) | Sales
by major product lines:
| | --- | -----------------------------

|                    | Year ended December 31
|------------------- | ----------------------
|
|
|
|
|Enterprise Solution |                       
|Carrier Solution    |                       
|                    |                       
|                    |                       
|                    |                       
|                    |                       

| | (c) | Principal
customers:
| | --- | --------------------

| | During
the fiscal year 2005, Company sales to one customer exceeding 10% of total sales were:
US$ 5,295 thousand (during fiscal year 2004  US$ 2,546 thousand; and during fiscal
year 2003  US$ 1,640 thousand).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---



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

| | B. | Statements
of Operations (contd)
| | -- | ---------------------------------

| | 2. | Cost
of sales
| | -- | -------------

|                                   | Year ended December 31
|---------------------------------- | ----------------------
|
|
|
|
|Payroll and related benefits       |                       
|Materials consumed                 |                       
|Subcontracted work                 |                       
|Royalties to the OCS               |                       
|Write-down of inventories          |                       
|Other production costs             |                       
|                                   |                       
|                                   |                       
|                                   |                       
|Decrease (increase) in inventories |                       
|                                   |                       
|                                   |                       
|                                   |                       
|                                   |                       

| | 3. | Financing
income, net
| | -- | ---------------------

|                                                | Year ended December 31
|----------------------------------------------- | ----------------------
|
|
|
|
|Expenses:                                       |                       
|Interest on short-term credits and bank charges |                       
|Exchange translation (expenses) income, net     |                       
|                                                |                       
|                                                |                       
|Income:                                         |                       
|Interest from banks and others                  |                       
|                                                |                       
|                                                |                       
|Financing income, net                           |                       
|                                                |                       

F - 34

---

---



|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
identical to those applied to transactions with other customers or suppliers and are
mainly sales of some 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
| | -------------------- | -----------
|
|
|
|
| | Accounts receivable: |            
| | Trade                |            
| |                      |            
| | Accounts payable:    |            
| | Trade                |            
| | Other                |            

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

| |                                                       | Year ended December 31
| | ----------------------------------------------------- | ----------------------
|
|
|
|
| | Income:                                               |                       
| | Sales                                                 |                       
| | Costs and expenses:                                   |                       
| | Purchases                                             |                       
| | Services                                              |                       
| | Research and development costs                        |                       
| | Sales, marketing, general and administrative expenses |                       
| |                                                       |                       

| |    |  |  |                                     | 
| | -- |  |  | ----------------------------------- | 
|
|
|
|
| | C. |  |  | Purchases of property and equipment | 

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.****
|--- |  | -------------------------------------------------

|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.



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