|UNITED STATESSECURITIES AND EXCHANGE COMMISSION
|-----------------------------------------------
|Washington, D.C. 20549                         

FORM
20-F

|oREGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
  1934                                              
|-------------------------------------------------------------------------------------------------------------------------------------------------
|OR                                                                                                                                               
|xANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                                          
|                                                                                                                                                 
|OR                                                                                                                                               
|oTRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
  from ________ to ________
|                                                                                                                                                 
|Commission
  file number: 0-29360                                                                                                                
|                                                                                                                                                 
|RiT TECHNOLOGIES LTD.                                                                                                                            
|(Exact name of Registrant as specified in
  its charter)                                                                                         
|                                                                                                                                                 
|Israel                                                                                                                                           
|(Jurisdiction of incorporation or
  organization)                                                                                                
|                                                                                                                                                 
|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, 2004, the
issuer had 14,081,188 ordinary shares outstanding (excluding 17,000 ordinary
shares held as treasury shares).

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 xNoo

Indicate
by check mark which financial statement item the registrant has elected to
follow.

Item 17oItem 18x

1

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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 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            | 36
|A      | Directors and Senior Management                         | 36
|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                                 | 45
|A      | Share History                                           | 45
|B      | Plan of Distribution                                    | 46
|C      | Markets                                                 | 46
|D      | Selling Shareholders                                    | 46
|E      | Dilution                                                | 46
|F      | Expenses of the Issue                                   | 46

2

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|Item 10  | Additional
  Information                                                       | 46
|-------- | ------------------------------------------------------------------------------ | --
|A        | Share Capital                                                                  | 46
|B        | Memorandum and Articles of Association                                         | 46
|C        | Material Contracts                                                             | 51
|D        | Exchange Controls                                                              | 52
|E        | Taxation                                                                       | 52
|F        | Dividends and Paying Agents                                                    | 59
|G        | Statements by Experts                                                          | 59
|H        | Documents on Display                                                           | 59
|I        | Subsidiary Information                                                         | 59
|         |                                                                                |   
|Item 11  | Quantitative
  and Qualitative Disclosures about Market Risk                   | 59
|         |                                                                                |   
|Item 12  | Description
  of Securities Other Than Equity Securities                       | 60
|         |                                                                                |   
|         | Part II                                                                        |   
|         |                                                                                |   
|Item 13  | Defaults,
  Dividend Averages and Delinquencies                                | 60
|         |                                                                                |   
|Item 14  | Material
  Modifications to the Rights of Security Holders and Use of Proceeds | 60
|         |                                                                                |   
|Item 15  | Controls
  and Procedures                                                      | 60
|         |                                                                                |   
|Item 16A | Audit Committee
  Financial Expert                                             | 61
|         |                                                                                |   
|Item 16B | Code of
  Ethics                                                               | 61
|         |                                                                                |   
|Item 16C | Principal
  Accounting Fees and Services                                       | 61
|         |                                                                                |   
|Item 16D | Exemptions
  from Listing Requirements and Standards for Audit Committee       | 61
|         |                                                                                |   
|Item 16E | Purchases
  of Equity Securities by the Issuer and Affiliated Purchasers       | 61
|         |                                                                                |   
|         | Part III                                                                       |   
|         |                                                                                |   
|Item 17  | Financial
  Statements                                                         | 61
|         |                                                                                |   
|Item 18  | Financial
  Statements                                                         | 61
|         |                                                                                |   
|Item 19  | Exhibits                                                                       | 62

3

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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 from operations to support our operations for specified periods of
  time;    
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                       
| | expectations
  as to the timing of raising additional financing;                                                                                                                      
|  |                                                                                                                                                                                       
| | statements
  as to expected increases in 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 below, 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, 2003, and 2004, and the selected consolidated operating data for
the years ended December 31, 2002, 2003, and 2004 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,
2000, 2001, and 2002 and the selected consolidated operating data for the years
ended December 31, 2000 and 2001 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,                       |          
|------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---------
|                                                                                      |  |                                               |          
|                                                                                      |  | 2000                                          |          
|                                                                                      |  |                                               |          
|                                                                                      |  | (Dollars in thousands, except per share data) |          
|                                                                                      |  |                                               |          
|Sales                                                                                 |  | $                                             | 38,628   
|                                                                                      |  |                                               |          
|Cost
  of sales                                                                       |  |                                               | 20,018   
|                                                                                      |  |                                               |          
|Gross
  profit                                                                        |  |                                               | 18,610   
|                                                                                      |  |                                               |          
|Operating
  cost and expenses:                                                        |  |                                               |          
|Research
  and development,gross                                                      |  |                                               | 4,610    
|Less-  royalty-bearing participation                                                  |  |                                               | 672      
|                                                                                      |  |                                               |          
|Research
  and development, net                                                       |  |                                               | 3,938    
|Sales
  and marketing                                                                 |  |                                               | 10,030   
|General
  and administrative                                                          |  |                                               | 2,315    
|                                                                                      |  |                                               |          
|Total
  operating expenses                                                            |  |                                               | 16,283   
|                                                                                      |  |                                               |          
|                                                                                      |  |                                               |          
|Operating
  income  (loss)                                                            |  |                                               | 2,327    
|Financial
  income, net                                                               |  |                                               | 226      
|                                                                                      |  |                                               |          
|Net
  income (loss) for the year                                                      |  | $                                             | 2,553    
|                                                                                      |  |                                               |          
|                                                                                      |  |                                               |          
|Earnings (Loss) Per Share                                                             |  |                                               |          
|                                                                                      |  |                                               |          
|Basic earnings (loss) per share                                                       |  | $                                             | 0.29     
|                                                                                      |  |                                               |          
|Diluted
  earnings (loss) per share                                                   |  | $                                             | 0.27     
|                                                                                      |  |                                               |          
|Weighted
  average number of
  shares used to compute basic earnings (loss) per share |  |                                               | 8,752,001
|                                                                                      |  |                                               |          
|Weighted
  average number ofshares used to compute diluted earnings (loss) per share  |  |                                               | 9,600,970
|                                                                                      |  |                                               |          

5

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Balance Sheet Data

|                                                    |  | December 31,           |       
|--------------------------------------------------- |  | ---------------------- | ------
|                                                    |  |                        |       
|                                                    |  | 2000                   |       
|                                                    |  |                        |       
|                                                    |  | (Dollars in thousands) |       
|                                                    |  |                        |       
|Working
  capital                                   |  | $                      | 17,974
|Total
  assets                                      |  |                        | 34,408
|Share
  capital and additional
     paid-in capital |  |                        | 23,810
|Shareholders
  equity                              |  | $                      | 18,266

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 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.

As
a result of our net losses during the year ended December 31, 2004, we used
approximately $4.2 million in cash during that period. At December 31, 2004, we had cash, cash equivalents and marketable
securities of approximately $8.3 million. 
We may need to raise additional financing to support our operations and
our growth strategy.

We have arranged for a line of credit from Bank
Hapoalim in the amount of $2 million, which expires on June 30, 2005. Prior to
its expiration, we intend to renew and to increase this line of credit for an
additional term of approximately 14 months. However, we cannot assure you that
we will be successful in our efforts to do so. At February 28, 2005, the
outstanding amount under this line of credit was $1,976,000.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 lower than $3 million and not lower 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 lower than $3 million. Although we currently are in compliance, if we do not
satisfy these undertakings in full, Bank Hapoalim may demand payment of the
outstanding amount of the line of credit and may refuse to grant us further
credit.

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, and may
continue to experience, a decrease in sales.

The enterprise solutions market has been in a
slowdown since the latter part of 2000. The slowdown has negatively affected
our enterprise solutions sales beginning in 2002. Although sales of our
enterprise solutions increased in 2004 as compared with 2003, 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 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 showed signs of improvement during 2004, there
is no assurance that this trend will continue in the future or that the
telecommunication markets will fully recover.

6

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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 former quarter.

In addition, carrier sales are relatively large
orders, and their postponement from one quarter to another could materially adversely affect our
results of operations for the former 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 depend upon independent distributors and representatives
and strategic alliance partners to sell our products to customers. If our
distributors and representatives 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 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 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.

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 give a high priority to, 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 (part of the Novar Group), 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 a strategic alliance partner, which could occur rapidly, or
by other 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
2004, more than 13.8% of our revenues was generated from orders placed by one major
customer. In 2003, 10.8% 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.

7

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Our products generally have long sales cycles, which increase
our costs in obtaining orders and reduces 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 this 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.

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 grew 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.
These changes 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.

8

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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 still strong.

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

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

Our
success is highly dependent upon our proprietary technology.   We rely upon a combination of patents,
patent applications, contractual rights, trade secrets, copyrights,
non-disclosure agreements and technical measures to establish and protect our
proprietary rights in our products, systems and technologies. We hold patents
on our 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 taken by us 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 us 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.

9

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

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 about 60 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 the results of our operations. Although we have not heretofore
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 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 Cabling System, SMART
GIGA Cabling System and CLASSIX
Cabling Systems, which when installed by a Certified Cabling
Installer, and registered by us, are granted 15 year and 20 year system
warranties respectively. These warranty periods are customary in the structured
cabling industry, but significantly longer than product warranties generally
offered in other industries. Although no material warranty claims have been
asserted against us in the past with respect to our structured cabling
products, we cannot assure you that such claims will not be asserted in the
future. If asserted, such claims may have a material adverse effect on our
business, financial condition and results of operation.

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, but we
collect a portion of our revenues in Europe in Euros and we incur a portion of
our expenses, principally salaries and related personnel expenses in other
currencies mainly in Israel, in NIS. As a result, we are exposed to several risks,
including: the NIS may increase in value relative to the dollar, or the Euro
may increase in value relative to the dollar. In such events, the dollar cost
of our operations in Israel or Europe will increase and our dollar-measured
results of operations will be adversely affected. In 2004, there was a decrease
in value of the dollar in relation to the NIS of 2% and there was a decrease in
the value of the dollar in relation to the Euro of 7%. 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 rates
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 Messrs. Yehuda Zisapel and Zohar Zisapel, individuals who
own more than 32% 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 has
had a historical downward trend from 2000 until 2003.  Although prices were more stable during 2003 and 2004, there can
be no assurance that we will not return to our 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.

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We may not satisfy the Nasdaq SmallCap Markets requirements
for continued listing.  If we cannot
satisfy these requirements, the 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 SmallCap
Market.  The transfer took effect in
January 2004.

To
continue to be listed on the Nasdaq SmallCap 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.  Accordingly, we cannot assure you that we
will continue to satisfy the minimum bid, MVPHS, stockholders equity or other
continued listing requirements of the Nasdaq Small Cap Market in the future. If
we are delisted from the Nasdaq SmallCap Market, trading in our ordinary shares
may be conducted in, if available, the OTC Bulletin Board Service or, if
available, another medium.  As a result,
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 to be delisted from the Nasdaq SmallCap 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.

Selling and buying our securities may be more difficult on
the Nasdaq Small Cap Market than on the Nasdaq National Market, our prior
trading market.

As
indicated above, effective January 2004, trading of our ordinary shares was
transferred from the Nasdaq National Market to the Nasdaq SmallCap Market.  Consequently, selling and buying our
securities may be more difficult because of, among other things, investor perception
and possible reduction in security analysts and the news medias coverage of
us.  This could result in lower prices
and larger spreads in the bid and ask prices for our ordinary shares than might
otherwise be obtained.

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.  In addition, as of December 31,
2004, options to purchase a total of 2,197,033 ordinary shares were outstanding,
and an additional 744,783 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 fund
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.

Messrs. 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, Messrs. Yehuda Zisapel and Zohar Zisapel (who are
brothers) and Roy Zisapel (who is Yehudas son) beneficially owned, in the
aggregate, approximately 32% 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.

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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
addition, the Israeli government has approved a plan to cede certain
territories to the Palestinians.  The
disengagement process, to the extent it is implemented, and its aftermath could
result in armed conflict and could destabilize the region.

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 seriously harm our
business, financial condition and results of operations. For more information
about Approved Enterprises, see Item 10.E.  Israeli Tax Considerations  Law
for the Encouragement of Capital Investments, 1959 below and Note 7(B) to the
financial statements.

The Investments Law will
expire on March 31, 2005, unless its term will be extended. Accordingly,
requests for new programs or expansions that are not approved on or before March
31, 2005 will not confer any tax benefits , unless the term of the law will be
extended. On January 12, 2005, a bill was submitted to the Israeli parliament
providing for certain changes to the Investments Law. Among others, the bill
proposes certain changes to both the criteria and procedure for obtaining
Approved Enterprise status for an investment program, and changes to the grants
and tax benefits afforded in certain circumstances to Approved Enterprises
under the Investments Law. The proposed amendment is expected to apply to new
investment programs following the enactment of the bill into law. In order to
enact the bill as legislation, the bill must be approved by the Israeli
parliament and published. 

The bill was approved by the Israeli parliament on March 29, 2005. However, since the final law has yet to be
published, we and our shareholders face uncertainties as to the potential consequences of the final law.

 Because we cannot predict whether, and to what
extent, the bill will eventually be enacted into law, we and our shareholders
face uncertainties as to the potential consequences of the bill.

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The impairment or
termination of our benefits could have a material adverse effect on our
business, financial condition, and results of operations.

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. The legitimacy of the aforementioned amendment to the Stamp
Duty Law and of said actions by the Israeli tax authorities are currently under
review by the Israeli High Court of Justice. 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.

In
January 2005, an order was signed in accordance with which the said requirement
to pay stamp duty is cancelled with effect from January 1,
2008. Furthermore, pursuant to such order, as of January 1, 2005, stamp
duty is no longer chargeable on, among others, loan agreements and mortgage
agreements.

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
and are prohibited from transferring the technology developed with these grants
to third parties outside Israel.  The
Government of Israel has reduced the grants available under the Chief
Scientists program in recent years, and this program may be discontinued or
curtailed in the future.  If we do not
receive these grants in the future, we will have to allocate other funds to
product development at the expense of other operational costs. For more
information about grants from the Chief Scientist, see Item 5.C.  Research
and Development, Patents and Licenses below.

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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;            
| |   |                                                                                                                                                                   
| |  | 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. 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 acquiror 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 acquiror 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.

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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.

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. The 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 SmallCap 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.

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, 2004, warrants to
purchase 42,858 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
2004, our capital expenditures totaled approximately $0.25 million (compared to
$0.7 million during 2003 and $0.2 million during 2002), 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 2004, 2003 and 2002, 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 System,
an end-to-end network infrastructure solution which provides the required end
to end connectivity solutions for both copper and fiber.

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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, or IPLMS. 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. PatchView for the Enterprise
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 PatchView
for the Enterprise, was used to manage more than 80,000 ports in one
communication room at a customer site. This new generation allows unlimited
size installation support and self learning capabilities to shorten the setup
time, as well as dozens of improvements based on customer feedback and requests
gathered over the last few years. Using our enterprise solutions, enterprises
can utilize their network infrastructures better.

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 PairView, a comprehensive
outside plant management and qualification system. The PairView 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 thirty percent
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 to new markets to capitalize on our expertise in intelligent physical
layer network solutions.

We
market our products in more than 60 countries including through our
wholly-owned subsidiary in the United States, RiT Technologies, Inc., and
representative offices in Germany and Russia.

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, connects 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 then has to 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 PatchView for the Enterprise software, and
guides the system administrator in planning and implementing network
changes.  Together with our PatchView Scanners and SMART Patch Panel
technology, PatchView for the Enterprise
monitors the networks physical layer.

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.

Carrier Solutions

The
increased need for high bandwidth data services, coupled with the emergence of
new technologies for data over voice lines (mainly DSL), 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 better customer value and satisfaction, maintaining and improving the
quality of services, and rapidly introducing new and improved services and
technologies, while continuously improving their operational efficiency and
reducing cost of ownership. This has led the telcos 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. 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 connectivity routing of active and inactive pairs
in the local loop and accurately identifies the line type and status of each
pair. Second, the system tests the inactive pairs electrically for basic line
qualification. For each pair, PairView
generates an end-to-end connectivity map, from the MDF through the various
street cabinets. PairViews
Automatic Number Identification unit (ANI) cross-references each cable pair
number to the corresponding subscriber telephone number.

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 pass-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 possible data rate 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
2004, 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 2002, 2003 and 2004, broken down by geographical
destination and major product lines, were as follows:

Classification
of sales by geographical destination:1

|              |  | Year Ended December
  31, | 
|------------- |  | ------------------------- | 
|              |  |                           | 
|              |  | 2002                      | 
|              |  |                           | 
|              |  | US$                       | 
|              |  |                           | 
|United States |  | 6,632,462                 | 
|Europe        |  | 9,395,988                 | 
|Israel        |  | 1,473,880                 | 
|Rest of world |  | 921,176                   | 
|              |  |                           | 
|              |  |                           | 
|              |  | 18,423,506                | 
|              |  |                           | 

| | (1) | Sales are attributed to
  geographical areas based on location of customers.                         
| | --- | -----------------------------------------------------------------------------------------------------
| | (2) | During 2004, significant
  sales resulted from orders received from a major U.S. enterprise customer.

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Sales
by major product lines:

|                       |  | Year Ended December 31, | 
|---------------------- |  | ----------------------- | 
|                       |  |                         | 
|                       |  | 2002                    | 
|                       |  |                         | 
|                       |  | US$                     | 
|                       |  |                         | 
|Enterprise
  Solutions |  | 16,429,652              | 
|Carrier
  Solutions    |  | 1,993,854               | 
|                       |  |                         | 
|                       |  |                         | 
|                       |  | 18,423,506              | 
|                       |  |                         | 

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

Our
enterprise solutions are sold primarily through distributors, as well as
through value added resellers (VARs), systems integrators and installers in
each country.

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 CIS, a
representative office in Düsseldorf, Germany and we are in the process of
establishing a new representative office in the Peoples Republic of 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 regularly visit our Israeli headquarters, and our
employees regularly visit distributors sites. Periodic distributors meetings
and technical seminars are organized by us to further advance our relationships
with our distributors and to familiarize them with our products.

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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 of flyers and advertisements 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 2004, our three largest distributors accounted for
approximately 15.8%, 6.7% and 5.4%, 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 (part of the Novar Group) (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). 
In 2004, our strategic partners together accounted for approximately
12%, of our enterprise sales.

We
have developed the following marketing programs to promote our products:

The PatchView Partner Program.The goal of this program is to achieve
customer satisfaction with PatchViewsystem
installations by ensuring professional pre-sale treatment, professional
planning of the installation, professional installation and professional
post-sale service by our PatchViewdistributors.
Through this program, PatchViewsystems
are sold only through distributors or system integrators who have been
qualified by us to market these systems upon meeting certain requirements (PatchViewPartners); individuals trained
and qualified by us (PatchViewConsultants)
provide technical and support services; and an installation certificate is
issued to the end-user, entitling the end-user to a one-year warranty.

The Certified Installer and Registered Installation Program. The goal of this program is to achieve
customer satisfaction with our end-to-end cabling system installations by
ensuring optimal system performance for at least 15 years. This program
includes the installation of the end-to-end cabling system by an installer
trained and qualified by us and the issuance of an installation certificate to
the end-user, entitling the end-user to a 15-year or 20-year performance
warranty, depending on the type of system installed.

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 eighteen to thirty-six 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.

In
addition, we participate in exhibitions worldwide, place advertisements in
professional publications and trade journals, and encourage exposure in the
form of editorials in communications journals.

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.

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In
addition to our direct service and support activities, our worldwide
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
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.

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 taken by us 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.

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.

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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, Nordx and Siemon from the United
States and Canada, and Alcatel, Brand-Rex, Nexans, ITT Cannon, ADC (previously
known as Krone) and Siemens from Europe, develop and sell products which
directly or indirectly compete with our structured cabling infrastructure.

We
are aware of two 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 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 (part of the Novar Group), ADC (previously
known as Krone) and Belden/CDT (previously known as Nordx/CDT) Nordx 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 the Fluke
Corporations acquisition of the Harris Corporations test division last year,
there is only one global competitor to PairView in the market, which is the
DaVaR Loop Management System of the Fluke Corporation.  SPE S.r.l. also offers a similar, although
local and less comprehensive, product that competes with PairView.  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, 2004, RiT Tech (1997) Ltd. holds 0.12% of our outstanding shares.

Messrs. 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 Messrs. 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 Ltd., BYNET Data Communications Ltd. and its subsidiaries, BYNET
ELECTRONICS LTD. and its subsidiaries, and several real estate 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 Haayin, Israel. Aggregate annual lease payments in 2004 for
the Tel Aviv and Rosh Haayin premises were approximately $491,414. We also
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 900 square feet in Mahwah, New
Jersey, from an affiliate of ours, at an annual rent of approximately $20,000.
See Item 7  Major Shareholders and Related Party Transactions and Notes 5B
and 9 to our Consolidated Financial Statements included in this annual report.

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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
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 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, 2004

Sales
in 2004 were approximately $18.4 million, an increase of approximately 21%
compared with sales of approximately $15.2 million in 2003. The cost of sales
as a percentage of revenues decreased by approximately 16% compared with 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 area 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 a one-time charge of
$1.9 million. Since both the carrier
solutions and the enterprise solutions markets showed indications of the
beginning of a recovery in 2004, especially on the carrier side, our
inventory write-down charge decreased significantly in 2004.

Research
and development expenses, net, were approximately $3.5 million in 2004 and $3.9
million in 2003. As a percentage of sales, research and development expenses
decreased to 18.9% of sales in 2004 from 25.4% of sales in 2003, due to the
higher level of revenues and a decrease in our research and development
activities in 2004.

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

As
a result of our net losses during the year ended December 31, 2004, we used
approximately $4.2 million in cash during that period. We had a net loss of
approximately $3 million in 2004, compared with net loss of approximately $6.8
million in 2003. The improvement in net loss in 2004 in comparison with 2003 is
attributable to the increase in our revenues and margins, as well as a decrease
in inventory write-downs during 2004.

At
December 31, 2004, we had cash, cash equivalents and marketable securities of
approximately $8.3 million. 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. On a regular
basis, we evaluate 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 be 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 under Item 3.D. herein. Our critical accounting
polices include:

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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.

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,
there may be objective and reliable evidence of the fair value of these
training services and we would alter our revenue recognition policy
accordingly.

For the fiscal year ended
December 31, 2004, there were no cases where training services had not been
rendered by the end of the fiscal year.

We sell most of our
products and solutions through distributors, value added resellers, system
integrators 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.

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, 2004 is determined based upon our experience
regarding the relationship between sales and warranty expenses. See Note
2M-Allowance for Product Warranty 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.

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Our provision for warranty
is calculated for sales of carrier and enterprise systems (Pair-Q, Pair View
and our Patch View products).  The
formula that we use to estimate the warranty provision for the systems being
sold for each period takes in consideration 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
situation, 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, 2004, is determined as a specific amount for those accounts the collection
of which is uncertain.

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

Inventories

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

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# 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, the Company has
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
85.5%-88.9% for the year ended December 31, 2004 (89.2% and 97.7% for the years ended
December 31, 2003 and 2002, 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.

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 $8.5 million
as of December 31, 2004, 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 at December 31, 2004,
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.

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Financial Data

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

| |                                        |  | Year Ended December 31, |      
| | -------------------------------------- |  | ----------------------- | -----
| |                                        |  |                         |      
| |                                        |  | 2002                    |      
| |                                        |  |                         |      
| |                                        |  |                         |      
| | Sales                                  |  |                         | 100.0
| | Cost of sales                          |  |                         | 60.1 
| |                                        |  |                         |      
| | Gross margin                           |  |                         | 39.9 
| |                                        |  |                         |      
| | Operating  cost and expenses:          |  |                         |      
| | Research and development,
  gross      |  |                         | 22.7 
| | Less - royalty-bearing
  participation |  |                         | 1.5  
| |                                        |  |                         |      
| | Research and development,
  net        |  |                         | 21.2 
| | Sales and marketing                    |  |                         | 42.6 
| | General and
  administrative           |  |                         | 14.1 
| |                                        |  |                         |      
| | Total operating expenses               |  |                         | 77.9 
| |                                        |  |                         |      
| | Operating income (loss)                |  |                         | (38.0
| | Financial income, net                  |  |                         | 0.5  
| |                                        |  |                         |      
| | Net Income (loss) for the
  year       |  |                         | (37.5
| |                                        |  |                         |      

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

Sales.  Sales consist of gross sales of
products less discounts and refunds. 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.

The
enterprise solutions market has been in a slowdown since the latter part of
2000. This slowdown has negatively affected our enterprise solutions sales.
Although beginning in the second half of 2003 the market started to show signs
of recovering and our year-over-year sales increased in 2004, there is no
guarantee that the enterprise solutions market will continue recovering in the
future.

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 during 2004 the
telecommunications market began recovering and our carrier sales showed signs
of improvement, there is no assurance that this trend will continue in the
future or that the telecommunication market will fully recover.

Cost of Sales.  Cost of sales consists
primarily of materials, sub-contractors expenses, warranty expenses,
compensation costs attributable to employees and overhead related to our
manufacturing operations. Cost of sales was approximately $10.1 million in 2004
compared with $10.8 million in 2003. This decrease is primarily attributable to
the decrease in our inventory write-downs and from the changes in our
inventories 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 area 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 a one-time charge of $1.9 million. Since both the carrier solutions and the enterprise solutions markets showed
indications of the beginning of a recovery in 2004, especially on the
carrier side, our inventory write-down charge decreased significantly in 2004.

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 $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 26.1% of sales in 2003, due to the higher level of revenues
and a decrease in our research and development activities in 2004.

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In
2003 Grants from the Chief Scientist were approximately $1.5million in 2004 and
$0.7 million in 2003.

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 $6.2 million in 2004, compared with approximately $5.9 million in
2003. The increase is mainly due to the increase in our local marketing
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 $1.7
million in 2004, compared with approximately $1.6 million in 2003. This 6%
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 is attributable to the increase in our revenues
and margins, as well as a result of the decrease in inventory write-downs
during 2004.

Year Ended December 31, 2003 Compared with Year Ended
December 31, 2002

Sales.  Sales consist of gross sales of
products less discounts and refunds. Sales decreased to approximately $15.2
million in 2003, compared with approximately $18.4 million in 2002, primarily
due to the continuing effects of the global enterprise solutions market and
carrier solutions market slowdowns which continued to restrain the overall
level of our customers capital expenditures both in the enterprise and the
carrier solution markets.

The
enterprise solutions market has been in a slowdown since the latter part of
2000. The slowdown has negatively affected our enterprise solutions sales
beginning in 2002. Although the market started to show signs of recovery in the
second half of 2003, our sales still have been lower than in prior years, and
may not recover in the future.

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 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 continuing
into 2003. If this trend continues or these orders are not realized, our
financial results could be materially adversely affected.

Cost of Sales.  Cost of sales consists
primarily of materials, sub-contractors expenses, warranty expenses,
compensation costs attributable to employees and overhead related to our
manufacturing operations. Cost of sales was approximately $10.8 million in
2003, compared with $11.0 million in 2002. This decrease is primarily
attributable to the decrease in sales. Cost of sales as a percentage of sales
was 71% in 2003, compared with 60.1% in 2002. This increase resulted primarily
from an inventory write-down of approximately $1.9 million taken in the third
quarter of the year, compared with an inventory write-down of approximately
$1.5 million taken in the third quarter of 2002 and from the changes in the
companys liability for product warranty. See Note 2M Allowance for product
warranty to our Consolidated Financials Statements.

Research and Development Expenses. Research and development, net, 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, net,
expenses were approximately $3.9 million in both 2003 and 2002. As a percentage
of sales, research and development, net, expenses increased to 25.4% of sales
in 2003 from 21.3% of sales in 2002, due to the lower level of revenues. Grants
from the Chief Scientist were approximately $0.1 million in 2003 and $0.3
million in 2002.

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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 $5.9 million in 2003, compared with
approximately $7.8 million in 2002. The decrease is mainly due to our
significant cost-cutting program, which we implemented in order to reduce our
expenses in light of lower revenues. At the same time, commencing the end of
year 2002, we increased our local marketing and sales expenses in certain
European countries via new representative agreements.   As a result, on a percentage of sales basis, sales and marketing
expenses decreased to 38.6% in 2003 from 42.6% in 2002, since the expense reduction
was not at the same percentage as the sales decrease.

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
debts expenses. General and administrative expenses were approximately $1.6
million in 2003, compared with approximately $2.6 million in 2002. This 39%
decrease was primarily related to our significant cost-cutting program, which
we implemented in order to reduce our expenses in light of lower revenues and a
significant decrease in our doubtful debts provisions, resulting from
recovering approximately $0.2M of amounts previous charged off. The recovery of
those amounts primarily resulted from the financial recovery of one of our
clients in Western Europe and from amounts received from the Israel Foreign
Trade Risk Insurance Corporation. As a result, on a percentage of sales basis,
general and administrative expenses were 10.4% in 2003 and 14.1% in 2002.

Financial Income, Net. Net financial income was approximately
$0.08 million in 2003, compared with financial income, net, of approximately
$0.09 million in 2002. This decrease was primarily due to a continuing decrease
in our cash reserves during the course of the year due to the significant
decrease in our revenues.

Net Loss We had a net loss of approximately $6.8 million in 2003, compared with
net loss of approximately $6.9 million in 2002. The slight improvement in net
loss in 2003 in comparison with 2002 is attributable to the cost cutting
measures we have undertaken, and offset by the significant decrease in our
revenues.

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. 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.

The Investments Law will
expire on March 31, 2005, unless its term will be extended. Accordingly,
requests for new programs or expansions that are not approved on or before
March 31, 2005 will not confer any tax benefits, unless the term of the law
will be extended. On January 12, 2005, a bill was submitted to the Israeli
parliament providing for certain changes to the Investments Law. Among others,
the bill proposes certain changes to both the criteria and procedure for
obtaining Approved Enterprise status for an investment program, and changes to
the grants and tax benefits afforded in certain circumstances to Approved
Enterprises under the Investments Law. The proposed amendment is expected to
apply to new investment programs following the enactment of the bill into law.
In order to enact the bill as legislation, the bill must be approved by the
Israeli parliament and published.The bill was approved by the Israeli parliament on March 29, 2005. However, since the final law has yet to be
published, we and our shareholders face uncertainties as to the potential consequences of the final law.
 Because we cannot predict whether, and
to what extent, the bill will eventually be enacted into law, we and our
shareholders face uncertainties as to the potential consequences of the bill.
The impairment or termination of our benefits could have a material adverse
effect on our business, financial condition, and results of operations.

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

Recently
Enacted Accounting Pronouncements

1.   EITF 03-1 Other than Temporary Impairment and its
Application to Certain Investments

In March 2004, the Emerging Issues Task Force (EITF)
reached a consensus on Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments (EITF 03-1). EITF 03-1
provides guidance on other-than-temporary impairment models for marketable debt
and equity securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115), and non-marketable
equity securities accounted for under the cost method. The EITF developed a
basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. On September 30, 2004, the FASB issued FSP
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments,
delaying the effective date for the recognition and measurement guidance of
EITF 03-1, as contained in paragraphs 10-20, until certain implementation
issues are addressed and a final FSP providing implementation guidance is
issued. The disclosure requirements of the consensus remain in effect.

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We have adopted the disclosure requirements of EITF Issue 03-1 for investments
accounts accounted for under SFAS 115 in fiscal year ended December 31, 2004.

2.     FASB Statement 123R Share-Based Payment

In December 2004, the
FASB issued SFAS No. 123 (Revision 2004), Share-Based Payment, (SFAS 123R),
that addresses the accounting for share-based payment transactions in which
employee services are received in exchange for either equity instruments of the
Company, liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using the intrinsic value method as prescribed in APB Opinion No.
25, Accounting for Stock Issued to Employees. Instead, SFAS 123R requires
that such transactions be accounted for using a fair-value-based method and
that compensation expense be recognized in the statement of operations rather
than disclosing the pro forma impact of the
stock based compensation as we currently disclose in Note 7. SFAS
123R provides two alternative adoption methods. The first method is a modified
prospective transition method whereby a company would recognize share-based
employee costs from the beginning of the fiscal period in which the recognition
provisions are first applied as if the fair-value-based accounting method had
been used to account for all employee awards granted, modified, or settled
after the effective date and to any awards that were not fully vested as of the
effective date. Measurement and attribution of compensation cost for awards
that are unvested as of the effective date of SFAS 123R would be based on the
same estimate of the grant-date fair value and the same attribution method used
previously under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). The second adoption method is a modified retrospective transition method
whereby a company would recognize employee compensation cost for periods
presented prior to the adoption of SFAS 123R in accordance with the original
provisions of SFAS 123; that is, an entity would recognize employee
compensation costs in the amounts reported in the pro forma disclosures
provided in accordance with SFAS 123. A company would not be permitted to make
any changes to those amounts upon adoption of SFAS 123R unless those changes
represent a correction of an error.  The
provisions of SFAS 123R are effective for periods beginning after June 15,
2005, which will be our third quarter beginning July 1, 2005.

Based upon our projection of unvested stock options at the
implementation date from stock options granted and outstanding as of December
31, 2004, we expect the adoption to result in the recognition of additional
compensation expense of approximately $102,000 during fiscal 2005 and approximately
$195,000 during fiscal 2006 and $193,000 during fiscal 2007.

3.     FASB Statement 151 Inventory Costs

In November 2004, the FASB issued SFAS No. 151, Inventory
Costs (SFAS 151). SFAS 151 requires abnormal amounts of inventory costs
related to idle facility, freight handling and wasted material expenses to be
recognized as current period charges. Additionally, SFAS 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The standard is effective for
fiscal years beginning after June 15, 2005. We believe the adoption of SFAS 151
will not have a material impact on our consolidated financial statements.

4.     FASB - Statement 153 - Exchanges of Nonmonetary Assets

In December 2004, the
FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets - an amendment to
APB No. 29. This Statement amends Opinion No. 29 to eliminate the exception
for nonmonetary 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. Adoption of this statement is not expected to have a
material impact on our consolidated financial statements.

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5.B.     Liquidity and
Capital Resources

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

On July 26, 2004, we
completed a private placement transaction in which we issued 5,064,129 of our
ordinary shares at $1.40 per share, for aggregate proceeds (before expenses) of
approximately $7.1 million.  In
connection with this transaction, we also issued warrants to purchase up to
1,266,032 of our ordinary shares. The warrants are exercisable through July 26,
2009 at an exercise price of $1.75 per ordinary share.  As of December 31, 2004, warrants to
purchase 42,858 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
investments were approximately $0.2 million in 2002, $0.07 million in 2003, and
$0.25 million in 2004. These expenditures were principally for machinery,
computers and research and development equipment purchases. During 2005, we
expect to invest additional resources for capital equipment. We do not have any
material commitments for capital expenditures as of December 31, 2004.

At
December 31, 2004, we had cash, cash equivalents and marketable securities
of approximately $8.3 million, compared with $4.1 million at December 31, 2003.
The increase in such balances as of December 31, 2004 compared to 2003
reflects the increased cash balance that resulted from our successful private
placement transaction, which was completed on July 26, 2004.

We
believe that cash generated from operations, our cash, cash equivalents and
time deposit balances will provide sufficient cash resources to finance our
operations and the projected expansion of our marketing and research and
development activities.  However,
depending upon our future level of revenues and the strategies that we adopted,
we may need to raise additional debt or equity capital to meet our working
capital needs in the future.

We
have arranged for a line of credit from Bank Hapoalim in the amount of $2
million, which expires on June 30, 2005. Prior to its expiration, we intend to
renew and to increase this line of credit for an additional term of
approximately 14 months. However, we cannot assure you that we will be
successful in our efforts to do so. At February 28, 2005, the outstanding
amount under this line of credit was $1,976,000  The line of credit is conditioned upon our compliance with the
following financial requirements during the term of the credit facility : (1) a
floating charge on all assets; (2) total shareholders equity will not be lower
than $3 million and not lower 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 lower than $3 million. Although we currently are
in compliance, if we do not satisfy these undertakings in full, Bank Hapoalim
may demand payment of the outstanding amount of the line of credit and may
refuse to grant us further credit.

Net
cash used in operating activities was $4 million in 2004, $3.3 million in 2003,
and $3.8 million in 2002. Net cash used in operating activities increased
during 2004 primarily as a result of an increase in our operational expenses
related to our increase in sales. Cash used in our operations decreased during
2003 from 2002 as a result of our significant cost-cutting program in the end
of 2002, which we implemented in order to align our expenses with revenues.

Net
cash used in investing activities was $0.25 million in 2004 and $0.07 million
in 2003. Net cash provided by investing activities was $0.4 million in 2002.
Investing activities consist primarily of fixed assets and marketable
securities. Our principal investing activity in 2004 and 2003 was the purchase
of equipment in the sums of $0.25 million and $0.07, respectively.  Our principal investing activity in 2002 was
our receipt of the proceeds from the sale of marketable securities in the sum
of $0.5 million.

Our
contractual and contingent obligations and commitments at December 31, 2004 principally include
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 from cash on hand and cash generated from operations.

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

31

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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 addressing the demands of the 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 repaid through a mandatory
royalty based on revenues from products incorporating know-how developed with
the grants or derived therefrom.  This
government support is conditioned upon our ability to comply with certain
applicable requirements and conditions specified in the Chief Scientists
program and with the provisions of the Law for the Encouragement of Research
and Development in Industry, 1984, and the regulations promulgated there under,
or the Research and Development Law.

Under the Research and
Development Law, research and development programs that meet specified criteria
and are approved by the research committee of the Chief Scientist are eligible
for grants of up to 50% of certain approved expenditures of such programs, as
determined by the 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 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 increasing 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 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 determination of the Chief Scientist as to whether to approve a program
and the amount and other terms of benefits to be granted. For example, the
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.

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

32

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Draft legislation was
submitted in December 2004 by the Israeli government proposing an amendment to
the R&D Law to make it 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 above, currently, the R&D Law permits the
Chief Scientist to approve the transfer of manufacturing rights outside Israel,
in consideration of payment of higher royalties. The proposed amendments
further permit the Chief Scientist, among other things, to approve the transfer
of manufacturing rights outside Israel in exchange for an import of different
manufacturing operations into Israel as a substitute, in lieu of the increased royalties. The proposed
amendment further enables, under certain circumstances and subject to the Chief
Scientists prior approval, the transfer of Chief Scientist-funded know-how
outside Israel, in consideration of payment of a portion of the sale price
(according to certain formulae calculated in proportion to the Chief
Scientists investment in the grantee minus depreciation), or in exchange for
know-how and cooperation in R&D with non-Israeli companies, without any
additional payment to the Chief
Scientist. Currently, the proposed amendment is pending, awaiting discussion in
the Knesset (Israeli parliament) Finance Committee and there can be no
certainty as to if and when such proposed draft legislation will actually be
finalized into law.

The funds available for
Chief Scientist grants made out of the annual budget of the State of Israel
were reduced in 1998, and the Israeli authorities have indicated in the past
that the government may further reduce or abolish Chief Scientist grants in the
future.  Even if these grants are
maintained, we cannot presently predict what would be the amounts of future
grants, if any, that we might receive. 
In each of the last ten fiscal years, we have received such
royalty-bearing grants from the Chief Scientist.  At December 31, 2004, our contingent liability to the Chief
Scientist in respect of grants received was approximately $1.3 million.

Our
gross research and development expenses were approximately $4.2 million in
2002, $4.0 million in 2003 and $3.8 million in 2004 (22.7%, 26.2% and 20.4%,
respectively, of sales). To date, all research and development expenses have
been charged to operating expense as incurred. Aggregate research and
development expenses funded by the Chief Scientist were approximately $0.3
million in 2002, $0.1 million in 2003 and $0.3 million in 2004.

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.

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.
Although these systems are competitive with our PatchViewsystem, we believe that their entry into the
market reflects a trend of growing acceptance of the IPLMS concept. This trend
is also reflected by the fact that most of the major vendors (constituting
approximately eleven) are proposing IPLMS systems based on one of the three
technologies above. Out of these eleven, five are using our PatchView
technology.

In
addition, after two years of a slowdown, we believe that, since the second half
of 2003, both the carrier solutions and the enterprise solutions markets have
showed indications of the beginning of a recovery.  However, the duration, extent and stability of this recovery is
unclear.  During 2004, our sales
increased, but were still lower then previous years, and may not continue to grow
in the future.  In the carrier solutions
market, many telcos have continued to focus their investments in DSL
deployment.  The 2002-2003 slowdown
caused some telcos to institute budgetary freezes or postponements, which have
deferred potential orders. This affected our financial results for 2002
continuing into 2003 and 2004.  During
the second half of 2004, some carriers began to gradually unfreeze their
budgets.  However, if market conditions
do not continue to recover, our financial results could be materially adversely
affected.

We
also have identified a trend of longer delivery times from subcontractors for
certain components that comprised our products. 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.

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5.F.     Tabular Disclosure
of Contractual Obligations

The
following table summarizes our material contractual obligations as of December
31, 2004:

|                                                   |  | Payments due by period
  (dollars in millions) |     
|-------------------------------------------------- |  | ---------------------------------------------- | ----
|                                                   |  |                                                |     
|                                                   |  | Total                                          |     
|                                                   |  |                                                |     
|                                                   |  |                                                |     
|Contractual
  Obligations                          |  |                                                |     
|Leases on Premises                                 |  | $                                              | 0.9 
|Operating Lease Obligations                        |  |                                                | 0.44
|Purchase
  Obligations                             |  |                                                | 4.9 
|Other Liabilities Reflected on Our   Balance Sheet |  |                                                | -   
|                                                   |  |                                                |     
|Total                                              |  | $                                              | 6.24
|                                                   |  |                                                |     

At December 31,
2004, our contingent liability to the Chief Scientist in respect of grants
received was approximately $1.3 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 February 15, 2005, 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             
|Liam Galin           |  | 37  |  | President, Chief
  Executive Officer and Director
|Simona Green         |  | 37  |  | Vice President Finance                           
|Avi Kovarsky         |  | 48  |  | Senior Vice President
  Sales                    
|Guy Shapira          |  | 35  |  | Vice President Research
  and Development        
|Roni Karp            |  | 58  |  | Vice President Operations                        
|Shelagh Hammer       |  | 54  |  | Vice President Corporate
  Marketing             
|Hila Hubsch          |  | 37  |  | General Counsel and
  Corporate Secretary        
|Zohar
  Gilon        |  | 57  |  | Director                                         
|Liora
  Katzenstein  |  | 49  |  | Director                                         
|Dr.
  Hagen Hultzsch |  | 65  |  | Director                                         
|Israel
  Frieder     |  | 55  |  | Director                                         
|Dr. Meir Barel       |  | 54  |  | Director                                         

Mr. Yehuda Zisapel is a co founder of RiT 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 also is 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. Liam Galin joined us in June 1998 as Vice President of Research and Development.
In March 2000, Mr. Galin was appointed President and CEO and director of RiT
and RiT Technologies, Inc. Prior to joining us, Mr. Galin served in the Israel
Defense Forces for nine years, as the head of a research and development
department in the fields of data and telecommunications. Mr. Galin holds B.Sc.
and M.Sc. degrees in Electrical Engineering from Tel Aviv University.

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Ms. Simona Green joined 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 Kovarskyjoined us in 1997 as Senior Marketing Manager, and in 1999 became Vice
President, Marketing and Sales, Data Communications Systems and in 2002 became
Senior Vice President Sales. Prior to joining us, Mr. Kovarsky was Software
Sales Manager at Digital Corp. for 7 years. Mr. Kovarsky holds M.Sc. degrees in
Computer Science and Civil Engineering from the Technion University in Haifa,
Israel.

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
the Company, 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. Roni Karp joined us in March 2000 as Vice President of Operations. Prior to
joining the Company, Mr. Karp managed the operations of two other Israeli high
tech companies, serving as the Vice President of Operations of Telegate and the
Director of Operations of Gilat Satellite Networks. Mr. Karp also has prior
experience in research and development and engineering as a designer and
project manager. Mr. Karp holds B.Sc. and M.Sc. degrees in Electrical
Engineering from the Israeli Institute of Technology (Technion) and a M.Sc.
degree in Management from the Tel Aviv University School of Business
Administration.

Ms. Shelagh Hammer joined us as Director of Corporate Marketing in July, 2003 and was
appointed Vice President Corporate Marketing in 2004.  Prior to joining RiT, 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 Hubschjoined RIT in August 2004 as the General Counsel and Corporate
Secretary. Prior to joining the Company, she was the General Counsel and
Corporate Secretary of On Track Innovations Ltd. for 4 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
Gilonhas served as a Director since 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 RIT Technologies 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 Katzenstein became a director of RiT as of February 15,
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, 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 Clal Industries &
Investments, Discount Issuers Ltd., Bezeq Globe, Amanet, RADWare and RADVision
(the latter two companies are part of the RAD BYNET Group).

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Dr.
Hagen Hultzsch was appointed as a director of RiT as of
January 1, 2002. Dr. Hultzsch is 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. Earlier he 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 is now serving 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 and InSynCo AG, a member of the boards of
SCM-Microsystems, of TranSwitch Corporation, of, Radware Ltd. and of ICANN, a
member of the Supervisory Boards of Authentidate International AG, of XTraMind
GmbH and others. Dr. Hultzsch received his Ph.D. in physics from Johannes
Gutenberg University in Mainz, Germany.

Mr.
Israel Frieder was appointed as a director of RiT as of
January 1, 2002.Mr. Frieder is the Chairman of A.A. Pearl Inv. and serves
as Director and management services at several Companies including R.R.
Satellites Ltd; Teledat-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, Israel Institute of Technology and an M.B.A. in Operational Research
from the Hebrew University in Jerusalem.

Dr. Meir
Barel was appointed as a Director as of February 2,
2004.  Dr. Barel, the principal managing
partner of STAR Ventures, has been active for more than eighteen 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 170
investments and had over 50 exits in the form of IPO or sale to other
corporations. Dr. Barel holds a masters degree and a doctorate (Dr.-Ing.)  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
for the year ended December 31, 2004 was approximately $ 942,000.  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 $197,000 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 2004, 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
2004, we granted options to purchase an aggregate amount of 368,000 ordinary
shares to our officers and directors under the 2003 Plan at exercise prices
ranging between $1.60 and $2.82 per share. The options expire on the tenth
anniversary of the date of grant.

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The
following table summarizes information about all employees and non-employees
stock options outstanding at February 15, 2005:

| |                        |  | Options unexercised                                  |          
| | ---------------------- |  | ---------------------------------------------------- | ---------
| |                        |  |                                                      |          
| |                        |  | Number of
  Shares
  Unexercised
  at
  Feb 15, 2005 |          
| |                        |  |                                                      |          
| | Exercise Prices (in $) |  |                                                      |          
| |                        |  |                                                      |          
| | 1.12                   |  |                                                      | 507,583  
| | 1.15                   |  |                                                      | 120,000  
| | 1.23                   |  |                                                      | 55,500   
| | 1.6                    |  |                                                      | 186,500  
| | 1.61  1.875           |  |                                                      | 664,583  
| | 2.05  2.75            |  |                                                      | 43,500   
| | 2.81                   |  |                                                      | 100,000  
| | 2.82                   |  |                                                      | 210,000  
| | 3.6875-
  4.5625       |  |                                                      | 80,500   
| | 6                      |  |                                                      | 48,200   
| | 7.375                  |  |                                                      | 60,000   
| | 9.6875                 |  |                                                      | 6,000    
| |                        |  |                                                      |          
| |                        |  |                                                      | 2,082,366

The
aggregate number of options outstanding held by all our directors and officers
as a group as of February 15, 2005 was 877,917.

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 three nor more than seven directors. Currently, our Board of
Directors consists of seven 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 fifteen months after
the last preceding meeting. Directors may be removed earlier from office by
resolution passed at a general meeting of our shareholders.

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

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External Directors; Independent Directors

Under
the Companies Law, companies incorporated under the laws of Israel whose shares
are listed for trade on a stock exchange or have been offered to the public in
or outside of Israel, are required to appoint at least two external directors.
The Companies Law provides that a person may not be appointed as an external
director if the person or the persons relative, partner, employer or any
entity under the persons control, has, as of the date of the persons
appointment to serve as external director, or had, during the two years
preceding that date, any affiliation with the company, any entity controlling
the company or any entity controlled by the company or by its controlling
entity. The term affiliation includes:

| |  | an employment relationship;                                             
| | - | ------------------------------------------------------------------------
| |  | a business or professional relationship maintained
  on a regular basis;
| |  | control; and                                                            
| |  | service as an office holder.                                          

The
Companies Law defines the term office holder of a company to include a
director, the chief executive officer, the chief financial officer and any
officer of the company who is directly subject to the chief executive officer.

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

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

| |  | at least one third of the shares of non-controlling
  shareholders voted at the meeting vote in favor of the election; or                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the total number of shares of non-controlling
  shareholders voted against the election of the external director does not
  exceed one percent of the aggregate voting rights in the company.

The
initial term of an external director is three years and 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.                                                                                                                                                                                                                  

38

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Our
ordinary shares are listed for quotation on the Nasdaq SmallCap Market and we
are subject to the rules of the Nasdaq SmallCap Market applicable to listed
companies.  Under Nasdaqs
rules, commencing July 31, 2005, a majority of the members of our board of directors will
be 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, commencing
July 31, 2005, we will be 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 the
Companys independent auditors.

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

| | the
  chairman of the board of directors;                                                        
|- | -------------------------------------------------------------------------------------------------
| | any
  controlling shareholder or any relative of a controlling shareholder; and                  
| | any
  director employed by the company or providing services to the company on a
  regular basis.

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

Our audit committee consists of Liora Katzenstein, Israel
Frieder, Zohar Gilon and Dr. Hagen
Hultzsch and satisfies the requirements of the Companies Law and the new 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 the Companys independent auditors.

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 Schwartz, Lerner, Duvshani & Co.

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

6.D.     Employees

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

39

---

---

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.

As
of December 31, 2002, we had 139 employees worldwide, of which 50 were employed
in sales and marketing, 37 in research and development, 34 in operations and 18
in management. As of December 31, 2002, 125 of our employees were based in
Israel, three employees were based at our sales office in Russia, one employee
was based in our office in Germany and 10 employees were based at our
wholly-owned United States subsidiary, RiT Technologies, Inc.

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

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

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

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
February 15, 2005:

|Name                    |  | Title/Office                                      |  | As a % of Outstanding
  Ordinary Shares | 
|----------------------- |  | ------------------------------------------------- |  | --------------------------------------- | 
|                        |  |                                                   |  |                                         | 
|                        |  |                                                   |  |                                         | 
|Yehuda Zisapel          |  | Chairman of the Board of
  Directors              |  |                                         | 
|Liam Galin              |  | President, Chief
  Executive Officer and Director |  |                                         | 
|Simona Green            |  | Vice President Finance                            |  |                                         | 
|Avi Kovarsky            |  | Senior Vice President
  Sales                     |  |                                         | 
|Guy Shapira             |  | Vice President Research
  and Development         |  |                                         | 
|Roni Karp               |  | Vice President Operations                         |  |                                         | 
|Shelagh Hammer          |  | Vice President Corporate
  Marketing              |  |                                         | 
|Hila Hubsch             |  | General Counsel and Corporate
  Secretary         |  |                                         | 
|Zohar
  Gilon           |  | Director                                          |  |                                         | 
|Dr.
  Liora Katzenstein |  | Director                                          |  |                                         | 
|Hagen
  Hultzsch        |  | Director                                          |  |                                         | 
|Israel
  Frieder        |  | Director                                          |  |                                         | 
|Meir Barel              |  | Director                                          |  |                                         | 

40

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*
Less than 1%

Note: As of February 15, 2005,
the total number of shares outstanding owned by all directors and officers as a group (fourteen persons, including
Yehuda Zisapel), excluding
options and warrants, was 23.9%.

Share Option Plans

Pursuant to the 2003 Israeli tax
reform (see Item 10.E.  Israeli Tax Considerations), 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 the Company 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.

On November 25, 2003, our
Board of Directors adopted an Option Exchange Plan pursuant to which employees
and consultants of the Company and its subsidiaries 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 the
Companys 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 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.

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 of February 15, 2005
(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.

41

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| | Name                                          |  | Number of Ordinary
  Shares Owned Excluding
  Options and Warrants |  | Number of Ordinary
  Shares Beneficially
  Owned |           | Number ofOrdinary Shares
  Beneficially Owned
  as Percent of Total
  Shares1 | 
| | --------------------------------------------- |  | ------------------------------------------------------------------ |  | ------------------------------------------------ | --------- | ----------------------------------------------------------------------------- | 
| |                                               |  |                                                                    |  |                                                  |           |                                                                               | 
| | Yehuda
  Zisapel2                             |  | 2,505.949                                                          |  |                                                  | 2,787,735 |                                                                               | 
| | Zohar Zisapel                                 |  | 1,753.621                                                          |  |                                                  | 1,854,514 |                                                                               | 
| | Kern Capital
  Management, LLC3               |  | 1,905,400                                                          |  |                                                  | 1,905,400 |                                                                               | 
| | Dr. Meir
  Barel4                             |  | 895,686                                                            |  |                                                  | 905,686   |                                                                               | 
| | Austin W.
  Marxe and 
  David M. Greenhouse5 |  | 2,214,300                                                          |  |                                                  | 2,767,875 |                                                                               | 

|(1) | Based on
  16,772,053 ordinary shares outstanding as of February 15, 2005, including any
  options and warrants granted and exercisable within 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represents
  1,335,650 shares held of record by Retem Local Networks Ltd., of which Yehuda
  Zisapel is the beneficial owner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | As of
  December 31, 2004, based on a Schedule 13G/A filed by Kern Capital
  Management, LLC with the U.S. Securities and Exchange Commission on February
  14, 2005. The Schedule 13G/A indicates that sole voting and dispositive power
  as to all such shares are held by Kern Capital Management, LLC , and that
  shared voting and dispositive power as to all such shares are held by Robert
  E Kern Jr. and David G. Kern, principals and controlling members of Kern
  Capital Management, LLC. Messrs. Robert and David Kern disclaim beneficial
  ownership as to all ordinary shares reported.                                                                                                                                                                                                                                                                                                                                                               
|(4) | As of
  December 31, 2004, based on a Schedule 13G/A filed by Dr. Meir Barel with the
  U.S. Securities and Exchange Commission on February 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(5) | As of
  December 31, 2004, 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 11, 2005. 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 December
31, 2004, there were 13 holders of record in the United States, who
collectively held an aggregate of 9,033,190 ordinary shares, constituting
approximately 64% of our ordinary shares as of that date.

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

Yehuda Zisapel, one of our founders and principal shareholders, acquired
additional ordinary shares in our private placement transaction described in
Item 10.C. in July 2004 and from another shareholder in January 2005.  As a result of these transactions, Mr.
Zisapel increased his ownership of our ordinary shares by 3.78%.

7.B.     Related Party Transactions

The RAD-BYNET Group

Messrs. Yehuda and Zohar Zisapel are our founders and principal
shareholders. Mr. Yehuda Zisapel is a director and the Chairman of the Board of
Directors.  Mr. Zohar Zisapel was a
director until November 30, 2003.  One
or both of Messrs. 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.

42

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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 Messrs. 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 Messrs. 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 2004, these services accounted for approximately $0.2 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 affiliate of our principal shareholders, Yehuda and Zohar Zisapel.
The aggregate annual payments in 2004 to these related parties were
approximately $239,004. A United States subsidiary of RAD provides
administrative services and leases premises in Mahwah, New Jersey, to RiT
Technologies, Inc. The annual payments in 2004 were approximately $20,000.

We have a non-exclusive distribution arrangement with Bynet Applications
for the distribution of our enterprise solutions in Israel. In 2004, sales
through this arrangement were approximately $1.1 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.

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.

43

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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  |  
| | ----------------------------------------- | ------------------------------------- | ---- | ----- | ---- | -
| |                                           |                                       |      |       |      |  
| | 2000 Full
  Year                          |                                       | $    | 19.75 |      | $
| | 2001 Full
  Year                          |                                       |      | 9.44  |      |  
| | 2002 Full
  Year                          |                                       |      | 3.93  |      |  
| | 2003 Full
  Year                          |                                       |      | 1.99  |      |  
| |                                           | First
  Quarter 2003                  |      |       | 1.31 |  
| |                                           | Second
  Quarter 2003                 |      |       | 1.25 |  
| |                                           | Third
  Quarter 2003                  |      |       | 1.92 |  
| |                                           | Fourth
  Quarter 2003                 |      |       | 1.99 |  
| | 2004 Full
  Year                          |                                       |      | 3.40  |      |  
| |                                           | First
  Quarter 2004                  |      |       | 1.96 |  
| |                                           | Second
  Quarter 2004                 |      |       | 1.76 |  
| |                                           | Third
  Quarter 2004                  |      |       | 1.79 |  
| |                                           | September
  2004                      |      |       | 1.54 |  
| |                                           | Fourth
  Quarter 2004                 |      |       | 3.4  |  
| |                                           | October 2004                          |      |       | 1.68 |  
| |                                           | November
  2004                       |      |       | 1.95 |  
| |                                           | December
  2004                       |      |       | 3.4  |  
| | 2005 Full
  Year (through March 15, 2005) |                                       |      | 4.5   |      |  
| |                                           | January 2005                          |      |       | 4.5  |  
| |                                           | February
  2005                       |      |       | 3.9  |  
| |                                           | March 2005
  (through March 15, 2005) |      |       | 3.44 |  
| |                                           |                                       |      |       |      |  

Effective
January 2004, our ordinary shares were transferred from the Nasdaq National
Market to the Nasdaq SmallCap Market. 
Our ordinary shares are currently traded on the Nasdaq SmallCap Market,
under the symbol RITT.  To continue to
be listed on the Nasdaq SmallCap 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 SmallCap
Markets requirements for continued listing. 
If we cannot satisfy these requirements, the Nasdaq could delist our
ordinary shares.

As of February 15, 2005, we had 14,265,674 ordinary shares outstanding.

9.B.     Plan of Distribution

Not
applicable.

9.C.     Markets

Our ordinary shares trade exclusively on the Nasdaq SmallCap Market
under the symbol RITT.

9.D.     Selling Shareholders

Not applicable.

9.E.     Dilution

Not applicable.

44

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9.F.     Expenses of the Issue

Not applicable.

|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  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 the purposes of the Company, 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.                                                                                        

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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, directors 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 a 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
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

In addition, under the Companies Law, each shareholder has a duty to
act in good faith in exercising his rights and fulfilling his obligations
toward the company and other shareholders and to refrain from abusing its power
in the company, such as in shareholder votes. In addition, specified
shareholders have a duty of fairness toward the company. These shareholders
include any controlling shareholder, any shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of the articles of association, has
the power to appoint or to prevent the appointment of an office holder or any
other power toward the company. However, the Companies Law does not define the
substance of this duty of fairness.

Exculpation, Insurance and Indemnification of
Office Holders

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 or the imposition of any
  financial liability in lieu of criminal proceedings other than with respect
  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;                                                                                                                                             
| |  | any act or
  omission done with the intent to derive an illegal personal benefit; or                                                                                                                                                                         

47

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

In addition,
under the Companies Law, exculpation and indemnification of, and procurement of
insurance coverage for, the office holders must be approved by our audit
committee and board of directors and, if the beneficiary is a director, by our
shareholders. Our current policy for directors and officers liability
insurance will expire in July 2005. We intend to either renew or replace this
policy prior to its expiration.

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 fifteen (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.

We have received an exemption from the Nasdaq Stock Market, Inc. from
the requirement to distribute our annual report to our shareholders, but we
have undertaken to post a copy of it on our website, www.rittech.com, after
filing it with the SEC.

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, 2004, warrants to purchase 42,858 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).

49

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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.

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 2004 tax year, 34% for the 2005 tax
year, 32% for the 2006 tax year and 30% for the 2007 tax year and thereafter,
and are 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).                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                
| |  | Taxable
  gains on certain traded securities, which are taxed at a reduced rate with
  respect to individuals following the Tax Reform, are taxable at the Corporate
  Tax rate (currently 35%) in certain circumstances.                                                                                                                                      

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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.

The Investments Law will expire on March 31, 2005, unless its term will
be extended.  Accordingly, requests for
new programs or expansions that are not approved on or before March 31, 2005
will not confer any tax benefits and will be treated under the new law, unless
the term of the law will be extended. On January 12, 2005, a bill was submitted
to the Israeli parliament providing for certain changes to the Investments Law.
Among others, the bill proposes certain changes to both the criteria and
procedure for obtaining Approved Enterprise status for an investment program,
and changes to the grants and tax benefits afforded in certain circumstances to
Approved Enterprises under the Investments Law. The proposed amendment is
expected to apply to new investment programs following the enactment of the
bill into law. In order to enact the bill as legislation, the bill must be
approved by the Israeli parliament and published. The bill was approved by the Israeli parliament on March 29, 2005. However, since the final law has yet to be
published, we and our shareholders face uncertainties as to the potential consequences of the final law.
Because we cannot predict whether, and to what extent, the bill
will eventually be enacted into law, we and our shareholders face uncertainties
as to the potential consequences of the bill.

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.

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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 the Company qualifies as a foreign investors company without
any time limitations.  This tax must be
withheld at source by the company paying the dividend.  A dividend paid from income derived from an
enterprise owned by a company that has elected the Alternative Benefits Program
during the period in which it is exempt from tax is also subject to withholding
tax at a 15% rate but causes the company to be liable for corporate tax on the
gross-up amount distributed which for this purpose includes the amount of the
corporate tax at the rate that would have been applicable had the company not
elected the Alternative Benefits Program of up to 25%.

Subject to certain provisions concerning income under the alternative
package of benefits, all dividends are considered to be attributable to the
entire enterprise and their effective tax rate is the result of a weighted
combination of the various applicable tax rates.  We are not obliged to distribute exempt retained profits under
the alternative package of benefits, and we may generally decide from which
years profits to declare dividends.

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

Income arising from our Approved Enterprise is subject to zero tax
rates under the Alternative 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 2005 - 2011. 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.

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.

52

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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.

Under new legislation, which became effective on January 1, 2003, the
capital gain from the sale of shares by non Israeli residents would be tax
exempt as long as our shares are listed on the Nasdaq SmallCap Market or any
other stock exchange recognized by the Israeli Ministry of Finance, and
provided certain other conditions are met, the most relevant of which are: (A)
the capital gain is not attributed to the foreign residents permanent
establishment in Israel, and (B) the shares were acquired by the foreign
resident after the companys shares had been listed for trading on the foreign
Exchange.  If the shares were sold by
Israeli residents, then (A) for the period ending December 31, 2002 their sale
would be tax exempt so long as (1) the shares are listed on a stock exchange,
such as the Nasdaq SmallCap Market, which is recognized by the Israeli Ministry
of Finance, and (2) we qualified as an industrial company or industrial holding
company under the law for Encouragement of Industry (Taxes) 1969, and (B) for the period commencing January
1, 2003, the sale of the shares would be subject to a 15% tax if the shares are
listed on a stock exchange recognized by the Israeli Ministry of Finance.  We believe that in 2004 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. 
If we are delisted, gains from the sale of our ordinary shares will be
subject to capital gains tax at a rate of 25% unless an exemption or other tax
rate applies in accordance with a tax treaty between Israel and the
shareholders country of residence.

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 and that such shareholders did not acquire their shares
prior to the issuers initial public offering. 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.

53

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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, we would be required to withhold income tax at the
rate of 25%. If the income out of which the dividend is being paid is
attributable to an Approved 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 will be 25% or 15% if
the dividends are generated by an Approved Enterprise; however if the income
out of which the dividend is being paid is not attributable to an Approved
Enterprise, then the maximum tax will be 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 (a U.S. holder) or (b) the trust has a valid election
in effect under applicable treasury regulations to be treated as a United
States person. 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.

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.

54

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

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

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

Disposition of Shares

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

Passive Foreign Investment Companies

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

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

55

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We were not a PFIC for the fiscal year ended December 31, 2004. 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; or (2) the individual non-U.S.
holder is present in the United States for 183 days or more in the taxable year
of the sale and certain other conditions are met or (3) the non-U.S. holder is
subject to tax pursuant to the provisions of the U.S. tax law applicable to
U.S. expatriates.

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

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

10.F.     Dividends and Paying Agents

Not applicable.

10.G     Statement by Experts

Not applicable.

56

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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 450 Fifth Street,
N.W., 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.

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 incur a portion of our expenses in NIS
and in Euro.

We generally do not enter into risk sensitive instruments, such as
derivatives, so that any future increase in the rate will not have a material
effect on our financial results.

Equity price risk

Marketable securities at December 31, 2004 included corporate bonds at
a fair value of $530,950.  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 $106,000.

Impact of Inflation and Currency Fluctuations

Substantially all 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 2004, the rate of
increase in value of the NIS against the dollar was 1.6% and the rate of
inflation was 1.2%.  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.

57

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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,
2004.  Based upon this evaluation, our
Chief Executive Officer and Vice President Finance have concluded that, as of
December 31, 2004, 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, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

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

Our board of
directors has determined that 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.

58

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|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.



|                   |  | 2004 |        | 2003 |  
|------------------ |  | ---- | ------ | ---- | -
|                   |  |      |        |      |  
|Audit Fees billed  |  | $    | 65,577 |      | $
|Audit-Related Fees |  |      | -      |      |  
|Tax Fees           |  |      | 5,000  |      |  
|All Other Fees     |  |      | -      |      |  
|                   |  |      |        |      |  
|Total              |  | $    | 70,577 |      | $
|                   |  |      |        |      |  

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.

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

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

|                                                                                                         |  | Page
|-------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                         |  |     
|                                                                                                         |  |     
|Report of
  Independent Registered Public Accounting Firm                                                |  | 2   
|                                                                                                         |  |     
|Consolidated
  Balance Sheets as of December 31, 2002 and 2002                                           |  | 3   
|                                                                                                         |  |     
|Consolidated
  Statements of Operations for the years 
   ended December 31, 2001, 2002 and 2003         |  | 4   
|                                                                                                         |  |     
|Statements
  of Changes in Shareholders Equity for the years 
   ended December 31, 2001, 2002 and 2003 |  | 5   
|                                                                                                         |  |     
|Consolidated
  Statements of Cash Flows for the years 
   ended December 31, 2001, 2002 and 2003         |  | 6   
|                                                                                                         |  |     
|Notes to the
  Consolidated Financial Statements                                                         |  | 7   
|                                                                                                         |  |     

|(b) | List of Exhibits
|--- | ----------------
|    |                 
|    | 1.1             
|    |                 
|    | 1.2             
|    |                 
|    | 2.1             
|    |                 
|    | 4.1             
|    |                 
|    | 4.2             
|    |                 
|    | 4.3             
|    |                 
|    | 4.4             
|    |                 
|    | 4.5             
|    |                 
|    | 8.1             
|    |                 
|    | 12.1            
|    |                 
|    | 12.2            
|    |                 
|    | 13.1            
|    |                 
|    | 13.2            

60

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

61

---

---

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/ Liam Galin                      
|                 |  |                                        
|                 |  | Liam Galin                             
|                 |  | President
  and Chief Executive Officer
|                 |  |                                        
|March 31,
  2005 |  |                                        

62

---

---

RiT Technologies Ltd. and its
Consolidated Subsidiaries
Financial Statements
December 31, 2004



---

---



|RiT Technologies Ltd.                                    
|---------------------------------------------------------
|and its Consolidated Subsidiaries                        
|Consolidated Financial Statements as at December 31, 2004
|                                                         

Content

|                                                                                                                                         |  | Page
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                         |  |     
|                                                                                                                                         |  |     
|Report of
  Independent Registered Public Accounting Firm                                                                                |  | F-2 
|                                                                                                                                         |  |     
|Consolidated
  Balance Sheets as of December 31, 2004 and 2003                                                                           |  | F-3 
|                                                                                                                                         |  |     
|Consolidated
  Statements of Operations for the years ended December 31, 2004, 2003 and 2002                                             |  | F-4 
|                                                                                                                                         |  |     
|Consolidated
  Statements of Changes in Shareholders Equity and Comprehensive Loss for the years ended December 31, 2004, 2003 and 2002 |  | F-5 
|                                                                                                                                         |  |     
|Consolidated
  Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                             |  | 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, 2004 and
2003 and the related consolidated statements of operations, changes in
shareholders' equity and comprehensive income (loss) and cash flows for each of
the three years period ended December 31, 2004. 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 aforementioned 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, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, in conformity with
generally accepted accounting principles in the United States of America.

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

Tel-Aviv, Israel
, March 30, 2005

F-2

---

---

RiT Technologies Ltd. 
and its Consolidated Subsidiaries

|Consolidated Balance Sheets
|---------------------------
|                           

|                                                                 |  | December 31, |            
|---------------------------------------------------------------- |  | ------------ | -----------
|                                                                 |  |              |            
|                                                                 |  | 2004         |            
|                                                                 |  |              |            
|                                                                 |  | US$          |            
|                                                                 |  |              |            
|                                                                 |  |              |            
|Assets                                                           |  |              |            
|Current Assets                                                   |  |              |            
|Cash and
  cash equivalents (Note 8A1)                           |  |              | 7,772,997  
|Marketable
  securities (Note 8A2)                               |  |              | 530,950    
|Trade
  receivables, net (Note 8A3)                              |  |              | 4,375,828  
|Other
  current assets (Note 8A4)                                |  |              | 1,016,449  
|Inventories
  (Note 8A5)                                         |  |              | 6,548,209  
|                                                                 |  |              |            
|Total Current
  Assets                                           |  |              | 20,244,433 
|                                                                 |  |              |            
|Assets held for severance benefits (Note 4)                      |  |              | 1,578,066  
|                                                                 |  |              |            
|                                                                 |  |              |            
|Property and Equipment (Note 3)                                  |  |              |            
|Cost                                                             |  |              | 3,458,581  
|Less -
  accumulated depreciation                                |  |              | 3,048,443  
|                                                                 |  |              |            
|                                                                 |  |              | 410,138    
|                                                                 |  |              |            
|Total Assets                                                     |  |              | 22,232,637 
|                                                                 |  |              |            
|Liabilities and Shareholders Equity                             |  |              |            
|Current Liabilities                                              |  |              |            
|Short-term
  bank credits (Note 8A7)                             |  |              | 2,466,867  
|Trade
  payables                                                 |  |              | 4,871,003  
|Other
  payables and accrued expenses (Note 8A6)                 |  |              | 2,425,297  
|                                                                 |  |              |            
|Total
  Current Liabilities                                      |  |              | 9,763,167  
|                                                                 |  |              |            
|Long-Term Liability                                              |  |              |            
|Liability in
  respect of employees severance benefits (Note 4) |  |              | 2,069,356  
|                                                                 |  |              |            
|Total
  Liabilities                                              |  |              | 11,832,523 
|                                                                 |  |              |            
|Commitments and Contingencies (Note 5 and Note 8A(7))            |  |              |            
|                                                                 |  |              |            
|Shareholders Equity (Note 6)                                    |  |              |            
|Share
  capital*                                                 |  |              | 374,094    
|Treasury
  Stock                                                 |  |              | (26,505    
|Additional
  paid-in capital                                     |  |              | 30,609,967 
|Accumulated
  other comprehensive gain (loss)                    |  |              | (14,515    
|Accumulated
  deficit                                            |  |              | (20,542,927
|                                                                 |  |              |            
|Total
  Shareholders Equity                                     |  |              | 10,400,114 
|                                                                 |  |              |            
|Total Liabilities and Shareholders Equity                       |  |              | 22,232,637 
|                                                                 |  |              |            

|* | Ordinary
  Shares  NIS 0.1 par value                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | Authorized shares:
39,979,770 as of December 31, 2004 and 2003 issued and outstanding 14,098,188 and 8,927,352
shares as of December 31, 2004 and 2003, 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, 2004 and 2003.                                                                                                                

|/s/ Liam Galin |  | /s/ Yehuda Zisapel
|-------------- |  | ------------------
|Director       |  | Director          

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

F-3

---

---

RiT Technologies Ltd. 
and its Consolidated Subsidiaries

|Consolidated Statements of Operations
|-------------------------------------
|                                     

|                                                                                                       |                            | Year ended December 31 |           
|------------------------------------------------------------------------------------------------------ | -------------------------- | ---------------------- | ----------
|                                                                                                       |                            |                        |           
|                                                                                                       |                            | 2004                   |           
|                                                                                                       |                            |                        |           
|                                                                                                       |                            | US$                    |           
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Sales (Notes 8B1)                                                                                      |                            |                        | 18,427,143
|                                                                                                       |                            |                        |           
|Cost of sales (Note 5A and 8B2)                                                                        |                            |                        | 10,066,199
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Gross profit                                                                                           |                            |                        | 8,360,944 
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Operating costs and expenses:                                                                          |                            |                        |           
|                                                                                                       |                            |                        |           
|Research and development:                                                                              |                            |                        |           
|Research and
  development, gross                                                                      |                            |                        | 3,767,240 
|Less -
  royalty bearing participation (Note 5A)                                                       |                            |                        | (285,949  
|                                                                                                       |                            |                        |           
|Research and development, net                                                                          |                            |                        | 3,481,291 
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Sales and marketing                                                                                    |                            |                        | 6,164,304 
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|General and administrative                                                                             |                            |                        | 1,719,382 
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|                                                                                                       | Total
  operating expenses |                        |           
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Operating loss                                                                                         |                            |                        | (3,004,033
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Financing income, net (Note 8B3)                                                                       |                            |                        | 29,435    
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Taxes on income (Note 7)                                                                               |                            |                        | -         
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Loss for the year                                                                                      |                            |                        | (2,974,598
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Loss per share (Note 2Q)                                                                               |                            |                        |           
|Basic and diluted loss per share                                                                       |                            |                        | (0.27     
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           
|Weighted average number of ordinary shares used to
  compute basic and diluted loss per ordinary share |                            |                        | 11,174,865
|                                                                                                       |                            |                        |           
|                                                                                                       |                            |                        |           

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

F-4

---

---

RiT Technologies Ltd. 
and its Consolidated Subsidiaries

|Consolidated Statements of Changes in Shareholders
  Equity and Comprehensive Loss
|-----------------------------------------------------------------------------------
|                                                                                   

|                                                                    |  | Share capital    |  |                  |  |                 |  |                  |            |                  |  |                  | 
|------------------------------------------------------------------- |  | ---------------- |  | ---------------- |  | --------------- |  | ---------------- | ---------- | ---------------- |  | ---------------- | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  | Deferred
 shares |  | Ordinary
 shares |  | Treasury
 Stock |  | Deferred
 shares |            | Ordinary
 shares |  | Treasury
 stocks | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  | (Note 6A)        |  | (Note 6A)        |  | (Note 6A)       |  | US$              |            | US$              |  | US$              | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  | Number of shares |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Balance
 as of January 1, 2002                                      |  |                  |  | 17,030           |  |                 |  |                  | 8,910,352  |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Changes
 during 2002                                                |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Net loss for the year                                               |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|Net unrealized change on
 available for sale securities             |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Comprehensive loss                                                  |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|Redemption of notes
 receivable by employees                        |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|Treasury
 stock                                                     |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Balance
 as of December 31, 2003                                    |  |                  |  | 17,030           |  |                 |  |                  | 8,910,352  |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|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           |  |                 |  |                  | 8,910,352  |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Balance
 as of December 31, 2004                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Changes
 during 2004                                                |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Issuance of shares and warrants,
    net of $372,018 issue expenses |  |                  |  | -                |  |                 |  |                  | 5,064,129  |                  |  |                  | 
|Exercise of options to
 service provided                            |  |                  |  | -                |  |                 |  |                  | 2,000      |                  |  |                  | 
|Exercise of warrants                                                |  |                  |  | -                |  |                 |  |                  | 42,858     |                  |  |                  | 
|Net loss for the year                                               |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|Net unrealized change on
 available for sale securities             |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Comprehensive loss                                                  |  |                  |  | -                |  |                 |  |                  | -          |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 
|Balance
 as of December 31, 2004                                    |  |                  |  | 17,030           |  |                 |  |                  | 14,019,339 |                  |  |                  | 
|                                                                    |  |                  |  |                  |  |                 |  |                  |            |                  |  |                  | 

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

F-5

---

---

RiT Technologies Ltd. 
and its Consolidated Subsidiaries

|Consolidated Statements of Cash Flows
|-------------------------------------
|                                     

|                                                                                                                   |       | Year ended December 31 |           
|------------------------------------------------------------------------------------------------------------------ | ----- | ---------------------- | ----------
|                                                                                                                   |       |                        |           
|                                                                                                                   |       | 2004                   |           
|                                                                                                                   |       |                        |           
|                                                                                                                   |       | US$                    |           
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Cash flows from operating activities:                                                                              |       |                        |           
|Net loss for
  the year                                                                                            |       |                        | (2,974,598
|Adjustments to reconcile net loss to net cash 
     used in operating activities:                                  |       |                        |           
|Allowance
  for doubtful accounts                                                                                  |       |                        | (272,119  
|Depreciation                                                                                                       |       |                        | 190,257   
|Severance
  pay benefits, net                                                                                      |       |                        | (44,164   
|Increase in
  value and accrued interest in marketable securities                                                  |       |                        | -         
|Capital loss
  (gain)                                                                                              |       |                        | -         
|                                                                                                                   |       |                        |           
|Changes in operating assets and liabilities:                                                                       |       |                        |           
|Decrease
  (increase) in trade receivable                                                                          |       |                        | (734,230  
|Decrease
  (increase) in other current assets                                                                      |       |                        | (249,546  
|Decrease
  (increase) in inventories                                                                               |       |                        | (1,788,612
|Increase
  (decrease) in accounts payable and accruals:                                                            |       |                        |           
|                                                                                                                   | Trade |                        |           
|                                                                                                                   | Other |                        |           
|                                                                                                                   |       |                        |           
|Net cash
  used in operating activities                                                                            |       |                        | (3,953,907
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Cash flows from investing activities:                                                                              |       |                        |           
|Proceeds
  from sale of marketable securities                                                                      |       |                        | -         
|Proceeds
  from sale of property and equipment                                                                     |       |                        | -         
|Purchase of
  property and equipment                                                                               |       |                        | (249,783  
|                                                                                                                   |       |                        |           
|Net cash
  provided by (used in) investing activities                                                              |       |                        | (249,783  
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Cash flows from financing activities:                                                                              |       |                        |           
|Short-term
  bank credits, net                                                                                     |       |                        | 1,621,365 
|Redemption
  of notes receivable by employees, net                                                                 |       |                        | -         
|Proceeds
  from issuance of shares and warrants, net 
     of share issue expenses 
     in the amount of $372,018 |       |                        | 6,718,674 
|Proceeds
  from exercise of options                                                                                |       |                        | 2,240     
|Proceeds
  from exercise of warrants                                                                               |       |                        | 75,001    
|                                                                                                                   |       |                        |           
|Net cash
  provided by financing activities                                                                        |       |                        | 8,417,280 
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Effect of
  exchange rate changes on cash                                                                          |       |                        | -         
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Increase (decrease) in cash and cash equivalents                                                                   |       |                        | 4,213,590 
|Cash and cash equivalents at beginning of year                                                                     |       |                        | 3,559,407 
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Cash and cash equivalents at end of year                                                                           |       |                        | 7,772,997 
|                                                                                                                   |       |                        |           
|                                                                                                                   |       |                        |           
|Supplemental disclosures:                                                                                          |       |                        |           
|Income tax
  paid in cash                                                                                          |       |                        | 49,868    
|                                                                                                                   |       |                        |           
|Cash paid
  for interest                                                                                           |       |                        | 84,824    
|                                                                                                                   |       |                        |           

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

F-6

---

---

RiT Technologies Ltd.and its Consolidated
Subsidiaries

|Notes ot the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 1 -
  General                                                      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Note 2 -
  Significant Accounting Policies                              
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

F-7

---

---

RiT Technologies Ltd.and its Consolidated
Subsidiaries

|Notes ot the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 2 -
  Significant Accounting Policies (contd)                     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|E.                                                                      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

F-8

---

---

RiT Technologies Ltd.and its Consolidated
Subsidiaries

|Notes ot the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 2 -
  Significant Accounting Policies (contd)                     
|                                                                        
|E.                                                                      
|                                                                        
|                                                                        

| |                    |  | Less than 12 months |  | 12 months or Greater |  | Total
   fair value |  | Total
   unrealized
   losses |        
| | ------------------ |  | ------------------- |  | -------------------- |  | ------------------- |  | ----------------------------- | -------
| |                    |  |                     |  |                      |  |                     | 
| |                    |  | Fair value          |  | Unrealized
   losses |  | Fair value          |  | Unrealized
   losses          |        
| |                    |  |                     |  |                      |  |                     |  |                               |        
| |                    |  | US$ (thousands)     |  | US$ (thousands)      |  | US$ (thousands)     |  | US$ (thousands)               |        
| |                    |  |                     |  |                      |  |                     |  |                               |        
| |                    |  |                     |  |                      |  |                     |  |                               |        
| | Fixed
  rate bonds |  |                     |  | 530,950              |  |                     |  |                               | (14,515
| |                    |  |                     |  |                      |  |                     |  |                               |        
| | Total              |  |                     |  | 530,950              |  |                     |  |                               | (14,515
| |                    |  |                     |  |                      |  |                     |  |                               |        

|   | The unrealized losses on the Companys investments
  in 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 at December 31, 2004.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                    
|   | F.                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                    
|   | 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 debts for
  all the periods through December 31, 2004 is determined as a specific amount
 for those accounts the collection of which is uncertain.                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                    
|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 employee severance benefits
  represent contributions to severance pay funds and cash surrender life
  insurance policies that are recorded at their current redemption value.                                                                                                                                                                     

F-9

---

---

RiT Technologies Ltd.and its Consolidated
Subsidiaries

|Notes ot the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 2 -
  Significant Accounting Policies (contd)                     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

| |                                                                                          |  | % |        
| | ---------------------------------------------------------------------------------------- |  | - | -------
| |                                                                                          |  |   |        
| | Research and
  development equipment                                                     |  |   | 25     
| | Manufacturing
  equipment                                                                |  |   | 15  20
| | Office
  furniture and equipment                                                         |  |   | 7  33 
| | Leasehold
  improvements                                                                 |  |   | *      
| |                                                                                          |  |   |        
| | *  Over the shorter of the relevant lease
  period or their useful lives (mainly at 25%) |  |   |        

|J. | Revenue recognition                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                
|   | Revenue is recognized when persuasive evidence of an
  arrangement exists, delivery has occurred, the amount is fixed or
  determinable, and collection of the resulting receivable is probable.                                                               
|   |                                                                                                                                                                                                                                                                
|   | Most of our sales are sold through distributors, as
  well through value added resellers, system integrators and installers. These
  distributions channels are our end users and therefore the Company sales
  occur when products are sold to these channels.
|   |                                                                                                                                                                                                                                                                
|   | We apply 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.                                   
|   |                                                                                                                                                                                                                                                                
|   | When the sale arrangement includes customer
  acceptance provisions, revenue is not recognized before 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 to return to any of its customers.                                                                                                                                                   

F-10

---

---

RiT Technologies Ltd.and its Consolidated
Subsidiaries

|Notes ot the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 2 -
  Significant Accounting Policies (contd)                     
|                                                                        
|K.                                                                      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

|                               |  | US$ |           
|------------------------------ |  | --- | ----------
|                               |  |     |           
|Balance at
  December 31, 2001 |  |     | 1,085,643 
|Warranties
  for products sold |  |     | 226,592   
|Warranty
  costs incurred      |  |     | (104,848  
|Lapsed
  warranties            |  |     | (1,106,092
|                               |  |     |           
|Balance at
  December 31, 2002 |  |     | 101,295   
|Warranties
  for products sold |  |     | 139,400   
|Warranty
  costs incurred      |  |     | (87,395   
|                               |  |     |           
|Balance at
  December 31, 2003 |  |     | 153,300   
|Warranties
  for products sold |  |     | 104,223   
|Lapsed
  warranties            |  |     | (38,652   
|Warranty
  costs incurred      |  |     | (92,183   
|                               |  |     |           
|Balance at
  December 31, 2004 |  |     | 126,688   
|                               |  |     |           

|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 For Stock-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 2T(2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-11

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

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, 2004, 2003 and 2002 would have been as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    |                                                                                                                                  | Year ended 
  December 31
  2004 |  | Year ended 
  December 31
  2003 |          | Year ended 
  December 31
  2002 | 
| | -------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- |  | -------------------------------- | -------- | -------------------------------- | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| |                                                    |                                                                                                                                  | US$                              |  | US$*                             |          | US$*                             | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| | Loss for the year                                  |                                                                                                                                  |                                  |  | (2,974,598                       | )        |                                  | 
| | Add:                                               | Stock-based employee
  compensation
  included in reported net
  loss, net of related tax effects                                |                                  |  |                                  | -        |                                  | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| | Deduct:                                            | Total stock-based employee
  compensation expense
  under fair value based
  method for all awards, net
  of related tax effects |                                  |  |                                  | (407,588 | )                                | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| | Loss - pro forma                                   |                                                                                                                                  |                                  |  | (3,382,186                       | )        |                                  | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| | Loss per share pro forma                           |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| | Basic and diluted loss per share as 
     reported |                                                                                                                                  |                                  |  | (0.27                            | )        |                                  | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 
| | Pro forma basic and diluted loss per 
     share   |                                                                                                                                  |                                  |  | (0.30                            | )        |                                  | 
| |                                                    |                                                                                                                                  |                                  |  |                                  |          |                                  | 

| | During 2004, the Company has revised certain
  assumptions for the estimations of the fair value of the options granted in
  the Black and Scholes options pricing model. 
  These assumptions include the risk free interest rates, the expected
  lives and the expected volatility.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                       
| | Accordingly, the pro-forma information as of
  December 31, 2003 and 2002 have been restated to conform with the new
  assumption.                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                       
| | *  Restated                                                                                                                                                                                                                                                                           

F-12

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial Statements
  as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 2 -
 Significant Accounting Policies (contd)

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

| | The effect of restatement were as follows:
| | ------------------------------------------

| |                                                      |                                                                                                                                          | Year ended December 31 2003 |  | Year ended December 31, 2002 |         
| | ---------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- |  | ---------------------------- | --------
| |                                                      |                                                                                                                                          |                             |  |                              |         
| |                                                      |                                                                                                                                          | As reported                 |  | As restated                  |         
| |                                                      |                                                                                                                                          |                             |  |                              |         
| |                                                      |                                                                                                                                          | US$                         |  | US$                          |         
| |                                                      |                                                                                                                                          |                             |  |                              |         
| | Loss for the
  year                                  |                                                                                                                                          |                             |  | (6,816,588                   | )       
| |                                                      |                                                                                                                                          |                             |  |                              |         
| | Add:                                                 | Stock-based
  employee
  compensation
  included in reported net
  loss, net of related tax 
  effects                                   |                             |  |                              | -       
| |                                                      |                                                                                                                                          |                             |  |                              |         
| | Deduct                                               | : Total
  stock-based employee 
  compensation expense 
  under fair value based 
  method for all awards, net 
  of related tax effects |                             |  |                              | (124,547
| |                                                      |                                                                                                                                          |                             |  |                              |         
| |                                                      |                                                                                                                                          |                             |  |                              |         
| | Loss - pro
  forma                                   |                                                                                                                                          |                             |  | (6,941,135                   | )       
| |                                                      |                                                                                                                                          |                             |  |                              |         
| |                                                      |                                                                                                                                          |                             |  |                              |         
| | Basic and
  diluted loss per share as 
     reported |                                                                                                                                          |                             |  | (0.77                        | )       
| |                                                      |                                                                                                                                          |                             |  |                              |         
| |                                                      |                                                                                                                                          |                             |  |                              |         
| | Pro forma
  basic and diluted loss per 
     share   |                                                                                                                                          |                             |  | (0.78                        | )       
| |                                                      |                                                                                                                                          |                             |  |                              |         

| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-13

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial Statements
  as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 2 -  Significant Accounting Policies (contd)

| | P.        Deferred
  income taxes (cont'd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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 issued upon exercise of stock options and
  warrants.  The common stock equivalent
  of anti-dilutive securities 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's 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.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | T.       Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Certain amounts have been reclassified to conform to
  the current year presentation, including reclassification of short-term bank
  credits previously reported net of cash and cash equivalents.  Such reclassifications did not have any
  impact on the Company's shareholders' equity or net loss.                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | U.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-14

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial Statements
  as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 2 -
 Significant Accounting Policies (contd)

| | U. | Recently Enacted Accounting Pronouncements (cont'd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2. | FASB - Statement 123R Share-Based Payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In December 2004, the FASB issued SFAS No. 123
  (Revision 2004), Share-Based Payment, (SFAS 123R), that addresses the
  accounting for share-based payment transactions in which employee services
  are received in exchange for either equity instruments of the Company,
  liabilities that are based on the fair value of the Company's equity
  instruments or that may be settled by the issuance of such equity
  instruments. SFAS 123R eliminates the ability to account for share-based
  compensation transactions using the intrinsic value method as prescribed in
  APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, SFAS
  123R requires that such transactions be accounted for using a
  fair-value-based method and that compensation expense be recognized in the
  statement of operations rather than disclosing the pro forma impact of the stock based compensation as the Company
  currently discloses in Note 7. SFAS 123R provides two alternative
  adoption methods. The first method is a modified prospective transition
  method whereby a company would recognize share-based employee costs from the
  beginning of the fiscal period in which the recognition provisions are first
  applied as if the fair-value-based accounting method had been used to account
  for all employee awards granted, modified, or settled after the effective
  date and to any awards that were not fully vested as of the effective date.
  Measurement and attribution of compensation cost for awards that are unvested
  as of the effective date of SFAS 123R would be based on the same estimate of
  the grant-date fair value and the same attribution method used previously
  under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).
  The second adoption method is a modified retrospective transition method
  whereby a company would recognize employee compensation cost for periods
  presented prior to the adoption of SFAS 123R in accordance with the original
  provisions of SFAS 123; that is, an entity would recognize employee
  compensation costs in the amounts reported in the pro forma disclosures
  provided in accordance with SFAS 123. A company would not be permitted to
  make any changes to those amounts upon adoption of SFAS 123R unless those
  changes represent a correction of an error. 
  The provisions of SFAS 123R are effective for periods beginning after
  June 15, 2005, which will be the Companys third quarter beginning July 1,
  2005.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Based
  upon our projection of unvested stock options at the implementation date from
  stock options granted and outstanding as of December 31, 2004, we expect the
  adoption to result in the recognition of additional compensation expense of
  approximately US$102,000 during 
  fiscal 2005 and approximately US$197,000 during fiscal 2006 and US$193,000
  during fiscal 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3. | FASB - Statement 151 Inventory Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In November
  2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151). SFAS 151
  requires abnormal amounts of inventory costs related to idle facility,
  freight handling and wasted material expenses to be recognized as current
  period charges. Additionally, SFAS 151 requires that allocation of fixed
  production overheads to the costs of conversion be based on the normal
  capacity of the production facilities. The standard is effective for fiscal
  years beginning after June 15, 2005. We believe the adoption of SFAS 151 will
  not have a material impact on our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-15

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial Statements
  as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 2 -
 Significant Accounting Policies (contd)

|T. | Recently Enacted Accounting
  Pronouncements (cont'd)
|-- | -----------------------------------------------------

| | 4. | FASB - Statement 153 - Exchanges of Nonmonetary Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | In December 2004, the FASB issued SFAS No. 153,
  Exchanges of Nonmonetary Assets - an amendment to APB No. 29. This
  Statement amends Opinion No. 29 to eliminate the exception for nonmonetary
  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. Adoption of this statement is not expected to have a material
  impact on the consolidated financial statements of the Company.

Note 3 -
 Property and Equipment

| |                                    |  | December 31 |          
| | ---------------------------------- |  | ----------- | ---------
| |                                    |  |             |          
| |                                    |  | 2004        |          
| |                                    |  |             |          
| |                                    |  | US$         |          
| |                                    |  |             |          
| | Cost                               |  |             |          
| | Research and development equipment |  |             | 1,040,267
| | Manufacturing equipment            |  |             | 570,532  
| | Office furniture and equipment     |  |             | 1,548,087
| | Leasehold improvements             |  |             | 299,695  
| |                                    |  |             |          
| |                                    |  |             | 3,458,581
| |                                    |  |             |          
| |                                    |  |             |          
| | Accumulated depreciation           |  |             |          
| | Research and development equipment |  |             | 1,011,253
| | Manufacturing equipment            |  |             | 486,246  
| | Office furniture and equipment     |  |             | 1,269,151
| | Leasehold improvements             |  |             | 281,793  
| |                                    |  |             |          
| |                                    |  |             | 3,048,443
| |                                    |  |             |          
| |                                    |  |             | 410,138  
| |                                    |  |             |          

F-16

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial Statements
  as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 4 -  Liability In Respect of Employees Severance Benefits

| | A. | 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, 2004, 2003 and 2002 amounted to US$461,634, US$491,590, and US$530,873,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | B. | Employees of the U.S. subsidiary may participate in
  an employee savings plan maintained by payments pursuant to Section 401(k) of
  the Internal Revenue Code (IRC). 
  Eligible participants may contribute a percentage of their pretax
  salaries, subject to certain IRC limitations.  The plan provides for equivalent employer contributions to be
  made at the discretion of the Board of Directors.                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | There were no discretionary amounts contributed to
  the plan during the years ended 2004, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                             

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.                                                                                                             
| |                                                                                                                                                                                                                                                                                          
| | 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, 2004, total grants received, net
  of royalties paid or accrued, amounted to approximately US$1,283,944.                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                          
| | Royalties payable to the OCS are classified as part
  of cost of sales (see Note 8B2).                                                                                                                                                                                                   

F-17

---

---

RiT
Technologies Ltd. 
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial Statements
  as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 5 -
 Commitments and Contingencies (cont'd)

| | B.  | Lease commitments:                                                                                                                                  
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                     
| | (1) | Premises occupied by the Company and the U.S.
  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 2005,
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 Lake Forest expired in June 2004 and the Company vacated the premises.  The lease agreement for representative
office in Moscow expired during December 2004 and has been renewed for
additional three months.  Minimum future
rental payments due under the above leases, at rates in effect on December 31,
2004, assuming no options are exercised, are as follows:

| | Year
  ending December 31 |  | US$ |        
| | ------------------------- |  | --- | -------
| |                           |  |     |        
| | 2005                      |  |     | 326,379
| | 2006                      |  |     | 281,280
| | 2007                      |  |     | 281,280
| | Thereafter                |  |     | -      
| |                           |  |     |        
| |                           |  |     | 888,839
| |                           |  |     |        

| | Part of the lease agreements in Israel are secured
  by a bank guarantee in the amount of US$22,514.                                                                 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                      
| | Rental expenses amounted to US$565,414, US$1,004,801
  and US$976,973 for the years ended December 31, 2004, December 31, 2003 and
  December 31, 2002, respectively.
| |                                                                                                                                                                      
| | (2)                                                                                                                                                                  
| |                                                                                                                                                                      

| | Year
  ending December 31 |  | US$ |        
| | ------------------------- |  | --- | -------
| |                           |  |     |        
| | 2005                      |  |     | 297,540
| | 2006                      |  |     | 126,540
| | 2007                      |  |     | 44,252 
| |                           |  |     |        
| |                           |  |     | 468,332
| |                           |  |     |        

| | Part of these lease commitments are secured by a
  bank guarantee in the amount of US$53,000.                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rental expenses amounted to US$359,353, US$347,075
  and US$274,843 for the years ended December 31, 2004, December 31, 2003 and
  December 31, 2002, respectively.

| | C.                                                                                                                              | Other commitments:
| | ------------------------------------------------------------------------------------------------------------------------------- | ------------------
| |                                                                                                                                
| | As of December 31, 2004, bank guarantees in the
  amount of US$47,841 have been issued, mostly for customs duty on importation.

F-18

---

---

RiT Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the
  Consolidated Financial Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 5 - Commitments and
  Contingencies (contd)                       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

F-19

---

---

RiT Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the
  Consolidated Financial Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 6 - Shareholders Equity                                           
|                                                                        
|                                                                        
|                                                                        
|                                                                        

| |                                                 |  | December 31, 2004        |            | December 31, 2003 | 
| | ----------------------------------------------- |  | ------------------------ | ---------- | ----------------- | 
| |                                                 |  |                          |            |                   | 
| |                                                 |  | Issued and
  outstanding |            | Authorized        | 
| |                                                 |  |                          |            |                   | 
| |                                                 |  | Number of shares         |            | Number of shares  | 
| |                                                 |  |                          |            |                   | 
| |                                                 |  |                          |            |                   | 
| | Ordinary
  Shares of NIS 0.1 par
     value (1) |  |                          | 14,098,188 |                   | 
| |                                                 |  |                          |            |                   | 
| |                                                 |  |                          |            |                   | 
| | Deferred
  Shares of NIS 0.1 par    value (2)   |  |                          | 17,030     |                   | 
| |                                                 |  |                          |            |                   | 

| | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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.                                                                                        

F-20

---

---

RiT Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the
  Consolidated Financial Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 6 - Shareholders Equity
  (contd)                                
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

F-21

---

---

RiT Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the
  Consolidated Financial Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 6 - Shareholders Equity
  (contd)                                
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

F-22

---

---

RiT Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the
  Consolidated Financial Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 6 - Shareholders Equity
  (contd)                                
|                                                                        
|                                                                        
|                                                                        
|                                                                        

| |                                                 |  | Number of
  options |           | Weighted
  average
  exercise price |  | Weighted
  average grant datefair value |      
| | ----------------------------------------------- |  | ------------------- | --------- | ----------------------------------- |  | --------------------------------------- | -----
| |                                                 |  |                     |           |                                     |  |                                         |      
| |                                                 |  |                     |           | US$                                 |  | US$                                     |      
| |                                                 |  |                     |           |                                     |  |                                         |      
| | Options
  unexercised as at January 1, 2002     |  |                     | 2,221,282 |                                     |  |                                         | 2.51 
| | Granted
  during 2002                           |  |                     | 210,000   |                                     |  |                                         | 2.81 
| | Exercised
  during 2002                         |  |                     | -         |                                     |  |                                         |      
| | Expired
  during 2002                           |  |                     | (34,000   | )                                   |  |                                         | 1.875
| | Forfeited
  during 2002                         |  |                     | (336,833  | )                                   |  |                                         | 2.59 
| |                                                 |  |                     |           |                                     |  |                                         |      
| | Options
  unexercised as at December 31,
  2002 |  |                     | 2,060,449 |                                     |  |                                         |      
| | Granted
  during 2003                           |  |                     | 580,750   |                                     |  |                                         | 1.16 
| | Exercised
  during 2003                         |  |                     | -         |                                     |  |                                         | -    
| | Expired
  during 2003                           |  |                     | (75,667   | )                                   |  |                                         | 4.3  
| | Forfeited
  during 2003                         |  |                     | (157,541  | )                                   |  |                                         | 2.02 
| |                                                 |  |                     |           |                                     |  |                                         |      
| | Options
  unexercised as at December 31,
  2003 |  |                     | 2,407,991 |                                     |  |                                         |      
| | Granted
  during 2004                           |  |                     | 461,000   |                                     |  |                                         | 2.12 
| | Exercised
  during 2004                         |  |                     | (2,000    | )                                   |  |                                         | 1.12 
| | Expired
  during 2004                           |  |                     | (333,000  | )                                   |  |                                         | 2.52 
| | Forfeited
  during 2004                         |  |                     | (336,958  | )                                   |  |                                         | 2.31 
| |                                                 |  |                     |           |                                     |  |                                         |      
| | Options unexercised as at December 31,
  2004   |  |                     | 2,197,033 |                                     |  |                                         |      
| |                                                 |  |                     |           |                                     |  |                                         |      

| | The options
  under the various stock option plans were granted at market value.                    
| | ----------------------------------------------------------------------------------------------------
| |                                                                                                     
| | The
  following table summarizes information about stock options outstanding at
  December 31, 2004:

| |                                       |  | Options outstanding                                      |           | Option exercisable                                  |    
| | ------------------------------------- |  | -------------------------------------------------------- | --------- | --------------------------------------------------- | ---
| |                                       |  |                                                          |           |                                                     |    
| | Rates of
  exercise
  prices in
  US$ |  | Number of
  shares
  unexercised at
  December 31
  2004 |           | Weighted
  average
  remaining
  contractual
  life |    
| |                                       |  |                                                          |           |                                                     |    
| |                                       |  |                                                          | In years  |                                                     | US$
| |                                       |  |                                                          |           |                                                     |    
| | 1.12 - 1.60                           |  |                                                          | 911,250   |                                                     |    
| | 1.61 - 1.875                          |  |                                                          | 724,083   |                                                     |    
| | 2.05 - 2.75                           |  |                                                          | 51,000    |                                                     |    
| | 2.81 - 2.82                           |  |                                                          | 310,000   |                                                     |    
| | 3.6875 -
  4.5625                     |  |                                                          | 86,500    |                                                     |    
| | 6                                     |  |                                                          | 48,200    |                                                     |    
| | 7.375                                 |  |                                                          | 60,000    |                                                     |    
| | 9.6875                                |  |                                                          | 6,000     |                                                     |    
| |                                       |  |                                                          |           |                                                     |    
| |                                       |  |                                                          | 2,197,033 |                                                     |    
| |                                       |  |                                                          |           |                                                     |    

| | At year-end
  2004, options with an average exercise price of $2.46 were exercisable for
  1,054,116 shares (at year-end 2003 and 2002, options with an average exercise
  price of $2.69 and $2.55, respectively, were exercisable for 1,151,616 and
  for 1,130,041, respectively).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                      
| | Weighted
  average exercise price for the options outstanding in 2004 and 2003 was $2.02
  and $2.16, respectively.                                                                                                                                                                  

F-23

---

---

RiT
Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note
  6 - Shareholders Equity (contd)                                
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

| |                                                |                                                                                                                                       | Year ended
  December 31
  2004 |          | Year ended
  December 31
  2003 |          | Year ended
  December 31
  2002 |         
| | ---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | -------- | ------------------------------- | -------- | ------------------------------- | --------
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| |                                                |                                                                                                                                       | U.S.$                           |          | U.S.$*                          |          | U.S.$*                          |         
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| | Loss for the
  year                            |                                                                                                                                       | (2,974,598                      | )        | (6,816,588                      | )        | (6,909,782                      | )       
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| | Add:                                           | Stock-based
  employee compensation
  expense included
  in reported net loss,
  net of related tax effects                           |                                 | -        |                                 | -        |                                 | -       
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| | Deduct:                                        | Total
  stock-based employee
  compensation 
  expense under fair value
  based method for
  all awards, net of related tax
  effects |                                 | (407,588 | )                               | (216,405 | )                               | (485,142
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| | Loss - pro
 forma                              |                                                                                                                                       | (3,382,186                      | )        | (7,032,993                      | )        | (7,394,924                      | )       
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| | Basic and
  diluted loss per share as reported |                                                                                                                                       | (0.27                           | )        | (0.77                           | )        | (0.78                           | )       
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         
| | Pro forma
  basic and diluted loss per share   |                                                                                                                                       | (0.30                           | )        | (0.79                           | )        | (0.83                           | )       
| |                                                |                                                                                                                                       |                                 |          |                                 |          |                                 |         

| | During 2004, the Company has revised certain
  assumptions utilized for the estimation of the fair value of the options
  granted in the Black and Scholes option pricing model.  These assumptions include the risk free
  interest rates, the expected lives and the expected volatility.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                            
| | Accordingly, the pro-forma information as of
  December 31, 2003 and 2002 have been restated to conform with the new
  assumption.                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                            
| | *  Restated                                                                                                                                                                                                                                                                                

F-24

---

---

RiT
Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 6 -
Shareholders Equity (contd)

| | B.                                         | Share options (contd)
| | ------------------------------------------ | ----------------------
| |                                            |                       
| | 7.                                         | Effect of SFAS 123    
| |                                            |                       
| | The effect of restatement were as follows:

| |                                                       |                                                                                                                               | Year ended December 31, 2003
  US$ |          | Year ended December 31, 2002
  US$ |         
| | ----------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | -------- | ---------------------------------- | --------
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| |                                                       |                                                                                                                               | As reported                        |          | As restated                        |         
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| | Loss for the
  year                                   |                                                                                                                               | (6,816,588                         | )        | (6,816,588                         | )       
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| | Add:                                                  | Stock-based
  employee
  compensation 
  included in reported net loss,
   net of related tax
  effects                       |                                    | -        |                                    | -       
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| | Deduct:                                               | Total stock-based employeecompensation expense
  under fair value based
  method for all awards, net
  of related tax effects |                                    | (124,547 | )                                  | (216,405
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| | Loss - pro
 forma                                     |                                                                                                                               | (6,941,135                         | )        | (7,032,993                         | )       
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| | Basic and
  diluted loss per
  share as
     reported |                                                                                                                               | (0.77                              | )        | (0.77                              | )       
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| |                                                       |                                                                                                                               |                                    |          |                                    |         
| | Pro forma
  basic and diluted
  loss per
     share   |                                                                                                                               | (0.78                              | )        | (0.79                              | )       
| |                                                       |                                                                                                                               |                                    |          |                                    |         

| | 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.                                                                                                                                                            
| |                                                                                                                                                               
| | 2.                                                                                                                                                            

F-25

---

---

RiT Technologies
Ltd.
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

Note 6 -
Shareholders Equity (contd)

| | B. | Share options (contd)                  
| | -- | ----------------------------------------
| |    |                                         
| | 7. | Effect of SFAS 123 (contd)             
| |    |                                         
| | 3. | Risk free interest rates are as follows:
| |    |                                         

| |  | Year ended
  December 31 |  | %    | 
| |  | ------------------------ |  | ---- | 
| |  |                          |  |      | 
| |  | 2004                     |  | 3.63 | 
| |  | 2003                     |  | 3.25 | 
| |  | 2002                     |  | 2.78 | 

| | 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 85.5%-88.9% for the year
  ended December 31, 2004 (89.2% and 97.7% for the years ended December 31,
  2003 and 2002, respectively).                                                                                                                                                                                                            | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                        | 
| | 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Options to non-employees                                                                                                                                                                                                                                                                                                                                               | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                        | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The Company applies the fair value-based method of
  accounting set forth in Statement 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 $1.75 per
  share.  The warrants are exercisable
 for five years from the date of closing of the Private Placement.  As at December 31, 2004 42,858 of these
  warrants had been exercised.                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Dividends                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Dividends may be paid by the Company only out of the
  Israeli Company earnings and other surpluses in Israeli currency as defined
  in the 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 U.S. 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, 2004, would subject RiT to a 25% tax in respect
  of the income from which it was distributed, according to the terms of tax
  exemption due to its approved enterprise status, as explained in Note 7B.                                                                                                                                                                                                                                                             
| | RiT 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 income.                                                                                                                                                                                                                                                                                                                                        
| | See also Note 7B(1)(b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-26



---

---

RiT
Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        

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.
| | The main provisions of the tax reform that may
  affect the Company are as follows:                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 1.                                                                                                                                                                                                                                                                                                                          | Transfer pricing of international transactions with
  related parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                             | The Income Tax Ordinance was amended to include
  provisions concerning transfer pricing between related parties, where one of
  the parties is situated abroad.  Detailed provisions are to be included in Income Tax Regulations
  that have yet to be issued.                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                             | Although the Company considers that the transfer
  pricing policy adopted with foreign affiliates is economically fair, an
  adjustment may be required following the issue of the said Regulations.                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 2.                                                                                                                                                                                                                                                                                                                          | Employee stock incentive plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                             | The tax reform codified past practice and determined
  three alternative tracks for taxing employee stock option plans.  Where a trustee arrangement is in place,
  the employer can either claim a deduction for tax purposes while the employee
  will be fully taxed up to the maximum marginal tax rate of 50% or the Company
  can waive the tax expense and the employee will pay a reduced tax rate of
  25%.  Where there is no trustee
  arrangement, the employee is fully taxable and no expense is allowed to the
  Company.  There are detailed
  provisions for implementing these tracks.
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 3.                                                                                                                                                                                                                                                                                                                          | Controlled foreign company (CFC)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                             | The amendment to the law introduced Controlled
 Foreign Company (CFC) provisions, which, in certain circumstances, will lead
  to the Israeli company being charged tax on passive income of foreign
  affiliates as if it had received a dividend from such companies.                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 4.                                                                                                                                                                                                                                                                                                                          | Capital gains tax is reduced to 25% from 36%, except
  with respect to capital gains from marketable securities, with transitional
  provisions for assets acquired prior to January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 5.                                                                                                                                                                                                                                                                                                                          | The seven year limit for carrying forward of capital
  losses has been removed with respect to capital losses arising from 1996 and
  thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-27

---

---

RiT
Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to the Consolidated Financial
  Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 7 - Taxes on Income (contd)                                       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                        

F-28

---

---

|RiT Technologies Ltd.
  and its Consolidated Subsidiaries               
|------------------------------------------------------------------------
|                                                                        
|Notes to
  the Consolidated Financial Statements as at December 31, 2004
|                                                                        

Note 7 -
Taxes on Income (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                                                                                           | Tax benefits under the Law for the
  Encouragement of Capital Investments, (hereafter - the Law)                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                   
| | 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.                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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 1999 tax year can be regarded as final.  No final tax assessments have been
  received by the subsidiary company. 
  Tax returns filed up to and including the 1999 tax year for the U.S.
  subsidiary can be regarded as final.
| | The Companys Israeli carryforward tax losses are
  approximately US$17,614,000 as of December 31, 2004.  The amount of the Companys carryforward
  tax losses will be reduced by any future income of the Company.                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The U.S. subsidiary is taxed under the United States
  Federal and State tax rules.  The U.S.
  subsidiarys carryforward tax losses amounted to approximately US$4,854,000
  as of December 31, 2004.  Such losses
  are available to offset any future U.S. taxable income of the U.S. subsidiary
  and will expire in the years 2008-2023.                                                                               

F-29

---

---

|RiT Technologies Ltd.
  and its Consolidated Subsidiaries               
|------------------------------------------------------------------------
|                                                                        
|Notes to
  the Consolidated Financial Statements as at December 31, 2004
|                                                                        

Note 7 -
Taxes on Income (contd)

| | F.                                                                                                                                                                                                                                                                                                                        | Changes in the Corporate Tax Rate
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
| |                                                                                                                                                                                                                                                                                                                           |                                  
| | On June 29, 2004, the Israeli Parliament approved
  the Income Tax Ordinance Amendment (No. 140 and Temporary Order), 2004 (the
  Amendment).                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                          
| | The Amendment prescribes a gradual reduction in the
  tax rate from 36% to 30%, in the following manner: in 2004 tax year at tax
  rate of 35% will be imposed, in 2005, a tax rate of 34% will be imposed, in
  2006 rate of 32% will be imposed, and from the 2007 tax year and thereafter,
  the tax rate will be 30%.
| |                                                                                                                                                                                                                                                                                                                          
| | 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 |           
| | ------------------------------ |  | ------------- | ----------
| |                                |  |               |           
| |                                |  | 2004          |           
| |                                |  |               |           
| |                                |  | US$           |           
| |                                |  |               |           
| |                                |  |               |           
| | Tax asset in respect of:       |  |               |           
| | Allowance for doubtful
  debts |  |               | 206,084   
| | Severance pay                  |  |               | 146,054   
| | Vacation pay                   |  |               | 147,387   
| | Research and development       |  |               | 1,047,520 
| | Losses carried forward         |  |               | 6,905,097 
| |                                |  |               |           
| |                                |  |               |           
| |                                |  |               | 8,452,142 
| |                                |  |               |           
| | Valuation allowance            |  |               | (8,452,142
| |                                |  |               |           
| |                                |  |               |           
| |                                |  |               | -         
| |                                |  |               |           

| | 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 to all of its tax loss carryforwards as well as for other
  temporary differences.

F-30

---

---

|RiT Technologies Ltd.
  and its Consolidated Subsidiaries               
|------------------------------------------------------------------------
|                                                                        
|Notes to
  the Consolidated Financial Statements as at December 31, 2004
|                                                                        

Note 7 -
Taxes on Income (contd)

| | 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 35% for the year ended
  December 31, 2004 and 36% for the years, 2003 and 2002, applicable to income
  of companies in Israel, and the actual tax expense, is as follows:

| |                                                                                                                                              |  | Year ended
  December 31 |           
| | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  | 2004                     |           
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  | US$                      |           
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  |                          |           
| | Loss before taxes, as
  reported in the
     statements of operations                                                                        |  |                          | (2,974,598
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  |                          |           
| | Theoretical taxes on income                                                                                                                  |  |                          | (1,041,109
| |                                                                                                                                              |  |                          |           
| | Non-deductible expenses                                                                                                                      |  |                          | 38,997    
| |                                                                                                                                              |  |                          |           
| | Valuation allowance                                                                                                                          |  |                          | 1,303,229 
| |                                                                                                                                              |  |                          |           
| | Tax exempt income                                                                                                                            |  |                          | -         
| |                                                                                                                                              |  |                          |           
| | Adjustments arising from differences on the basis of
     measurement for tax purposes and for
     financial reporting purposes and other** |  |                          | (301,117  
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  |                          |           
| | Taxes on income for the
  reported year                                                                                                      |  |                          | -         
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  |                          |           
| |                                                                                                                                              |  |                          | 35        
| |                                                                                                                                              |  |                          |           

| | *  | 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-31

---

---

|RiT Technologies Ltd.
  and its Consolidated Subsidiaries               
|------------------------------------------------------------------------
|                                                                        
|Notes to
  the Consolidated Financial Statements as at December 31, 2004
|                                                                        

Note 8 -
Supplementary Financial Statement Information

| | A.            | Balance Sheet            
| | ------------- | -------------------------
| |               |                          
| | 1.            | Cash and cash equivalents
| |               |                          
| | Comprised of:

| |                          |  | December
  31 | 
| | ------------------------ |  | ------------- | 
| |                          |  |               | 
| |                          |  | 2004          | 
| |                          |  |               | 
| |                          |  | US$           | 
| |                          |  |               | 
| | Cash and deposits (1)(2) |  | 7,772,997     | 
| |                          |  |               | 

| | (1) | The deposits are in US
  dollars and bearing an average annual interest of 1.8% per annum. (2003 - 1%
  per annum).
| | --- | -------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                    
| | 2.  | Marketable
  securities                                                                                            

| |                               |  | Interest rate |  | December
  31 | 
| | ----------------------------- |  | ------------- |  | ------------- | 
| |                               |  |               |  |               | 
| |                               |  |               |  | 2004          | 
| |                               |  |               |  |               | 
| |                               |  | %             |  | US$           | 
| |                               |  |               |  |               | 
| |                               |  |               |  |               | 
| | Corporate bonds in US dollars |  |               |  | 7.75          | 
| |                               |  |               |  |               | 

| | The fair market value, cost and unrealized holdings
  losses (gains) of such securities at December 31, 2004 were US$ 530,950, US$
  545,465 and US$ 14,515, respectively (December 31, 2003  US$ 560,124,
  US$ 545,465 and US$ (14,659), respectively.)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                           
| | All of the Companys securities mature in June 2006.                                                                                                                                                                                                      

F-32

---

---

|RiT Technologies Ltd.
  and its Consolidated Subsidiaries               
|------------------------------------------------------------------------
|                                                                        
|Notes to
  the Consolidated Financial Statements as at December 31, 2004
|                                                                        

Note 8 -
Supplementary Financial Statement Information (contd)

| | A.                                                                                                                  | Balance Sheet (contd) 
| | ------------------------------------------------------------------------------------------------------------------- | -----------------------
| |                                                                                                                     |                        
| | 3.                                                                                                                  | Trade receivables, net:
| |                                                                                                                     |                        
| | As of December 31, 2003 and 2004, trade accounts receivable
  are presented net of allowance for doubtful accounts.
| |                                                                                                                    
| | The following are the changes in the allowance for
  doubtful accounts:                                            

| |                                           |  | US$       |  
| | ----------------------------------------- |  | --------- | -
| |                                           |  |           |  
| |                                           |  |           |  
| | Balance at January 1, 2002                |  | 914,234   |  
| | Additions during 2002                     |  | 600,414   |  
| | Deductions                                |  | (178,431  | )
| |                                           |  |           |  
| |                                           |  |           |  
| | Balance at December 31, 2002              |  | 1,336,217 |  
| | Additions during 2003                     |  | 21,338    |  
| | Deductions                                |  | (165,541  | )
| | Write-downs charged against the allowance |  | (490,324  | )
| |                                           |  |           |  
| |                                           |  |           |  
| | Balance at December 31, 2003              |  | 701,690   |  
| | Additions during 2004                     |  | -         |  
| | Deductions                                |  | (230,301  | )
| | Write-downs charged against the allowance |  | (41,818   | )
| |                                           |  |           |  
| |                                           |  |           |  
| | Balance at December 31, 2004              |  | 429,571   |  
| |                                           |  |           |  

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

| |                                              |                               | December
  31 |          
| | -------------------------------------------- | ----------------------------- | ------------- | ---------
| |                                              |                               |               |          
| |                                              |                               | 2004          |          
| |                                              |                               |               |          
| |                                              |                               | US$           |          
| |                                              |                               |               |          
| |                                              |                               |               |          
| | Receivables
  from the Government of Israel: |                               |               |          
| |                                              | Chief
  Scientist             |               |          
| |                                              | Tax
  authorities             |               |          
| |                                              | Value added
  tax authorities |               |          
| | Prepaid
  expenses                           |                               |               | 74,687   
| | Other                                        |                               |               | 104,240  
| |                                              |                               |               |          
| |                                              |                               |               |          
| |                                              |                               |               | 1,016,449
| |                                              |                               |               |          

F-33

---

---

RiT
Technologies Ltd.
and its Consolidated Subsidiaries

|Notes to
  the Consolidated Financial Statements as at December 31, 2004
|------------------------------------------------------------------------
|                                                                        
|                                                                        
|Note 8 -
  Supplementary Financial Statement Information (contd)       
|                                                                        
|                                                                        
|                                                                        
|                                                                        

| |                                 |  | December 31 |          
| | ------------------------------- |  | ----------- | ---------
| |                                 |  |             |          
| |                                 |  | 2004        |          
| |                                 |  |             |          
| |                                 |  | US$         |          
| |                                 |  |             |          
| |                                 |  |             |          
| | Raw materials and subassemblies |  |             | 2,108,198
| | Work in process                 |  |             | 869,083  
| | Finished products               |  |             | 3,570,928
| |                                 |  |             |          
| |                                 |  |             | 6,548,209
| |                                 |  |             |          

| | 6. | Other payables and accrued
  expenses:
| | -- | --------------------------------------

| |                                     |  | December 31 |          
| | ----------------------------------- |  | ----------- | ---------
| |                                     |  |             |          
| |                                     |  | 2004        |          
| |                                     |  |             |          
| |                                     |  | US$         |          
| |                                     |  |             |          
| |                                     |  |             |          
| | Employees and employee institutions |  |             | 1,332,611
| | Government of Israel:               |  |             |          
| | Chief Scientist                     |  |             | 264,749  
| | Accrued expenses                    |  |             | 507,341  
| | Provision for products trade-in     |  |             | 15,000   
| | Provision for product warranty      |  |             | 126,688  
| | Other                               |  |             | 178,908  
| |                                     |  |             |          
| |                                     |  |             | 2,425,297
| |                                     |  |             |          

| | 7. | Short-term bank credits:
| | -- | ------------------------
| |    |                         
| |    | a.                      

|            |  | December 31 |          
|----------- |  | ----------- | ---------
|            |  |             |          
|            |  | 2004        |          
|            |  |             |          
|            |  | US$         |          
|            |  |             |          
|In NIS (1)  |  |             | 2,197,423
|In Euro (2) |  |             | 269,444  
|            |  |             |          
|            |  |             | 2,466,867
|            |  |             |          

|(1) | As of December 31, 2004 and 2003, the relative
  amounts are unlinked and bear an annual interest of 5.4% for year 2004 and
  6.05% for year 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                   
|(2) | As of December 31, 2004 bear an annual interest of
  2.75%.                                                                                       

F-34

---

---

|                                                                        | RiT Technologies Ltd.
 and its Consolidated Subsidiaries
|----------------------------------------------------------------------- | --------------------------------------------------------
|                                                                        |                                                         
|Notes to the Consolidated Financial Statements as at
 December 31, 2004
|                                                                       

Note 8 -
Supplementary Financial Statement Information (contd)

| | A. | Balance Sheet (contd)                                                                                                                                                                                                                                                                                                                                                                         
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | 7. | Short-term bank credits: (contd)                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | b.                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | On
 April 28, 2004 the Company signed a credit line agreement with a bank for an
 amount of up to US$2,000,000. The interest rate for each amount withdrawn
 from the credit line will be determined on the withdrawal date. The credit
 line will expire on June 30, 2005.  As
 part of the agreement, a first degree floating charge has been registered
 over all the assets of the Company.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The
 granting of the credit line is also subject to additional terms and conditions
 (covenants), as follows:                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | a)                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | b)                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Non
 compliance with the said additional terms may lead to immediate repayment of
 the credit line.  As at December 31,
 2004, there is no unutilized line of credit and the Company is in compliance
 with the covenants.                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | 8. | Monetary balances in non-dollar currencies                                                                                                                                                                                                                                                                                                                                                     

| |                      |  | December
 31, 2004 |          
| | -------------------- |  | ------------------ | ---------
| |                      |  |                    |          
| |                      |  |                    |          
| |                      |  | Israeli
 currency  |          
| |                      |  |                    |          
| |                      |  | US$                |          
| |                      |  |                    |          
| |                      |  |                    |          
| | Current
 assets      |  |                    | 941,855  
| | Current
 liabilities |  |                    | 6,912,502
| |                      |  |                    |          
| |                      |  | December
 31, 2003 |          
| |                      |  |                    |          
| |                      |  |                    |          
| |                      |  | Israeli
 currency  |          
| |                      |  |                    |          
| |                      |  | US$                |          
| |                      |  |                    |          
| |                      |  |                    |          
| | Current
 assets      |  |                    | 603,440  
| | Current
 liabilities |  |                    | 1,246,027

| | The
 preceding tables reflect the exposure of the Companys monetary balances in
 non-dollar currencies (mainly EURO) to the effect of changes in the rate of
 exchange of the NIS, or other non-dollar currencies, to the dollar at the
 indicated balance sheet dates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-35

---

---

|                                                                        | RiT Technologies Ltd.
 and its Consolidated Subsidiaries
|----------------------------------------------------------------------- | --------------------------------------------------------
|                                                                        |                                                         
|Notes to the Consolidated Financial Statements as at
 December 31, 2004
|                                                                       

Note 8 - Supplementary Financial Statement Information
(contd)

|   | A.                                                                                                                                                                                                                                            | Balance Sheet (contd)                              
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------
|   |                                                                                                                                                                                                                                               |                                                     
|   | 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 and assets and liabilities in
 respect of employees severance benefits.
|   |                                                                                                                                                                                                                                              
|   | In view of their nature, the fair value of financial
 instruments is usually identical to their carrying value.                                                                                                                              
|   |                                                                                                                                                                                                                                              
|B. | Statement of Operations                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                              
|   | 1.                                                                                                                                                                                                                                            | Sales (1)                                           
|   |                                                                                                                                                                                                                                               |                                                     
|   | (a)                                                                                                                                                                                                                                           | Classification of sales by geographical destination:

| |                                                                                     |  | Year ended
 December 31 | 
| | ----------------------------------------------------------------------------------- |  | ----------------------- | 
| |                                                                                     |  |                         | 
| |                                                                                     |  | 2004                    | 
| |                                                                                     |  |                         | 
| |                                                                                     |  | US$                     | 
| |                                                                                     |  |                         | 
| |                                                                                     |  |                         | 
| | United States                                                                       |  | 7,605,014               | 
| | Europe                                                                              |  | 8,329,907               | 
| | Israel                                                                              |  | 1,529,063               | 
| | Rest of world                                                                       |  | 963,159                 | 
| |                                                                                     |  |                         | 
| |                                                                                     |  |                         | 
| |                                                                                     |  | 18,427,143              | 
| |                                                                                     |  |                         | 
| |                                                                                     |  |                         | 
| | (1)     Sales
 are attributed to geographical areas based on location of customers.

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

| |                     |  | Year ended
 December 31 | 
| | ------------------- |  | ----------------------- | 
| |                     |  |                         | 
| |                     |  | 2004                    | 
| |                     |  |                         | 
| |                     |  | US$                     | 
| |                     |  |                         | 
| | Enterprise Solution |  | 16,132,554              | 
| | Carrier Solution    |  | 2,294,589               | 
| |                     |  |                         | 
| |                     |  |                         | 
| |                     |  | 18,427,143              | 
| |                     |  |                         | 

| | (c) | Principal customers:                                                                                                                                                                                                                
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                     
| |     | During the fiscal year 2004, Company sales to one
 customer exceeding 10% of total sale were: US$2,545,661 (during fiscal year
 2003 - US$1,640,350; and during fiscal year 2002 - no single customer
 exceeded 10% of total sales).

F-36

---

---

|                                                                        | RiT Technologies Ltd.
 and its Consolidated Subsidiaries
|----------------------------------------------------------------------- | --------------------------------------------------------
|                                                                        |                                                         
|Notes to the Consolidated Financial Statements as at
 December 31, 2004
|                                                                       

Note 8 - Supplementary Financial Statement Information
(contd)

| | B. | Statement of Operations (contd)
| | -- | --------------------------------
| |    |                                 
| | 2. | Cost of sales                   

| |                                    |  | Year ended
 December 31 |  
| | ---------------------------------- |  | ----------------------- | -
| |                                    |  |                         |  
| |                                    |  | 2004                    |  
| |                                    |  |                         |  
| |                                    |  | US$                     |  
| |                                    |  |                         |  
| |                                    |  |                         |  
| | Payroll and related benefits       |  | 1,205,403               |  
| | Materials consumed                 |  | 6,704,244               |  
| | Subcontracted work                 |  | 1,666,292               |  
| | Royalties to the OCS               |  | 408,613                 |  
| | Write-down of inventories          |  | 373,909                 |  
| | Other production costs             |  | 1,096,088               |  
| |                                    |  |                         |  
| |                                    |  |                         |  
| |                                    |  | 11,454,549              |  
| | (Increase) decrease in inventories |  | (1,388,350              | )
| |                                    |  |                         |  
| |                                    |  |                         |  
| |                                    |  | 10,066,199              |  
| |                                    |  |                         |  

| | In the year ended December 31, 2004, the Company
 recorded a write-down of inventories in the amount of US$373,909 (December
 31, 2003 - US$1,938,036) (December 31, 2002 - US$1,518,916).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                           
| | 3.                                                                                                                                                                                        

| |                                                 |  | Year ended
 December 31 |  
| | ----------------------------------------------- |  | ----------------------- | -
| |                                                 |  |                         |  
| |                                                 |  | 2004                    |  
| |                                                 |  |                         |  
| |                                                 |  | US$                     |  
| |                                                 |  |                         |  
| | Expenses:                                       |  |                         |  
| | Interest on short-term credits and bank charges |  | (94,298                 | )
| | Exchange translation (expenses) income, net     |  | 24,918                  |  
| |                                                 |  |                         |  
| |                                                 |  | (69,388                 | )
| | Income:                                         |  |                         |  
| | Interest from banks and others                  |  | 98,815                  |  
| |                                                 |  |                         |  
| |                                                 |  |                         |  
| | Financing income, net                           |  | 29,435                  |  
| |                                                 |  |                         |  

F-37

---

---

|                                                                        | RiT Technologies Ltd.
 and its Consolidated Subsidiaries
|----------------------------------------------------------------------- | --------------------------------------------------------
|                                                                        |                                                         
|Notes to the Consolidated Financial Statements as at
 December 31, 2004
|                                                                       

Note 9 - Related Party Balances and Transactions

| | Related parties are comprised of 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 U.S.
 subsidiary in the U.S. (See Note5B).
| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | A.                                                                                                                                                                                                                                                                                                                                                                                                        

| |                      |  | December
 31 | 
| | -------------------- |  | ------------ | 
| |                      |  |              | 
| |                      |  | 2004         | 
| |                      |  |              | 
| |                      |  | US$          | 
| |                      |  |              | 
| | Accounts receivable: |  |              | 
| | Trade                |  | 403,763      | 
| |                      |  |              | 
| | Accounts payable:    |  |              | 
| | Trade                |  | 67,830       | 
| | Other                |  | 4,799        | 

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

| |                                                        |                                     | Year ended
 December 31 |       
| | ------------------------------------------------------ | ----------------------------------- | ----------------------- | ------
| |                                                        |                                     |                         |       
| |                                                        |                                     | 2004                    |       
| |                                                        |                                     |                         |       
| |                                                        |                                     | US$                     |       
| |                                                        |                                     |                         |       
| | Income:                                                |                                     |                         |       
| | Sales                                                  |                                     | 908,559                 |       
| | Cost and expenses:                                     |                                     |                         |       
| | Purchases                                              |                                     | 36,697                  |       
| | Services                                               |                                     | 75,526                  |       
| | Research and development cost                          |                                     | 183,011                 |       
| | Sales, marketing, general and
 administrative expenses |                                     | 437,335                 |       
| |                                                        |                                     |                         |       
| | C.                                                     | Purchases of property and equipment |                         | 16,502
| |                                                        |                                     |                         |       

F-38

---

---

Exhibit
Index

|Exhibit
 Number |  | 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).

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