UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 20-F




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




OR




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





For the fiscal year ended December 31, 2009.





OR





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





OR





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




Commission file number: 0-29360







RiT TECHNOLOGIES LTD.


(Exact name of Registrant as specified in its charter)




Israel


(Jurisdiction of incorporation or organization)





24 Raoul Wallenberg Street, Tel Aviv, Israel


(Address of principal executive offices)





Eran Ayzik, C.F.O


RiT Technologies Ltd.


24 Raoul Wallenberg Street, Tel Aviv, Israel


Mail to: erana@rit.co.il


Tel: +972-3- 7664249


Fax: +972-3- 6455162


(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)




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





Title of Each Class
Name of Each Exchange On Which RegisteredOrdinary Shares,NIS 0.8 par value per share
NASDAQ Capital Market





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





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




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, 2009, the issuer had 2,604,428 ordinary shares outstanding (excluding 2,125 ordinary shares held as treasury shares).











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





o Yes                     x No





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





o Yes                     x No





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





x Yes                      o No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such reports).





o Yes                      o No





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





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




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




x
U.S. GAAP





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





o
Other





If "Other" has been checked in response to the previous question indicate by check mark which financial statements the registrant has elected to follow:





o Item 17                      o Item 18





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





o Yes                      x No





2




Part IItem 1
Identity of Directors, Senior Management and Advisors
5Item 2
Offer Statistics and Expected Timetable
5Item 3
Key Information
5Item 4
Information on the Company
17Item 4A
Unresolved Staff Comments
28Item 5
Operating and Financial Review and Prospects
28Item 6
Directors, Senior Management and Employees
41Item 7
Major Shareholders and Related Party Transactions
49Item 8
Financial Information
53Item 9
The Offer and Listing
54Item 10
Additional Information
55Item 11
Quantitative and Qualitative Disclosures about Market Risk
68Item 12
Description of Securities Other Than Equity Securities
69Part IIItem 13
Defaults, Dividend Arrearages and Delinquencies
69Item 14
Material Modifications to the Rights of Security Holders and Use of Proceeds
69Item 15
Controls and Procedures
69Item 16A
Audit Committee Financial Expert
70Item 16B
Code of Ethics
70Item 16C
Principal Accountant Fees and Services
70Item 16D
Exemptions from Listing Requirements and Standards for Audit Committee
71Item 16E
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
71Item 16F
Change in Registrant’s Certifying Accountant
71Item 16G
Corporate Governance
71Part IIIItem 17
Financial Statements
71Item 18
Financial Statements
72Item 19
Exhibits
73





3





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;




·
"dollars" or "$" are to United States Dollars




·
“NIS” are to New Israeli Shekels, the currency of the State of Israel;




·
"Companies Law" or the "Israeli Companies Law" are to the Israeli Companies Law, 5759-1999;




·
"SEC" are to the United States Securities and Exchange Commission;




·
“STINS” or “STINS COMAN” are to STINS COMAN Incorporated, a Russian corporation headquartered in Moscow, Russia, and which is our largest shareholder; and




·
"enterprise" and "carrier"" relate to the sectors we formerly identified as "datacom" and "telecom."




Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms.  If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms,and the summary included herein is qualified by reference to the full text of the document which is incorporated by reference into this annual report.




Trademarks




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




Reverse Share Split




On August 24, 2009, we effected a one-for-eight reverse split of our ordinary shares, and accordingly the par value of our ordinary shares was changed from NIS 0.1 per share to NIS 0.8 per share. Unless otherwise indicated, all ordinary share, option and per share amounts in this annual report have been adjusted to give retroactive effect to the stock split for all periods presented.





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 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;




4




·
expectations that our markets will  grow;




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




·
expectations that competitive conditions within our markets will not change materially or adversely;




·
expectations that we will retain key technical and management personnel;




·
expectations that our recent change in control and changes in management will not be disruptive to our business;




·
expectations that our forecasts will accurately anticipate market demand;




·
expectations as to the adequacy of our manufacturing facilities and the timing of any expansion;




·
our inability to satisfy Nasdaq’s requirements for continued listing; and




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




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





PART I





ITEM 1.                     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS





Not applicable.




ITEM 2.                     OFFER STATISTICS AND EXPECTED TIMETABLE





Not applicable.




ITEM 3.                      KEY INFORMATION




3.A.                      Selected Financial Data





We have derived the following selected consolidated balance sheet data as of December 31, 2009 and 2008, and the selected consolidated operating data for the years ended December 31, 2009, 2008, and 2007 from our audited consolidated financial statements and notes included elsewhere in this annual report, which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. We have derived the selected consolidated balance sheet data as of December 31, 2007, 2006, and 2005 and the selected consolidated operating data for the years ended December 31, 2006 and 2005 from our audited consolidated financial statements not included in this annual report, which have been prepared in accordance with U.S. GAAP.





5




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 31,2009


2008


2007


2006


2005(in thousands, except per share data)Sales

$
8,655


$
22,556


$
23,369


$
25,092


$
27,852Cost of sales


4,710



11,080



14,156



12,942



12,923Gross profit


3,945



11,476



9,213



12,150



14,929Operating expenses:Research and development, gross


3,158



3,781



4,722



4,325



4,212Less - royalty-bearing participation


206



104



110



128



119Research and development, net


2,952



3,677



4,612



4,197



4,093Sales and marketing


5,268



6,351



7,633



7,735



7,624General and administrative


2,065



2,718



2,334



2,177



2,007Total operating expenses


10,285



12,746



14,579



14,109



13,724Operating income (loss)


(6,340
)


(1,270
)


(5,366
)


(1,959
)


1,205Financial income (loss), net


(110
)


52



64



237



198Net income (loss) for the year

$
(6,450
)

$
(1,218
)

$
(5,302
)

$
(1,722
)

$
1,403Net Income (Loss) Per ShareBasic net income (loss) per ordinary share

$
(2.48
)

$
(0.59
)

$
(2.89
)

$
(0.96
)

$
0.8Diluted net income (loss) per ordinary share

$
(2.48
)

$
(0.59
)

$
(2.89
)

$
(0.96
)

$
0.72Weighted average number of ordinary shares used to compute basic net income (loss) per ordinary share


2,604,428



2,060,697



1,833,772



1,828,607



1,786,113Weighted average number of ordinary shares used to compute diluted net income (loss) per ordinary share


2,604,428



2,060,697



1,833,772



1,828,607



1,932,423




Balance Sheet Data




Year Ended December 31,2009


2008


2007


2006


2005(in thousands)Working capital

$
4,528


$
8,975


$
6,143


$
10,846


$
12,345Total assets


9,555



16,836



14,795



21,761



20,715Share capital and additional paid-in capital


37,352



37,213



32,942



32,488



31,691Shareholders' equity

$
3,062


$
9,373


$
6,320


$
11,168


$
12,054





3.B.           Capitalization and Indebtedness





Not applicable.





6





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





Not applicable.




3.D.           Risk Factors





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





Risks Related to Our Business




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




Although we reported a profit in 2005, we incurred operating and net losses from fiscal year 2002 through 2004 and again from fiscal year 2006 through 2009 and we may incur losses in the future. In 2009 we had a record high net loss. As of December 31, 2009, our accumulated deficit was $34.3 million. We will need to generate revenues as well as manage our costs to obtain profitability. Our revenues may not grow or continue at their current level. In addition, in order to meet expanding sales and operations requirements, our expenses may increase. As a result, net cash outflows may continue for the near term, and we may again incur net operating losses. If our revenues do not increase, or if our expenses increase at a greater pace than our revenues, profitability may not be achieved or sustained. We may not be able to sustain or increase profitability on a quarterly or annual basis. Even if we maintain profitability, we cannot assure that future net income will offset our cumulative losses.




Severe global economic conditions may materially adversely affect our business.




Our business and financial condition are substantially affected by global economic conditions. Starting in late 2008 and lasting through much of 2009, a steep downturn in the global economy sparked by uncertainty in credit markets and deteriorating consumer confidence, reduced technology spending by many organizations. Although the global economy showed signs of recovery by the end of 2009 and the beginning of 2010 ,should the economic slowdown resume, it may cause our customers to reduce or postpone their technology spending significantly, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition, which would have a material adverse effect on our business, operating results and financial condition.




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




On December 31, 2009, we had cash and cash equivalents of approximately $1.6 million. Our working capital requirements and the cash flow provided by our operating activities are likely to vary greatly from quarter to quarter depending on the timing of orders and deliveries, and the payment terms offered to our customers. On June 11, 2009, we entered into a Convertible Loan Agreement with STINS COMAN, our controlling shareholder, which was amended on June 17, 2009, pursuant to which STINS COMAN agreed to loan us up to $10 million,$2.85 million of which were already extended to us. For more information, see "Item 7.B. - Related Party Transactions. As of June 23, 2010 we can borrow an additional $7.15 million. Under the Convertible Loan Agreement, we anticipate that our existing capital resources will be adequate to satisfy our working capital and capital expenditure requirements until at least June 2011. However, we may need to raise additional funds in the future in order to satisfy our working capital, capital expenditure requirements and growth strategy. 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.Ifadditional funds are raised through the issuance of equity securities or conversion of loans into equity, the percentage ownership of then current shareholders could be significantly diluted.




7





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





The sales of our enterprise sales solutions decreased in 2009 by 57% compared with year 2008 and by more than 59% compared with year 2007. There is no assurance that we will be able to return and achieve the same or higher levels of enterprise sales in the future.  The sales of our carrier business solutions decreased in 2009 by almost 86% compared with year 2008 and by more than 84% compared with year 2007. There is no assurance that we will be able to return and achieve the same levels of carrier sales in the future.





We may experience significant fluctuations in our quarterly financial performance.





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





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




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




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




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




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




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





Certain of our distributors are permitted to sell competing products or solutions, and there can be no assurance that any of them will continue, or prioritize, marketing and supporting our products or solutions. Certain of our distributors are the only entities engaged in the distribution of our products or solutions in their respective geographical areas. In addition to the independent distributors mentioned above, we also have strategic alliances and relationships with five major cabling companies: 3M, Brand-Rex (acquired by The Gores Group LLC),Belden/CDT (previously known as Nordx), ADC (previously known as Krone) and Furukawa (Brazil). We are highly dependent upon their acceptance of, and active marketing and sales efforts relating to, our products and solutions.




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




8





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




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




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





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





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.  Certain products sometimes contain undetected errors or "bugs," which can cause delays in product introductions or require design modifications. In addition, it often takes several months before the manufacturing costs of new products stabilize, which may adversely affect operating results during such period. If we are unable to introduce new or enhanced products on a timely and cost-effective basis and to gain market acceptance for such products, our business, financial condition and results of operations may be materially adversely affected.


In May 2010we announced that we are broadening our business to take advantage of new laser technologies developed in co-operation with STINS COMAN.





A laser-based speed camera is currently in the final development and certification stage, and is expected to be ready for launch by the beginning of the fourth quarter. There is no assurance that we will be able to finish the development on time and pass the safety regulation needed for a laser based product. We do not have previous experience in this line of products. Even if we will overcome the technological barriers it is difficult to forecast the market response to this technology.




9





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




Our success is dependent, in part, on the willingness of our customers to transition or migrate to new products, such as the SiteWizTM solution we introduced in 2008 and the PaladinTM product we introduced in 2009. We are involved in a continuous process of evaluating changing market demands and customer requirements in order to develop and introduce new products, features and applications to meet changing demands and requirements. We need to be able to interpret market trends and the advancement of technology in order to successfully develop and introduce new products, features and applications. If potential customers defer transition or migration to new products, our return on our investment in research and development with respect to products recently introduced or expected to be introduced in the near future will be lower than we originally anticipated and our results of our operations may suffer. For example, we have recently launched a strategic new product family, PaladinTM, which offers solutions for real-time, active environment and security management, and marks our entrance to a new business line which we call Environment and Security Management. There is no assurance that the market or demand for PaladinTM will develop as rapidly as we expect or at all, or even if such market develops, that we will be successful in marketing and selling PaladinTM and growing revenues to justify our investments.




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





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





Our failure to manage our corporate expansion or contraction effectively could have a material adverse effect on our business, financial control and results of operations.





In 2005 and 2006, we increased our operational expenses as a result of a significant increase in our revenues compared with 2004. This growth placed a significant strain on our management, operational, financial and other resources. Any future growth or contraction may increase this strain. Following a decrease in our sales and margins, we instituted significant work force reductions and cost cutting measures in the third quarter of 2007. In 2009, as a result of the global economic crisis which affected us severely and caused a sharp decrease in our sales, we launched a work force reduction and cost cutting measures which included cutting approximately 35% of our workforce. Furthermore, all or a portion of the expenses associated with any expansion of our operations may be incurred prior to the generation of any associated revenues, and the savings associated with cutbacks may not be realized prior to the decrease in associated revenues.  If there is a substantial increase in demand in, or orders for, our products, we may not have the capacity to increase production using our existing reduced staff and may be unable to timely hire and train new employees.  As a result, we could lose business to competitors with greater capacity and flexibility. If we are unable to manage our corporate expansion or contraction, there could be a material adverse effect on our business, financial condition, and results of operations.




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




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




10





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





Our future performance depends in large part on the continued service of our key technical, sales and management personnel. None of our key personnel is bound by an employment agreement requiring service for any defined period of time. If we are unable to retain members of our management and key employees, we must successfully manage transition and replacement issues that may result from such departures. Our future performance also depends on our ability to attract skilled personnel in the future. 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 Patch-View and PairView technologies and some of our cabling products. These patents expire in 2025, 2015 and 2024, respectively. We also have several patents and design patents pending on our new products. In addition, we enter into nondisclosure and confidentiality agreements with our employees and with certain suppliers and customers with access to sensitive information. There can be no assurance that the steps we have taken to protect our proprietary rights will be adequate to prevent misappropriation of our technology or independent development or sale by others of our technology or of products or solutions with features based upon, or otherwise similar to, our own.





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





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




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





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




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




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




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




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




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




If we fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, it could have a material adverse effect on our business, operating results, investor confidence and stock price.


The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the management assessment requirements of Section 404, which apply to our financial statements beginning with year 2007, have resulted in increased general and administrative expenses and a devotion of management time and attention to compliance activities, and we expect these efforts to require the continued commitment of significant resources. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. We may also identify material weaknesses or significant deficiencies in our internal control over financial reporting. In addition, our internal control over financial reporting has not yet been audited by our independent registered public accounting firm. In the future, if we are unable to assert that our internal controls are effective; our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation and/or sanctions by regulatory authorities, and could have a material adverse effect on our business and operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.




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




Most of our revenues are denominated in U.S. dollars or are dollar-linked.  We collect a portion of our revenues in Europe in Euros while most purchases of materials and components, and most marketing costs, are denominated in dollars or dollar-linked. We incur a material portion of our expenses, principally salaries and related personnel expenses, in Israel, in NIS. As a result, we are exposed to several risks, including that either the NIS or the Euro may increase in value relative to the dollar. If either of such events occurs, the dollar cost of our operations in Israel or Europe will increase and our dollar-measured results of operations will be adversely affected.  In 2009 on an average yearly basis, there was an increase of approximately 10% in value of the dollar in relation to the NIS (following a decrease of approximately 13% in 2008) and there was a decrease of approximately 5% in the value of the Euro in relation to the dollar (following an increase of approximately 7% in 2008). In 2009 the total influence of these two changes was immaterial. We cannot assure you that we will not be materially affected in the future from currency exchange rate fluctuations or the rate of inflation in Israel. If the value of the NIS or the Euro continues to rise in value, relative to the dollar, our business and financial condition could continue to be negatively impacted.





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Changes in our senior management may cause uncertainty in, or be disruptive to, our business.





We have recently experienced significant changes in our senior management. In June 2008, in connection with the acquisition of our control by STINS COMAN, Messrs. Sergey Anisimov and Boris Granovsky joined our Board of Directors, replacing Messrs. Yehuda Zisapel and Meir Barel. Mr. Anisimov was appointed Chairman, replacing Yehuda Zisapel who served as our Chairman since 1989. In addition, Mr. Avi Kovarsky has been appointed as our Chief Executive Officer, replacing Mr. Doron Zinger, who served as our Chief Executive Officer since June 2005. In March 1 2010 Mr. Eran Ayzik was appointed as the new Chief Financial Officer, replacing Ms. Simona Green, who had served as our Vice President of Finance since 2001. In addition, during 2009 and 2010, several other individuals joined and left our Board of Directors and senior management. The difficulties inherent in transitioning the Company under the leadership of new management, particularly a new Chief Executive Officer, and assimilating new management personnel into our corporate culture, may be disruptive to our business, and, during the transition period, there may be uncertainty among investors, vendors, employees and others concerning our future direction and performance.




Risks Related to our Relationship with STINS COMAN





STINS COMAN beneficially owns 68.3% of our ordinary shares and may therefore be able to control the outcome of matters requiring shareholder approval.




As of June 9, 2010, STINS COMAN beneficially owned 68.3% of our outstanding ordinary shares.  Accordingly, STINS COMAN has, subject to special approvals required by Israeli law for transactions involving controlling shareholders, sufficient voting power to elect all of our directors (subject to the provisions of the Companies Law with regard to outside directors), control our management, and approve or reject any merger or similar transaction. STINS COMAN may increase its shareholdings pursuant to the terms of the Convertible Loan Agreement entered between RiT and STINS COMAN on June 11, 2009. This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares. This concentration of ownership may also adversely affect our share price.  In addition, the market price of our ordinary shares may be adversely affected by events relating to STINS COMAN that are unrelated to us.




We may be affected by transactions with STINS COMAN.




We are engaged and may in the future engage in transactions with STINS COMAN or its affiliates. In particular, STINS COMAN (1) is our non-exclusive distributor in the Commonwealth of Independent States market, or CIS market, for our enterprise products since 1994 and for our carrier products since the end of 2008,(2)  has entered into a Convertible Loan Agreement with us, and (3) has entered into a Product Alliance Agreement with us. We believe that such transactions are beneficial to us and are, or will be, conducted upon terms, which are no less favorable to us than would be available to us from unaffiliated third parties. However, you should be aware that STINS COMAN could, subject to compliance with provisions of Israeli law concerning related-party transactions, exercise their influence over our affairs in their own interest.  See "Item 7.B. –Related Party Transactions."




Some members of our board of directors may have conflicts of interest with us.




Two of the members of our board of directors are executive officers and directors of STINS COMAN.  These individuals may have conflicts of interest with respect to business opportunities and similar matters that may arise in the ordinary course of the business of STINS COMAN and us and could favor STINS COMAN in negotiations or relationships between STINS COMAN and us.




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Risks Related to Our Ordinary Shares




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





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





We may not satisfy the NASDAQ Capital Market's requirements for continued listing.  If we cannot satisfy these requirements, NASDAQ could delist our ordinary shares.In addition, we recently recived a NASDAQ notification Deficiency Letter regarding stockholders' equity.




Our ordinary shares are listed on the NASDAQ Capital Market, or NASDAQ, under the symbol RITT. To continue to be listed on NASDAQ, we 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. In December 6, 2007, we received a NASDAQ Staff Deficiency Letter indicating that, for the 30 consecutive business days prior to the date of the letter, the bid price of our ordinary shares closed below the minimum bid price requirement of $1.00 per share.




In August 2009, we effected a one-for-eight reverse split of our ordinary shares, and accordingly the par value of the ordinary shares was changed to NIS 0.8 per share. Following such reverse share split and as of the date of this annual report, the bid price of our ordinary shares satisfies the minimum $1.00 bid price required by NASDAQ.




Following our net losses incurred during the first quarter of 2010, our shareholders’ equity decreased below the $2.5 million required by theNASDAQ listing requirements. For solving this, on June 9, 2010, STINS COMAN converted $1.5 million of the loan amount received under the Convertible Loan Agreement dated June 11, 2009 (as amended on June 17, 2009) with STINS COMAN into 615,485 of our ordinary shares. Following such conversion, of debt to equity, our shareholders' equity increased by approximately $1.5 million, that enabled us to meet the NASDAQ Capital Market continuing listing requirements regarding minimum shareholders' equity of $2.5 million. Despite such efforts, on June 17, 2010, we received a Nasdaq Staff Deficiency Letter indicating that, according to our first quarter results, we were not in compliance with the Nasdaq Capital Market’s $2,500,000 minimum stockholders’ equity requirement, giving the Company 45 days to demonstrate a plan for returning to compliance. We belive that the debt to equity conversion set forth above has substantially solved that problem and that currently we are in compliance with Nasdaq's minimum stockholders' equity requirement. We intend to follow the Nasdaq’s procedures for presenting these facts within 45 days, and expect to receive formal confirmation of continued compliance and approval of continued listing.




We cannot assure you that we will be able to satisfy the minimum bid, or continue to meet the MVPHS, shareholders' equity or other continued listing requirements of NASDAQ in the future. If we are delisted from NASDAQ, trading in our ordinary shares may be conducted, if available, on the "OTC Bulletin Board Service" or, if available, another medium.  In the event of such delisting, an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of our ordinary shares, and our ability to raise future capital through the sale of our ordinary shares could be severely limited.




In addition, if our ordinary shares were delisted from NASDAQ, 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.




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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.




As of June 9, 2010, we had 3,219,913 ordinary shares issued and outstanding, approximately 0.2 million of additional ordinary shares which are issuable upon exercise of outstanding options and an additional  0.2 million ordinary shares which are reserved for issuance pursuant to options which may be granted under our stock option plan.  Sales of the ordinary shares previously issued in private placements, sales of the ordinary shares issuable upon exercise of options, or even the prospect of such sales, could materially adversely affect the market price of our ordinary shares and our ability to raise capital through our offering of securities at acceptable prices. A substantial decrease in the market price of our ordinary shares could also discourage potential customers and partners from doing business with us, and could result in a material adverse effect on our business, financial condition, and results of operations.




We do not intend to pay dividends.




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




Risks Related to Operating In Israel





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





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





Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and the Arab countries in the region. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  Since October 2000, there has been a high level of violence between Israel and the Palestinians which has strained Israel's relationship with its Arab citizens, Arab countries and, to some extent, with other countries around the world. The election in 2006 of representatives of the Hamas movement to a majority of the seats in the Palestinian Legislative Council and its subsequent seizure of control of the Gaza strip have created additional unrest and uncertainty in the region. Further, in the summer of 2006, Israel engaged in a war with Hezbollah, a Lebanese Islamist Shiite militia group, which involved thousands of missile strikes and disrupted most day-to-day civilian activity in northern Israel. Thereafter, thousands of missiles were fired from Gaza at population centers in southern Israel, leading to an armed conflict between Israel and the Hamas in January 2009. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons.  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.





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





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





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





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




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




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




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




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




·
the judgment is enforceable in the state in which it was given;




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




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




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




·
an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the U.S. court.




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





Provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making an acquisition of our company more difficult. For example, under the Companies Law, upon the request of a creditor of either party to a proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger. These provisions could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control of us.  Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law. See “Item 10.B. - Additional Information — Memorandum and Articles of Association — Anti-Takeover Provisions; Mergers and Acquisitions.”




ITEM 4.             INFORMATION ON THE COMPANY





4.A.           History and Development of the Company





Corporate History and Details





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 address on the Internet is http://www.rittech.com. The information on our website is not incorporated by reference into this annual report.





Our agent in the United States is RiT Technologies, Inc., which was incorporated in 1993 under the laws of the State of New Jersey and is located at 900 Corporate Drive, Mahwah, New Jersey 07430, telephone number +1-201-512-1970. Our U.S. subsidiary is primarily engaged in the selling and marketing of our products in the Unites States.





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





Major Business Developments





In June 2010, we issued 615,485 ordinary shares to STINS COMAN in connection with the conversion of approximately $1.5 million from the loan given to us by STINS COMAN pursuant to a Convertible Loan Agreement, dated June 11, 2009, as amended on June 17.As a result of these transactions, as of June 9, 2010, STINS COMAN owns 2,198,817 of our outstanding ordinary shares Representing approximately 68.3% of our outstanding shares. For more information, see “Item 7.B. – Related Party Transactions.”




During 2009, we suffered a sharp decrease in our sales, as a result of which we implemented a worldwide reorganization and cost cutting plan, primarily through a workforce reduction, during the last quarter of 2009 and the first quarter of 2010.




In  May 13, 2010 we announced that we are broadening its business to take advantage of new laser technologies developed in co-operation with STINS COMAN.  We intend to leverage these new technologies to launch new product lines, thereby expanding our addressable market significantly. In connection therwith,we have executed a Product Alliance Agreement with STINS COMAN,dated February 19,2010.see "Item 7.b.-Related Party Transactions."





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Our first new product will be a highly accurate laser-based speed camera designed for use by traffic police. The product is designed to be used by officials to instantaneously measure and document the speed of cars in all types of traffic environments in ways that are highly defensible in court. The product’s use of advanced innovative optical laser technology will make its measurements much more accurate than those taken by other speed cameras on the market, and will give it greater range. This solution is also useful for other types of enforcement agencies, such as the coast guard and others.





The laser-based speed camera is currently in the final development and certification stage, and is expected to be ready for launch by the beginning of the fourth quarter 2010.




There is no assurance that we will be able to finish the development on time and pass the safety regulation needed for a laser based product. We do not have previous experience in this line of products. Even if we will overcome the technological barrier it is difficult for us to forecast the market response to this technology.


Principal Capital Expenditure and Divestitures





During 2009, our capital expenditures totaled approximately $0.1 million (compared to $0.1 million during 2008 and $0.3 million during 2007), 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.





During 2006 and 2008, we did not make any significant divestitures. In 2007, as a result of a change in our development strategy, we wrote off certain redundant development property and equipment in the amount of $0.26 million. During 2008 and 2009, we did not make any significant divestitures.




4. B.           Business Overview





Overview





Enterprise Solutions





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





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





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





Building upon our foundation in structured cabling products, we developed and introduced PatchViewTM, our intelligent infrastructure management solution in 1999. PatchViewTM 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 PatchViewTM for the EnterpriseTM software ("PV4E"). PV4E leverages our unique ability to identify infrastructure connections in real-time and extends the capability to all network resources, from physical connectivity components to switches, servers, PCs and other hard and soft, active and passive, network components. In 2004, we launched PVMaxTM, a new hardware platform for PatchViewTM. During the course of 2005, we introduced the Category 7 STP cabling solution, Versions 4 and 4.1 of the PV4E network management software and also a RiT private label version of a midspan Power over Ethernet solution. In 2006, we introduced our SMARTen 10GB cabling solution, our Management Dashboard application and additional features to the core PV4E product such as automated provisioning. In 2007, we launched PV4E version 5.0, the 5th generation of PV4E. With Version 5.0 of the PV4E, we have extended PV4E’s technology with additional features in the areas of automated provisioning and implementation, PDA-based field implementation support tool (SitePro) and mass data upload tool (SiteBuilder), datacenter oriented features such as integration with intelligent power and environment management and physical layer security and integration. These features were designed to meet the evolving technology needs of customers as they cope with today’s most difficult IT challenges – particularly the mobile workforce, rapidly growing datacenters, distributed infrastructures and a provisioning workload.





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In 2008, we introduced the SiteWizTM solution. SiteWizTM is a software-only solution based on the foundation of the PatchViewTM software (PV4E) but does not include any hardware or cabling components that are part of the PatchViewTM solution. This means that in order to install SiteWiz the customer needs to perform only a software installation process. SiteWizTM is mainly intended to help RIT RiT penetrate additional market segments that are not addressed by PatchViewTM today. The first such segment is customers with existing infrastructure installations that would like to introduce infrastructure management but without changing or affecting the already installed infrastructure (a change required in order to install a management solution such as PatchView). The second segment is that of customers that are unable to or are not interested in investing in the full PatchView solution.





During 2008, we introduced additional features that were incorporated into the PV4E and SiteWiz solutions, including cable infrastructure management feature that allows the user to document the passive cabling infrastructure in detail; additional capabilities to our automatic discovery module such as generic IP phone support and multi-NIC device support; and extended out support for smart power strips, cabinets and blade servers enhancing our customers ability to effectively manage their network assets.





In January 2008, we also launched a new product that complement PV4E and SiteWiz, the Report Center, a flexible and friendly report management solution that allows the users to create their own reports and easily distribute them in the organization.




In January 2009, we launched a new product family, PaladinTM, which offers solutions for real-time, active environment and security management, and marks our entrance to a new business line which we call Environment and Security Management.The Paladin solution, which is primarily based on technology from one of our business partners, is comprised of both hardware and software components. The hardware includes a family of controllers that can interface with and manage a wide variety of sensors and can be used to monitor a facility from the environment, safety and physical security aspects. The software includes a management system that is able to centrally manage a large number of geographically distributed controllers and provide the user with the ability to view the output of the different controllers, configure various thresholds and business rules and define various actions to be taken as a result of the controller’s input. The innovative Paladin solutions are designed for active monitoring and real-time analysis of a premises' temperature, power usage, physical access and many other environmental and security parameters. Taking a preventive rather than a reactive approach, the system consists of both software and hardware components, and is designed to interface fully and easily with the sensors and equipment of other vendors. Paladin can be deployed in a broad variety of mission-critical environments, such as data centers, communications rooms, remote unmanned stations and other facilities and can be used by utilities, telecommunications service providers, military/governmental installations, and other types of organizations.  Its scalable modular architecture enables Paladin to grow with the installation, if required.




In February 2010 we announced a new, enhanced version of EPV appliance-based cabling management solution aimed at large as well as small-to-medium-sized organizations. Through a significant expansion in the size of network that can be monitored, the new EPV allows large as well as small-to-medium-sized organizations to take advantage of the system’s no-risk approach towards the implementation of real-time connectivity monitoring in the communications room and remote sites.The EPV has been designed to be easy to deploy and implement, and does not require any additional software or server installation. As with previous versions, the new EPV offers straightforward, real-time access to all patching information via a user-friendly, permission-based GUI on a web browser, yet requires no compromise on sophisticated features such as email alerts, data export to Excel and task management.




19




In February, 2010 we also introduced the new Active I Technology, its new actionable graphical interface & platform. This latest technology is being introduced into RiT’s PatchView and siteWIZ products making them significantly more powerful and intuitive to use. In the future, RiT intends to use Active I in other solutions and products.




As a web-based system, the Active I gives IT Managers, Facilities Managers and Integrators full visibility and control over the communications room regardless of where they are actually located. Tasks that can be completed through the Active I include the full range of IIM activities,




Carrier Solutions





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





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





During 2004, we introduced PairViewTM 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 PairViewTM system, the PairViewTM Pro, like its predecessor, the PairViewTM, gathers information about the line's telephone number, type, connectivity status, electrical characteristics, and routing, unintrusively from active and inactive pairs. The result is a reliable database, which becomes a platform for more accurate billing, efficient maintenance, and effective network management. In addition, PairViewPro provides a 30% increase (over its predecessors) in the scanning speed and an improved Graphical User Interface – all of which combine to provide carriers with higher technician efficiency and an even faster return on their investment.





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





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





Our Strategy





Our strategy is to utilize our expertise, innovative products and continued research and development activities to strengthen our position as innovators of intelligent infrastructure management and asset management solutions for improved control, utilization and maintenance of networks and data centers. We continuously seek to expand our existing markets and business by existing product enhancement and, new product introduction, and to expand into new markets.





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





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Principal Markets





Enterprise Solutions: Intelligent Infrastructure Management and Structured Cabling Solutions





The current trend of computer networking devices used within enterprises has resulted in a rapid growth of computer networking which has led to a decrease in hardware costs and has significantly increased the amount of network-related services.  Accurate network documentation of large enterprises is vital. Organizations carry out Moves, Adds and Changes (MACs) for people and equipment on an almost daily basis. These changes must be documented accurately, which can sometimes prove very difficult when information is gathered manually and often results in inaccurate information. Companies today are also increasingly relying on mission-critical systems to keep them up and running efficiently.  Disaster recovery from faults must be fast and effective to stop potential losses to the enterprise.





We take an end-to-end approach to infrastructure and network management. Our enterprise product line begins with an extensive range of high-quality structured cabling components, and extends to a full suite of software and hardware products that together comprise the industry-leading PatchViewTM solution. Our SMART cabling components coupled with our PVMax intelligent hardware and sophisticated PatchView for the EnterpriseTM (PV4E) software applications afford full control of network connectivity.  Our asset utilization automates many of today’s laborious provisioning, network planning, implementation and operational activities. We also offer SiteWiz, a powerful cable and asset management (CAM) solution, to bring intelligent infrastructure management to existing sites. PatchView and SiteWiz are designed to be integrated seamlessly with the full range of help desk applications, intrusion detection systems, and others.





Our principal structured cabling solution is the SMART Cabling System that answers the needs of copper and fiber environments. It offers an extensive range of products for enterprise cabling needs and comprises a wide selection of patch panels, cables, patch cords and outlets, as well as other innovative components.





Our complementary products include: Dashboard, an online management tool that enables each user to track personalized Key Performance Indicators, alerts and trends and perform proactive management; SitePro, a software installed on a hand-held device (PDA), that provides the technician with detailed information about tasks that need to be performed in the communication room or datacenter in real time; SiteBuilder, an Excel based utility that enables upload of large amounts of information onto the PV4E/SiteWiz database.





Our end-users of enterprise solutions are typically medium to large-size enterprises.  Many of the recent purchases of our solutions were for datacenters designed to ensure maximal infrastructure and asset utilization, complete redundancy and security of information.





Carrier Solutions: Access Network Data Integrity, Testing & Qualification





Cable and wireless networks have intensified competition in the telecommunications industry. To remain competitive, telcos must differentiate themselves by offering additional services, such as triple play service (voice, video and data). Companies must also be at the forefront in up-to-date operational efficiency while reducing cost of ownership, and ultimately keep their customers satisfied.





This has led telcos to significantly invest in the network and migrate to next generation networks (NGN) and triple play services, and to focus on increasing revenues through mass deployment of high-bandwidth services, such as digital subscriber lines (DSL), and reducing total cost of ownership (TCO) through improved maintenance efficiency plans.





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





21





Telcos database updates are prone to human errors since they are based mainly on field technician reports. These reports are mostly incorrect due to repeated maintenance activities on incorrect records, which lead to labor inefficiencies – ultimately, available and unused phone lines go undetected and unused.





We believe that these changes create a significant opportunity for our carrier solutions that address these industry requirements.





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




·
Identification and recording of the specific services provisioned on each line and the specific phone number on active lines. It also tests inactive pairs for basic line qualification.




·
Identification and recording of the connectivity routing of active and inactive pairs in the local loop. For each pair, PairView generates an end-to-end connectivity map, from the MDF through the various street cabinets, mapping the overall network assets and their capabilities.




·
After mapping and testing, the product imports the data from the telco’s database, compares it with the product's findings and updates the database automatically or manually.







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





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





PairGuideTM is a single point of interface to the Carrier OSS. PairGuide centrally collects the data sent from the test systems, analyzes it and updates the Carrier database to allow optimal OSP qualification and verification programs.  Customized management reports are produced to further enhance the user’s decision making capabilities.




Sales





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





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Our total consolidated sales in 2009, 2008 and 2007, broken down by major product lines and geographical location were as follows:





Classification of sales by major product lines:








Year Ended December 31,2009


2008


2007(Dollars in thousands)Enterprise Solutions

$
8,129


$
18,919


$
20,015Carrier Solutions


526



3,637



3,354$
8,655


$
22,556


$
23,369





Classification of sales by geographical location:1





Year Ended December 31,2009


2008


2007(Dollars

in thousands)


(percentage of

Revenues )


(Dollars in

thousands)


(percentage of

Revenues)


(Dollars

in thousands)


(percentage of RevenuesUnited States

$
1,723



20
%

$
2,911



13
%

$
6,764



29
%Europe


3,461



40
%


13,445



60
%


8,289



35
%Israel


1,155



13
%


1,728



8
%


1,565



7
%Latin America


351



4
%


944



4
%


3,092



13
%Asia Pacific


1,494



17
%


2,728



12
%


3,289



14
%Rest of the world


471



6
%


800



3
%


370



2
%$
8,655



100
%

$
22,556



100
%

$
23,369



100
%





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




Seasonality




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





Manufacturing





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.





In addition, the components used in our products may be subject to significant volatility in prices for raw materials and components. For example, since 2006 until the first quarter of 2010, the price of copper required for the manufacture of some of our components increased significantly. In 2009 the price of copper more than doubled (from $3,000 to $7,000 per ton). As a result we had to increase the selling price to our customers for such components. Significant volatility in prices for raw material and components may result in a required increase in prices that, if we are unable or fail to apply, may adversely affect the results of our operations.




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Marketing Channels





Enterprise Solutions





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





Our distributors generally sign a non-exclusive International Distributor Agreement. A small minority of our distributorships 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 is neither obligated to deal with us exclusively nor contractually subject to minimum purchase requirements with respect to our products or solutions. In the CIS market, we designated STINS COMAN, our principal shareholder, as our non-exclusive distributor. For more information, see “Item 7.B. – Related Party Transactions.”





We maintain a representative office in Moscow, Russia, which coordinates marketing activities in the CIS market and a representative office in Beijing, China. In addition, we retain local representatives in London, England, Prague, Czech Republic, Milan, Italy, Brazil and Mumbai, India. Certain risks related to international sales and dependence upon distributors and resellers are described above in "Item 3.D - Risk Factors."





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





In addition, we, in conjunction with our distributors, prepare exhibitions of our products worldwide, place advertisements in local publications, encourage exposure in the form of editorials in communications journals and prepare direct mailings (both print and electronic) focusing on our products. We have published an electronic catalog, which is available both on CD-ROM and on-line through our Web site. In 2009, our three largest distributors accounted for approximately 8%, 6% and 6%, respectively, of our enterprise solutions sales.





The leading vendors of data communications network infrastructure equipment have begun adding management capabilities to their solution portfolios. Recognizing this interest, we have several strategic alliances for joint marketing and sale of our PatchViewsystem as a means of expanding our market exposure and our customer base and enhancing our enterprise solutions sales prospects. Our existing strategic partnerships and relationships include Brand-Rex (selling PatchViewunder the brand name SmartPatch), Belden/CDT (previously known as Nordx/CDT) (selling PatchViewunder the brand name IntellimacPlus), LS Cable (selling PatchView under the PatchView brand), ADC (previously known as Krone) (also known as ADC/Krone in Europe) (selling PatchView under the brand name TrueNet) and other local strategic partnerships.  In 2009, our strategic partners together accounted for approximately 25.9% of our enterprise sales.




Carrier Solutions





We market our carrier solutions directly to telcos, with the aid of local agents and distributors. Completing a sale of products such as the PairView or PairQTMsystems to telcos typically requires approval processes by customers. The sales cycle usually takes 18 to 36 months. The length of the approval process by customers 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 may involve 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.





24





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





Customer Service and Support





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





Enterprise Solutions





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





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





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





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





Carrier Solutions





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





Dependence on Patents, Licenses and Material Contracts





We rely upon a combination of patents, patent applications, trademarks, copyrights, trade secret laws, contractual restrictions and technical measures to establish and protect our proprietary rights in our products, systems and technologies. We hold patents on our PatchView and PairView technologies and some of our cabling products. These patents expire in 2025, 2015 and 2024, respectively. We also have several patents and design patents pending on our new products. In addition, we enter into nondisclosure and confidentiality agreements with our employees and with certain partners, suppliers and customers with access to sensitive information. We cannot assure you that the steps we have taken to protect our proprietary rights will be adequate to prevent misappropriation of our technology or independent development and sale by others of software products with features based upon, or otherwise similar to, those of our products and solutions.





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





25





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 products from us. In 2009 and 2008, there was no customer that accounted for more than 10% of our total sales. See Note 8B.1(c) to our Consolidated Financial Statements included elsewhere in this annual report





Competitive Position





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




Enterprise Solutions





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





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




Carrier Solutions





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





26





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





Environmental Regulation





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





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




4. C.         Organizational Structure





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





In 1997, we incorporated a wholly-owned subsidiary in Israel, RiT Tech (1997) Ltd., which was intended to make various investments, including in our securities. As of December 31, 2009, RiT Tech (1997) Ltd. held 2,125 (0.08%) of our outstanding shares. Under the Israeli Companies Law, the shares held by our subsidiary  bear no voting rights.





Until June 2008, we were associated with the “RAD BYNET group,” a group of companies which is affiliated with our former principal shareholders, Yehuda Zisapel and Zohar Zisapel.




4. D.          Property and Equipment





We do not own any real property.





We lease an aggregate of 15,758 square feet of office and manufacturing premises in Tel Aviv, Israel and we lease 6,545 square feet of warehousing premises in Rosh Ha'ayin, Israel. Aggregate annual lease payments in 2009 for the Tel Aviv and Rosh Ha'ayin premises were approximately $414,000.





We lease approximately 1,190 square feet of office premises for our representative office in Beijing, China at an annual rent of approximately $21,000. We lease 746 square feet of office premises for our representative office in Moscow, Russia at an annual rent of approximately $44,000. RiT Technologies, Inc., our U.S. subsidiary, leases approximately 2,288 square feet in Mahwah, New Jersey, at an annual rent of approximately $42,000. See "Item 7 – Major Shareholders and Related Party Transactions" and Notes 5B and 9 to our Consolidated Financial Statements included elsewhere in this annual report.





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





27





ITEM 4A.          UNRESOLVED STAFF COMMENTS





Not applicable.





ITEM 5.                       OPERATING AND FINANCIAL REVIEW AND PROSPECTS





5.A.           Operating Results





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





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





Overview





We commenced operations in 1989. We are a leading provider of intelligent solutions for infrastructure management, asset management, environment and security, and network utilization. Our enterprise solutions address data centers, communication rooms and workspace environments, ensuring maximum utilization, reliability, decreased downtime, physical security, automated deployment, asset tracking, and troubleshooting. Our environment and security solutions enable companies to effectively control their data centers, communications rooms and remote physical sites and facilities in real-time, comprehensively and accurately. Our carrier solutions provide carriers with the full array of network mapping, testing and bandwidth qualification capabilities needed for access network installation and service provisioning.





2009 Financial Highlights





In 2009, the sales of our enterprise sales solutions decreased by 57% compared with 2008 mainly due to a decrease in our European sales. The decrease in our sales is mainly related to the ongoing capital market crisis and to the economic situation. The sales of our carrier business solutions decreased in 2009 by almost 86% compared with 2008, primarily due to the economic crisis.




In 2009, the geographical breakdown of sales changed compared with 2008. Our sales to Europe decreased significantly while our sales to the United States increased. In 2009, the classification of sales by geographical regions was approximately 40% of sales to Europe compared with approximately 60% in 2008 and approximately 20% of sales to the United States compared with approximately 13% in 2008. The sales to the European market in 2009 were $3.5 million compared with $13.4 million in 2008. This significant decrease is mainly due to the global economic crisis.





Overall sales in 2009 were approximately $8.7 million, a decrease of almost 62% compared with sales of approximately $22.6 million in 2008.  This significant decrease in our 2009 sales was due mainly to the decrease in our enterprise solutions sales in Europe as a result of  the economic crisis and the situation in our markets during such period. See the table under "Item 4.B – Sales by Major Product Lines.”





The cost of sales as a percentage of revenues decreased by approximately 5% compared with 2008. This decrease resulted mainly from the mix of our enterprise and carrier sales during the year.





Operating expenses were approximately $10.3 million in 2009, a decrease of almost 19% compared with operating expenses of approximately $12.7 million in 2008. The decrease is mainly related to a reduction in compensation costs attributable to our sales employees and commissions. Specifically, we implemented a worldwide reorganization and cost cutting plan, primarily through a workforce reduction, during the last quarter of 2009 and the first quarter of 2010. This workforce reduction was required due to the Company’s revenues results of the first three quarters of 2009, which were significantly lower than expected due both to delays in the timing of substantial orders and the ongoing economic slowdown in our target markets. With the goal of preserving cash and ensuring operating flexibility, we decided that it was necessary to align expenses with current business levels, and therefore initiated the cost-cutting steps. The plan was implemented in two stages; first stage of layoffs of approximately 15% of our manpower, during November 2009, and the second stage, which included layoffs of another 20% of our workforce, occurred during the first quarter of 2010.




28





Another reason for the decrease in our operating expenses is a one-time expense recorded in the second quarter of 2008 in connection with the changes in our principal shareholders and senior management.





Our cash and cash equivalents decreased from $6.1 million as of December 31, 2008 to approximately $1.6 million as of December 31, 2009.  The decrease is mainly attributed to the $4 million private placement transaction we completed in September 2008 and to decreasing sales in 2009 due to financing operating activities while not generating sufficient sales.




On June 11, 2009, we entered into a Loan Agreement (as amended on June 17,2009) with STINS COMAN, our controlling shareholder.whereby STINS COMAN agreed to extend us a loan of up to $10 million For additional details and information, see "Item 7.B. – Related Party Transactions."







As of June 23, 2010, we have drawn a total principal amount of $2.9 million under the STINS COMAN Loan Agreement.





We may need to draw additional funds in the future to support our operations and our growth strategy.





Critical Accounting Policies





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




Our critical accounting polices include:




Revenue recognition





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 collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. When the sale arrangement includes customer acceptance provisions, revenue is not recognized before we have demonstrated that the criteria specified in the acceptance provisions have been satisfied, including a written approval received from the customer.





We apply the guidance in “ASC Topic 605 Revenue Recognition” to determine if the contract or arrangement contains more than one unit of accounting, as defined in ASC Topic 605, and, if applicable, the allocation of the arrangement consideration to such units of accounting.





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





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





29





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





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





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




Allowances for product warranties





It is our policy to grant a warranty for periods of 12 to 36 months, except with respect to our end-to-end cabling systems (the SMART Cabling System, SMART GIGA Cabling System and CLASSix Cabling System) which, when installed by a Certified Cabling Installer, and registered by us, are granted 15-year warranties (for the SMART Cabling System and the SMART GIGA Cabling System) or 20-year warranties (for the CLASSix Cabling System) for system performance. The balance sheet provision for warranties for all periods through December 31, 2009 is determined based upon our experience regarding the relationship between sales and actual warranty expenses incurred. See Note 2L to our Consolidated Financial Statements included elsewhere in this annual report. This determination may require the exercise of certain judgments, estimates and assumptions.





The warranty for our products is a basic manufacturer warranty accounted for under ASC Topic 450 Contingencies and is not a portion of multiple element revenue.  Besides the warranty period, we have no obligation for continuing customer service and support.





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





·
number and nature of  systems sold;





·
price;





·
remaining warranty period; and





·
elements related to the customer’s history and traits (e.g., sales region, number of systems bought, past warranty claims experience).




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





Allowances for doubtful accounts





Our financial statements include an allowance that we believe reflects adequately the loss inherent in receivables for which collection is in doubt.  In determining the adequacy of the allowance, we based our estimate on information at hand about debtors' financial situations, the volume of their operations, aging of the balance and evaluation of the security received from them or their guarantors and the existence of credit insurance policies and the terms of payment. If there is a major deterioration in a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due to us could be adversely affected.  This would result in an increase in our general and administrative expenses by increasing the allowance for bad and doubtful debts and would decrease the amount of our trade receivables.





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The balance sheet allowance for doubtful debts for all the periods through December 31, 2009 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 is 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.  Our write off’s of inventory in 2009 were $0.1 million compared with $0.2 million in 2008.





Accounting for Stock-based Compensation





On December 31, 2009, we had several employee compensation plans, which are more fully described in “Item 6.E.-Share Ownership”. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of ASC Topic 718 Compensation – Stock Compensation (“ASC Topic 718”), and related interpretations as permitted by ASC Topic 718. Effective January 1, 2006, we adopted the fair value recognition method detailed in ASC Topic 718using the modified prospective transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of ASC Topic 718, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718.





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





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


·
Dividend yield of zero percent for all relevant periods.


·
Risk free interest rates are as follows:




Year ended December 31,
Interest Rate (%)2009
1.872008
2.752007
4.51





·
Expected term of 4 years for each option granted.


·
Expected volatility of 88.54% for the year ended December 31, 2009 (81.9% and, 68.7% for the years ended December 31, 2008 and 2007, respectively).





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





With respect to non-employees, we apply the fair value-based method of accounting set forth in ASC Topic718  and ASC Topic 505 Equity, 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 fully vested.





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Accounting for Income Taxes





As of January 1, 2007, we adopted ASC Topic 740 Income Taxes, which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC Topic 740 Income Taxes. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax obligations in accordance with ASC Topic 740 Income Taxes and ASC Topic 450 Contingencies.




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 $8.6 million as of December 31, 2009, 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. For the year ended December 31, 2009, we did not generate any taxable income. In the event that we generate taxable income in the future, we may be required to adjust our valuation allowance.





While we believe the resulting tax balances as of December 31, 2009, 2008 and 2007 are appropriately accounted for in accordance with ASC Topic 740, ASC Topic 450 Contingencies and ASC Topic 740 Income Taxes as applicable; the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire. See Note 7 to our Consolidated Financial Statements included elsewhere in this annual report.




Financial Data





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





Year Ended December 31,2009


2008


2007Sales


100.0
%


100.0
%


100.0
%Cost of sales


54.4



49.1



60.6Gross margin


45.6



50.9



39.4Operating expenses:Research and development, gross


36.5



16.8



20.2Less – royalty-bearing participation


2.4



0.5



0.5Research and development, net


34.1



16.3



19.7Sales and marketing


60.8



28.2



32.7General and administrative


23.9



12.0



10.0Total operating expenses


118.8



56.5



62.4Operating loss


(73.2
)


(5.6
)


(23.0
)Financial income (loss), net


(1.3
)


0.2



0.3Net loss for the year


(74.5
)


(5.4
)


(22.7
)





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Year Ended December 31, 2009 Compared with Year Ended December 31, 2008





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





Sales decreased to approximately $8.7 million in 2009 from approximately $22.6 million in 2008, primarily due to a decrease in our enterprise solutions revenues in Europe. There is high correlation between our enterprise solutions sales and the real-estate market, if new offices or buildings are not constructed, then our solutions are not needed. Our carrier business revenues decreased by more than 85% in 2009 compared to 2008, primarily due to the economic crisis which lead to closing of very small number of purchase orders. Our enterprise business revenues decreased by 57% in 2009 compared to 2008.  The main reason for this decrease is lower sales in Europe, associated mainly with the economic situation and market challenges especially in the commercial real-estate sector.





Cost of Sales.  Cost of sales consists primarily of materials, sub-contractors expenses, warranty expenses, compensation costs attributable to employees, write-down of inventory and overhead expenses related to our manufacturing operations.





Cost of sales was approximately $4.7 million in 2009 compared with $11.1 million in 2008. Cost of sales as a percentage of sales equaled 54.4% in 2009 compared with 49.1% in 2008. This insignificant increase resulted mainlyfrom the mix of our enterprise sales during the year, which had a smaller proportion of high margin sales compared with 2008. Our inventory write-down charge in 2009 was $0.1 million compared with $0.2 million in 2008. The decrease is mainly due to our improved purchasing and sales forecast processes. See Note 8B2 to our Consolidated Financial Statements included elsewhere in this annual report.




Gross Margin.Gross margin decreased from 50.9% in 2008 to 45.6% in 2009, primarily due to the increase in our cost of sales, as described above.





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.





Gross Research and Development expenses were approximately $3.2 million in 2009 compared with $3.8 million in 2008. As a percentage of sales, gross research and development expenses increased to 36.5% of sales in 2009 from 16.8% of sales in 2008, resulting mainly from the sharp decrease in our sales in 2009.





Grants from the Israeli Office of the Chief Scientist were approximately $0.2 million in 2009 and $0.1 million in 2008.




Sales and Marketing Expenses. 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 $5.3 million in 2009 compared with approximately $6.4 million in 2008. The decrease is mainly related to the decrease in our sales which caused to reduction in compensation costs attributable to our sales employees and commissions.





General and Administrative Expenses. General and administrative expenses consist primarily of compensation costs for administration, finance and general management personnel, office maintenance and administrative costs and doubtful debt expenses.





General and administrative expenses were approximately $2.1 million in 2009 compared with approximately $2.7 million in 2008. The decrease is primarily due to a one-time expense recorded in the second quarter of 2008 in connection with the changes in our principal shareholders and senior management.





Financing Income (Loss) Net. Net financing loss was approximately $0.1 million in 2009 compared with net income of approximately $0.05 million in 2008. The loss in 2009 is primarily related to translation adjustments during the second quarter that were caused by higher exchange rate of the dollar.





Net Loss.We had a net loss of approximately $6.4 million in 2009 compared with a net loss of approximately $1.2 million in 2008. This significant increase in net loss is attributable mainly to the decrease in our sales.





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Year Ended December 31, 2008 Compared with Year Ended December 31, 2007





Sales.





Sales decreased to approximately $22.6 million in 2008 from approximately $23.4 million in 2007, primarily due to a decrease in our enterprise solutions revenues in the United States. Our carrier business revenues increased by more than 8% in 2008 compared to 2007, primarily due to closing of higher number of new and repeat purchase orders. Our enterprise business revenues decreased by more than 5% in 2008 compared to 2007.  The main reason for this decrease is lower sales in the United States, primerly as a result of a significant decrease in our OEM sales.





Cost of Sales.





Cost of sales was approximately $11.1 million in 2008 compared with $14.2 million in 2007. Cost of sales as a percentage of sales equaled 49.1% in 2008 compared with 60.6% in 2007. This decrease resulted mainlyfrom the decrease in our inventory write-down charge in 2008 and from the mix of our enterprise sales during the year, which had a larger proportion of high margin sales compared with year 2007. Our inventory write-down charge in 2008 was $0.2 million compared with $1.8 million in 2007. The decrease is mainly due to our improved purchasing and sales forecast processes. See Note 8B2 to our Consolidated Financial Statements included elsewhere in this annual report.




Gross Margin.Gross margin increased from 39.4% in 2007 to 50.9% in 2008, primarily due to the significant decrease in our cost of sales.





Research and Development Expenses





Gross Research and development expenses were approximately $3.8 million in 2008 compared with $4.7 million in 2007. As a percentage of sales, gross research and development expenses decreased to 16.8% of sales in 2008 from 20.2% of sales in 2007, resulting mainly from the cost reduction program implemented in the third quarter of 2007 which resulted in a significant decrease in our compensation costs attributable to our research and development employees.





Grants from the Chief Scientist were approximately $0.1 million in 2008, at the same level of the amounts as in 2007.




Sales and Marketing Expenses.





Sales and marketing expenses were approximately $6.4 million in 2008 compared with approximately $7.6 million in 2007. The significant decrease is mainly related to the cost reduction plan implemented in the third quarter of 2007 which resulted in a significant decrease in our compensation costs attributable to our marketing and sales employees and to lower marketing and promotion expenses incurred by us in 2008 compared to 2007.





General and Administrative Expenses.


General and administrative expenses were approximately $2.7 million in 2008 compared with approximately $2.3 million in 2007. The increase is primarily due to a one-time expense recorded in the second quarter of 2008 in connection with the changes in our principal shareholders and senior management.





Financing Income Net. Net financing income was approximately $0.05 million in 2008 compared with approximately $0.06 million in 2007.





Net Loss.We had net loss of approximately $1.2 million in 2008 compared with a net loss of approximately $5.3 million in 2007. This significant decrease is attributable mainly to the cost reduction program implemented in the third quarter of 2007 and the decrease in our inventory write-offs charge in 2008 compared with 2007.





Government Policies





We are entitled to receive tax benefits under the Israeli Law for the Encouragement of Capital Investments, 5719- 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 materially harm our business, financial condition and results of operations. For more information about Approved Enterprises, see "Item 10.E. –Israeli Tax Considerations – Law for the Encouragement of Capital Investments, 1959" below and Note 7B to our Consolidated Financial Statements included elsewhere in this annual report.





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





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Market Risk





For a description of market risk, including the impact of interest rates and foreign currency exchange rates on us, see Item 11.




Recently Issued and Adopted Accounting Pronouncements





SFAS No.168





In June 2009, the FASB issued SFAS No. 168 (“SFAS 168”), “Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles”. The FASB Accounting Standards CodificationTM (“Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our year ending December 31, 2009, all references made by us to GAAP in our consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, does not have an impact on our financial position, results of operations and cash flows.





ASU 2009-13 - Multiple-Deliverable Revenue Arrangements





ASC Subtopic 605-25, Revenue Recognition—Multiple-Element Arrangements, sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. One of those current requirements is that there be objective and reliable evidence of the standalone selling price of the undelivered items, which must be supported by either vendor-specific objective evidence (VSOE) or third-party evidence (TPE).





ASU 2009-13 amends ASC Subtopic 650-25 to eliminate the requirement that all undelivered elements have VSOE or TPE before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered.  In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements.





The Consensus is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.  If a company elects early adoption and the period of adoption is not the beginning of its fiscal year, the requirements must be applied retrospectively to the beginning of the fiscal year. Retrospective application to prior years is an option, but is not required.  In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impact of the changes.





We do not expect the adoption of ASU 2009-13 to have a material impact on our balance sheet or statement of operations.





ASU 2009-14 - Certain Revenue Arrangements that Include Software Elements





ASC Subtopic 985-605, Software-Revenue Recognition,addresses the accounting for revenue transactions involving software.  Currently, that guidance applies to revenue arrangements for products or services that include software that is “more-than-incidental” to the products or services as a whole.





ASU 2009-14 amends ASC Subtopic 985-605 to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality.




35





The Consensus will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If a company elects early adoption and the period of adoption is not the beginning of its fiscal year, the requirements must be applied retrospectively to the beginning of the fiscal year. Retrospective application to prior years is an option, but is not required.  In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impact of the changes.





We do not expect the adoption of ASU 2009-14 to have a material impact on our balance sheet or statement of operations.





ASC 820-10-65-4, Fair Value Measurements and Disclosures





ASC 820-10-65-4, Fair Value Measurements and Disclosures, required us to apply our provisions to fair value measurements of non-financial assets and non-financial liabilities that were recognized or disclosed at fair value in the financial statements on a nonrecurring basis.





It also provided guidance for estimating fair value in accordance with the guidelines of Fair Value Measurements, when the volume and level of activity for the asset or liability havesignificantly decreased. It also included guidance on identifying circumstances that indicated a transaction was not orderly. It also emphasized that even if there had been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remained the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.





We adopted ASC 820-10-65-4 but it did not have a material impact on our balance sheet or statement of operations.





ASC 320-10-65-1 Recognition and Presentation of Other-Than-Temporary Impairments





ASC 320-10-65-1, Recognition and Presentation of Other-Than-Temporary Impairments, provided that the objective of an other-than-temporary impairment analysis under existing U.S. GAAP was to determine whether the holder of an investment in a debt or equity security for which changes in fair value were not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment was impaired. An investment is impaired if the fair value of the investment is less than its amortized cost basis. It also amended the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.





This guidance was effective for interim and annual reporting periods ending after June 15, 2009.





We adopted ASC 320-10-65-1 but it did not have a material impact on our balance sheet or statement of operations.





ASC 470-20 – Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)





ASC 470-20, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement), was issued clarifying that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should be separately accounted for with regards to the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC 470-20 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.





36





We adopted ASC 470-20 but it did not have a material effect on our balance sheet or statement of operations.





ASU 2009-05, Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value





ASU 2009-05, Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value, allows companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset, according to ASU 2009-05 that amends ASC Topic 820, Fair Value Measurements.  The update addresses practice difficulties caused by the tension between fair-value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place.





The new guidance iseffective for interim and annual periods beginning after August 27, 2009,and applies to all fair-value measurements of liabilities required by GAAP.  No new fair-value measurements are required by the standard.





We adopted ASU 2009-05 but it did not have a material impact on our balance sheet or statement of operations.




37





5.B.           Liquidity and Capital Resources





Since our initial public offering in 1997, 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 and recently, also financing from our major shareholder STINS COMAN . We believe that our cash and cash equivalents together with cash generated from operations will be sufficient to finance our operations for at least the next 12 months.  However, we cannot assure you that our actual cash requirements will not be greater than we currently expect. In addition, depending upon our future level of revenues and the strategies that we have adopted, we may need to raise additional debt or equity capital to meet our working capital needs in the future.





Our principal financing activities during the past three years were:





·
In March 2008, we arranged for a $1 million line of credit from a bank. In connection with the change of control we underwent in June 2008, the credit line expired. We were not able to secure a new credit line since then.




·
In September 2008, we completed a private placement transaction in which we issued 769,231 ordinary shares (6,153,846 pre- reverse split) to STINS COMAN, our principal shareholder, for a total investment of $4.0 million, reflecting a $5.2 purchase price per share ($0.65 pre- reverse split). The private placement replaced a $4.0 million loan we secured from STINS COMAN in June 2008. See “Item 7.B. – Related Party Transactions.”




·
In June  2009, we  entered into a Convertible Loan Agreement with STINS COMAN, according to which,  STINS COMAN agreed to extend to us a loan of up to $10 million. See “Item 7.B. – Related Party Transactions.”




·
In October 2009, we launched a cost reduction plan aiming to reduce costs by 35% in a 2 stage plan ending in  the first quarter of 2010.




·
In January 2010, we entered in to a short term loan agreement with Newcon International Ltd., a Canadian corporation affiliated with STINS COMAN. See “Item 7.B. – Related Party Transactions.”




·
In May  2010, as contemplated by the Convertible Loan Agreement with STINS COMAN we entered into a Share Purchase Agreement with STINS COMAN , for the sale by private placement of  ordinary shares in connection with the conversion of approximately $1.5 million of the loan amount owed to STINS COMAN.  See “Item 7.B. – Related Party Transactions.”




·
Capital expenditures were approximately $0.3 million in 2007, $0.1 million in 2008 and $0.1 million 2009. These expenditures were principally for machinery, computers and research and development equipment purchases. During 2010, we expect to invest additional resources in capital equipment at the same level as in 2009. We did not have any material commitments for capital expenditures as of December 31, 2009.




Working Capital and Cash Flows





On December 31, 2009, we had cash and cash equivalents of approximately $1.6 million, compared with $6.1 million on December 31, 2008. This decrease resulted primarily from the $6.4 million net loss in 2009.




Net cash used for operating activities was $6.4 million in 2009 compared to $1.6 million in 2008 and $2.4 million in 2007. Net cash used for operating activities increased in 2009 primarily as a result of the significantly decreased sales which resulted in a decrease in trade receivables and in a high net loss for the year. Net cash used in investing activities was $0.1 million in 2009 and $0.1 million in 2008 and $0.3 million in 2007. Our principal investing activity in 2009, 2008 and 2007 was the purchase of property and equipment.





Our contractual and contingent obligations and commitments on December 31, 2009, primarily consisted of obligations associated with our future operating lease obligations, our suppliers' obligations and a contingent liability to the Israeli Office of the Chief Scientist. See Note 5 to our Consolidated Financial Statements included elsewhere in this annual report and “Item 5.F.-Tabular Disclosure of Contractual Obligations” for a table of our material contractual obligations. We expect to finance these contractual commitments with cash on hand ,cash generated from operations and loans from STINS COMAN  as needed.





38





Impact of Related Party Transactions





We have entered into a number of agreements with our principal shareholder or its affiliates. Please see “Item 7.B. – Related Party Transactions” below for specific details as to certain related party transactions entered into by us.





We believe that the terms of these related party transactions are beneficial to us and no less favorable to us than terms which might be available to us from unaffiliated third parties. Our management reviewed the pricing and other items of such transactions and confirmed that they were not materially different than could have been obtained from unaffiliated third parties.





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




5.C.           Research and Development, Patents and Licenses





We believe that our future success will depend upon our ability to enhance our existing products and solutions and introduce new commercially viable products and solutions that address the demands of evolving markets for intelligent infrastructure solutions and, more specifically, enterprise infrastructure solutions and outside plant qualification and management products on a timely basis. As part of the product development process, we work closely with current and potential customers, distribution channels and leaders in certain industry segments to identify market needs and define appropriate product specifications. Our employees also participate in numerous industry and standards forums in order to stay informed about the latest industry developments. As of December 31, 2009, we employed 23 persons in research and development.





Our gross research and development expenses were approximately $3.2 million in 2009, $3.8 million in 2008 and $4.7 million in 2007 (36.5%, 16.8% and 20.2% respectively of our total 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 $0.2 million in 2009 and $0.1 million in each of 2008 and 2007. We believe that our investment in product development activities in 2010 will be at the same level of our expenditures in 2009.





Grants from the Office of the Chief Scientist





The Government of Israel encourages research and development projects through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, pursuant to the Law for the Encouragement of Industrial Research and Development, 5744 - 1984, and the regulations promulgated thereunder, or the R&D Law.  Generally, grants from the Chief Scientist constitute up to 50% of qualifying research and development expenditures for particular approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to 5% is due on revenues from sales of products and related services that incorporate know-how developed, in whole or in part, within the framework of projects funded by the Chief Scientist. Royalty obligations are usually 100% of the dollar-linked amount of the grant, plus interest. The royalty rate applicable to our programs is 3.5%.





The R&D Law generally requires that the product developed under a program be manufactured in Israel.  However, upon a notification to the Office of the Chief Scientist a portion of up to 10% of the manufacturing volume may be performed outside of Israel. Upon the approval of the Chief Scientist, a greater portion of the manufacturing volume may be performed outside of Israel. Ordinarily, any such approval will be conditioned upon acceleration of the rate of royalties and an increase in the total amount to be repaid to up to 300% of the grants, depending on the portion of the total manufacturing volume that is performed outside of Israel. The R&D Law further permits the Chief Scientist, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing rights into Israel, in lieu of the increased royalties. The R&D Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program.





39





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





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





The funds available for Chief Scientist grants under the annual budget of the State of Israel were reduced in 1998, and the Israeli authorities have indicated that the government may further reduce or abolish Chief Scientist grants in the future.  Even if these grants are maintained, we cannot presently predict the amounts of any future grants that we may receive.  Since 1998, we have received such royalty-bearing grants from the Chief Scientist. As of December 2009 we have approvals for grants to be received in 2010 for two different projects. On December 31, 2009, our unrecognized contingent liability, including interest, to the Chief Scientist in respect of grants received, was approximately $1 million.




5.D.     Trend Information




General. During the global economic slowdown of late 2008 and most of 2009, many companies, including our customers, have reduced or postponed their technology spending significantly. Although the global economy showed signs of recovery by the end of 2009, should the economic slowdown resumes, it may cause our customers to further reduce or postpone their technology spending significantly, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition.




Our Market. Significant marketplace trends have greatly reduced the overall profitability of pure product-based business models. Rather, professional services backed by advanced technical expertise are emerging as the key to long-term success. In keeping with market trends, we have launched professional services in 2008 in an effort to broaden our solutions portfolio and increase our revenue stream. However, at this point, we are unable to predict how our positioning will affect future sales. We are also looking for new markets and the first new market we are trying to approach is speed control cameras. At this stage we are unable to predict what will be the outcome of this trend.





As described in "Item 4.B – Competitive Position," two enterprise products directly compete with our PatchViewsystems: the iTRACS Infrastructure Manager system produced by the iTRACS Corporation and the iPatch System produced by Systimax Solutions. The number of cabling vendors around the world that have partnered with us or with one of the other IIM solution providers and now offer an IIM solution in their product portfolio has increased and, consequently, competition in this market is likely to continue to intensify in the future.





40





5.E.           Off-Balance Sheet Arrangements





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




5.F.           Tabular Disclosure of Contractual Obligations





The following table summarizes our contractual obligations related to our long-term debt, operating leases and accrued severance pay, as of December 31, 2009:





Total(Dollars in millions)


Less than 1 year

(Dollars in millions)


1-3 years

(Dollars in millions)


3-5 years

(Dollars in millions)


More than 5 years

(Dollars in millions)Contractual ObligationsLeases on Premises


0.7



0.4



0.3



-



-Operating Lease Obligations


0.5



0.3



0.2



-



-Purchase Obligations


1.3



1.3



-



-



-Liability in respect of employees' severance benefits*


1.8



0.2



-



-



1.6Principal shareholder convertible loan


1.8







1.8



-Total

$
6.1


$
2.2


$
2.3



-


$
1.6





*Severance pay obligations to our Israeli employees, as required under Israeli labor law, are payable only upon termination, retirement or death of the respective employee.


On December 31, 2009, our unrecognized contingent liability to the Chief Scientist in respect of grants received was approximately $1 million including interest. See Note 5A to our Consolidated Financial Statements included elsewhere in this annual report.  We are only required to repay this liability in the form of royalties based on revenues derived from products developed with funding from these grants.




ITEM 6.                    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





6.A.           Directors and Senior Management





The following table sets forth, as of the date hereof, the name, age and position of each of our directors and executive officers:





Name

Age

PositionSergey Anisimov


55

Chairman of the Board of DirectorsAvi Kovarsky


52

President and Chief Executive OfficerBoris Granovsky


42

DirectorIsrael Frieder (1)(2)(3)(4)


60

DirectorRoman Govorov (1)(3)(4)


32

DirectorGalia Druker (1)(2)(3)


62

DirectorEran Ayzik


51

Chief Financial OfficerJacob Elisha


53

Vice President SalesOfer Herman


43

Vice President SalesBenny Sharabi


40

Vice President Research and DevelopmentBen Carmi


32

Vice President OperationsJulia Geva


35

Assistant Vice President Marketing


___________________




(1) Designated as “Independent Director” under NASDAQ Marketplace Rules.


(2) External Director.


(3) Member of the Audit Committee.


(4) Member of the Compensation and Nominating Committee.





41





Mr. Sergey Anisimov has served as the Chairman of our Board of Directors since June 2008. In 1992, Mr. Anisimov founded STINS COMAN Incorporated, a Russian holding company which is engaged, through its group companies, in IT system distribution, integration, training and service, and since then has served as its president. Mr. Anisimov has over 30 years of experience in various positions in the information technology business. He received an engineer diploma from the Moscow Institute of Aviation Technology and holds a Ph.D. in technologies from Moscow State Technical University N.A. N.E. Bauman.




Mr. Avi Kovarsky has served as our Chief Executive Officer since July 2008. He served in various sales and marketing positions at RiT from 1997 to 2007, including Vice President of Sales and Marketing and Senior VP Sales. Prior to joining RiT, Mr. Kovarsky held several sales and marketing positions in Israeli hi-tech companies. Mr. Kovarsky holds a M.Sc. degree in Computer Science and Civil Engineering from the Technion - Haifa, Israel.




Mr. Boris Granovsky has served as a director since June 2008. He is the Chief Executive Officer of STINS COMAN Incorporated since 2000. Prior thereto, Mr. Granovsky served as a sale manager and thereafter as Vice President of Sales in STINS COMAN since 1995. Mr. Granovsky received a diploma in engineering in automated control systems from the Moscow Institute of Radio Engineering, Electronics and Automation and a BBA degree in management from Business School of the Open University of United Kingdom.




Mr. Israel Frieder has served as a director since January 2002. Mr. Frieder is the Co-Chairman of IXI Mobile Inc., and Chairman of A.A. Pearl Inv. and serves as director and provides management services at several companies. Mr. Frieder's previous positions include serving as the Chairman and CEO of Israel Technology Acquisition Corp Inc., 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 RRSAT Ltd. , Teledata Ltd., Tadiran Telecommunications Canada, Inc., ECI - Tadiran Synchronous System Limited Partnership, Tadiran Telecommunications Public Switching Ltd., Tadiran Telecom (Kunming) Co. Ltd. (Joint Venture), Tadiran Telecommunication UK Ltd., and TNN - Tadiran Newbridge Networks Ltd. Mr. Frieder also served as the President of Elisra Tadiran, Public Switching Ltd. and served as a director of Motorola Tadiran Cellular Ltd. (PelePhone). Mr. Frieder holds a B.Sc. in Electrical Engineering from the Technion and an M.B.A. in Operational Research from the Hebrew University in Jerusalem.




Mr. Roman Govorovhas served as a director since August 2008. He has served as a Managing Director of IBRG Capital, a private equity fund, since September 2007.  From 2006 to 2007, he served as a senior associate and deputy head of the M&A department of Columbus Nova, a private equity fund.  From 2004 to 2006, he served as an associate and analyst at Aton Capital, a Russian investment bank.  From 2000 to 2004, he served as an analyst at United Financial Group, an investment bank that was acquired by Deutsche Bank in 2004.  Mr. Govorov is a graduate (major: finance and credit) of the Plekhanov Russian Academy of Economics and a graduate (major: applied mathematics) of the Moscow Engineering Physics Institute.




Ms. Galia Druker has served as an external director since September 2009. She has served as deputy manager of Bank Hapoalim (Geneva, Switzerland), between 2005 and June 2009. From 2003 to 2005 she served as the head of the East European desk of Bank Hapoalim (Zurich, Switzerland). From 2002 to 2003 she served as the head of foreign trade in Bank Otsar Hachayal head office. From 1972 to 2002 she was employed by Bank Hapoalim, mostly in different managerial positions. Ms. Druker holds MA degree in English Philology from the Vilnius State University. Ms. Druker also holds a banking diploma (obtained through the internal school of bank Hapoalim).




Mr. Eran Ayzikhas served as ourChief Financial Officer since March 2010. Mr. Ayzik has over 25 years of business experience in a variety of managerial and CFO roles in high-tech companies.  He was Chairman of Omnilogos (Medilogos) Ltd., a software company that develops decision support solutions for the medical market and CEO of Leprechaun Technologies Ltd, a software company developing speech recognition software. Previously, he was a partner, VP and CFO, of The Challenge Fund - Etgar L.P., a $245 million investment fund. He was also the CFO of Dovrat, Shrem & Co. Ltd a leading Israeli holding company, traded on the TASE. Prior to that, he was a Senior Partner at Haft & Haft CPA (Israel). Mr. Ayzik holds dual B.A. degrees in economics and accounting from Tel-Aviv University and is a Certified Public Accountant (CPA) in Israel.




42





Mr. Jacob Elisha has served as ourDirector of Sales for Asia Pacific and Latin America (EMEA) since 2009. Mr. Elisha has extensive managerial experience from leading high-tech companies. Prior to joining RiT, Mr. Elisha served as VP sales, EMEA at Allot Communications. Previously, he led technical sales activities at Texas Instruments. Prior to that, Mr. Elisha held R&D positions in various high-tech companies in Israel. Mr. Elisha holds a B. Sc. Degree in Electrical Engineering and M.Sc. in Computer Science from the Polytechnic Institute of New York, NY, USA.




Mr. Ofer Herman has served as our Vice President Sales since 2007. From 2003 to 2007 he served as our Director of Sales for EMEA and from 2000 to 2003 he served as our Sales Manager for Europe. Prior to joining us, Mr. Herman held various positions in sales and marketing in several high tech companies in Israel. His last position before joining RiT was Sales Director in ArelNet Ltd. Mr. Herman holds a B.Sc. in Industrial Engineering from University of New Haven, Connecticut.




Mr. Benny Sharabihas served as our Vice President Research and Development since 2009. Mr. Sharabi has over 15 years of experience as a manager of multi-disciplinary R&D teams in networking and telecommunication organizations. Prior to joining RiT, Mr. Sharabi served as CEO at Ace Verification and AVP R&D at Actelis Networks. Previously, he served as VP R&D at Civcom. Prior to that, Mr. Sharaby held various managing positions at Alvarion. Mr. Sharabi holds a B. Sc. and and M.Sc. in Electrical Engineering from Tel Aviv University and MBA from the Recanati School at Tel Aviv University.




Mr. Ben Carmi has served as our Vice President Operations since September 2008. From 2003 to 2008 he served in various positions at RiT Technologies, including Product Line Manager, Commercial Department Manager and Regional Sales Director. Mr. Carmi holds a B.Sc. in Industrial Engineering and an MA in Public Policy, both from Tel Aviv University.




Mrs. Julia Geva has served as our Assistant Vice President Marketing since 2006. From 2005 to 2006 she served as our Marketing Manager. Prior to joining us, Mrs. Geva held a position of Marketing Manager at Creo. Previously she served as PR Manager at CreoScitex. Prior to that, Mrs. Geva filled a number of marketing positions at Scitex Corporation. Mrs. Geva holds an MA in Linguistics from Nizhny Novgorod State Linguistic University and an MBA from Tel Aviv University.




There are no family relationships between any of the directors or members of senior management named above.




6.B.           Compensation




The aggregate direct remuneration paid to all our directors and officers as a group (consisting of 15 persons in 2009) for the year ended December 31, 2009, was approximately $1.4 million compared with $1.7 million in 2008 (the group consisted of 17 persons in 2008). 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 $0.3 million 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.




As of March 6, 2008, our non-employee directors receive amounts consistent with the regulations promulgated under the Companies Law regarding compensation to external directors. The regulations mandate, among other things, that Israeli public companies, such as we, to provide external directors with minimum cash compensation. Consistent with the aforesaid, our Audit Committee and Board of Directors have determined to set the annual compensation paid to our external directors at NIS 71,300 (approximately $19,270) and at NIS 3,470 (approximately $938) per board meeting or per board committee meeting, all linked to the Israeli consumer price index, effective March 6, 2008. All other independent directors of the Company (namely Roman Govorov) receive the same compensation as the external directors.




In 2009, we granted options to purchase an aggregate amount of 1,875 ordinary shares to our officers under the 2003 Plan at an exercise price of $5.44 per share. The options expire on the sixth anniversary of the date of grant. No options were granted to any of our directors in 2009. See also "Item 6.E. - Directors, Senior Management and Employee – Share Ownership – Share Option Plans.”




43





6.C.           Board Practices





We are subject to the provisions of the Israeli Companies Law and the regulations promulgated thereunder. In addition, as a NASDAQ-listed company, we are also subject to certain corporate governance standards adopted by NASDAQ. For further information, see “Item 16G – Corporate Governance.”





Introduction





Our Articles of Association provide that the board of directors shall consist of not less than 3 and not more than 7 directors. Currently, our board of directors consists of 5 members.





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




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





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




External Directors




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





·
an employment relationship;


·
a business or professional relationship maintained on a regular basis;


·
control; and


·
service as an "office holder."





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





Pursuant to the Companies Law, (1) each external director must have either “accounting and financial expertise” or “professional qualifications” (as such terms are defined in regulations promulgated under the Companies Law) and (2) at least one of the external directors must have “accounting and financial expertise.” We have determined that both Mr. Israel Frieder and Ms. Galia Druker have the requisite “accounting and financial expertise”.




No person can serve as an external director if the person's position or other business creates, or may create, a conflict of interest 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.





44





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





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


·
the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company.





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





Independent Directors


Our ordinary shares are listed for quotation on the NASDAQ Capital Market and we are subject to the rules of the NASDAQ Capital Market applicable to listed companies.  Under NASDAQ’s rules, a majority of the members of an issuer’s board of directors are required to be "independent," as defined thereunder, except where the issuer is a “controlled company,” a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. Although we are a controlled company by virtue of STINS COMAN’s shareholdings in us, we currently satisfy this requirement as Mr. Israel Frieder, Ms. Galia Druker and Mr. Roman Govorov were determined by our board to qualify as independent directors under NASDAQ rules.
 
 Committees
 
 Audit Committee
 
 Pursuant to applicable SEC and NASDAQ rules, we are required to have an audit committee of at least three members, each of whom must satisfy the independence requirements of the SEC and NASDAQ.  In addition, pursuant to NASDAQ rules, all of the members of the audit committee must be financially literate and at least one member must possess accounting or related financial management expertise.  The audit committee must also have a written charter specifying the committee’s duties and responsibilities, which include, among other things, the selection and evaluation of our independent auditors.
 
 Under the Companies Law, our board of directors is required to appoint an audit committee, which must be comprised of at least three directors and include all of the external directors, but may not include:




•
the chairman of the board of directors;




•
any controlling shareholder or any relative of a controlling shareholder; and




•
any director employed by the company or providing services to the company on a regular basis.




The duty of the audit committee under the Companies Law is to examine flaws in the business management of the company, including in consultation with the internal auditor and 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.
 
 45
 
 Our audit committee consists of Mr. Roman Govorov, Mr. Israel Frieder and Ms. Galia Druker and satisfies the requirements of the Companies Law, the SEC and NASDAQ rules. Our board of directors has determined that Mr. Israel Frieder is an audit committee financial expert, as defined by applicable SEC regulations, and that he also has the requisite financial expertise, as defined under the NASDAQ rules.  Our audit committee adopted a written charter specifying the committee's duties and responsibilities, which include, among other things, the selection and evaluation of our independent auditors.
 
 Compensation and Nominations Committee
 
 Pursuant to applicable NASDAQ rules, director nominees must be selected or recommended for the board’s selection either by a nominations committee composed solely of independent directors or by a majority of independent directors, subject to certain exceptions, including where the issuer is a controlled company. Similarly, the compensation payable to a company’s chief executive officer and other executive officers must be approved either by a majority of the independent directors on the board or a compensation committee comprised solely of independent directors, subject to certain exceptions, including where the issuer is a controlled company.
 
 Although we are a controlled company by virtue of STINS COMAN’s shareholdings in us, we maintain a compensation and nominations committee which consists of Messrs. Roman Govorov and Israel Frieder and satisfies the requirements of the NASDAQ rules.  Our board of directors approved a written charter specifying the committee's duties and responsibilities.




Internal Auditor




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





Directors’ Service Contracts





Except as set forth in Item 6.B. “Directors, Senior Management and Employees – Compensation,” there are no arrangements or understandings between us and any of our current directors for benefits upon termination of service.




6.D.           Employees





The following table details certain data on the workforce (including temporary employees) of RiT and its consolidated subsidiaries for the periods indicated:





As at December 31,2009


2008


2007Approximate numbers of employees by geographic locationIsrael


67



79



85Europe, Far East


9



11



10United States


4



4



4Total workforce


80



94



99Approximate numbers of employees by category of activityResearch and development


23



31



31Sales and marketing


33



39



38Operations


14



15



16Management and administrative


10



9



14Total workforce


80



94



99





46





The sharp decrease in our workforce, from 94 employees in 2008 to 80 employees in 2009, relates to the work force and cost reduction plan implemented in the fourth quarter of 2009 and completed in the beginning of 2010.





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 are 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 workday, minimum daily wages for workers, procedures for dismissing employees, determination of severance pay, certain social contributions and other conditions of employment. See Note 4 to the Consolidated Financial Statements included elsewhere in this annual report.





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





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 our directors and members of our senior management, as of  June 9, 2010:





Name

Title/Office

No. of Ordinary Shares

As a % of Outstanding

Ordinary SharesSergey Anisimov (1)

Chairman of the Board of Directors

2,198,817

68.3%Avi Kovarsky

CEO and President



*Eran Ayzik

CFO



0JacobElisha

Vice President Sales



0Benny Sharabi

Vice President Research and Development



0Ben Carmi

Vice President Operations



*Offer Herman

Vice President Sales



*Julia Geva

Assistant Vice President Marketing



*Israel Frieder

Director



*Galia Druker

Director



0Roman Govorov

Director



*Boris Granovsky (1)

Director

2,198,817

68.3%All directors and executive officers as a group (2)



2,265,924

70.37%





* Less than 1%




(1)
Through STINS COMAN. See Item 7A.


(2)
Includes outstanding options exercisable, within 60 days as of May 15, 2010, into 67,107 ordinary shares at exercise prices that range between $2.96 to $25.20 per ordinary share and with expiration dates that range between December 2013 and July 2016.





47





Share Option Plans





In July 2003, we adopted the RiT Technologies Ltd. 2003 Share Option Plan, or the 2003 Plan, which is currently administered by our board of directors (or the Share Incentive Committee appointed by the Board to administer the 2003 Share Option 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 exercise price and vesting schedule of options granted under the 2003 Plan are approved by the board of directors, as specified in the grant letter issued by us to the grantee. Unless otherwise determined by the board of directors, the options fully vest on the third anniversary following their grant, vesting in three equal shares annually.  We have reserved 404,583 ordinary shares for the grant of options under the 2003 Plan, of which, as of May 15, 2010, we have outstanding options to purchase 156,559 ordinary shares at a weighted exercise price of $10.37 per ordinary share.





In addition, in May 1999, we adopted the RiT Technologies, Inc. Employee Stock Option Plan, or the RiT Inc. Plan, pursuant to which options to purchase our ordinary shares may be granted to the employees of RiT Technologies, Inc. The RiT Inc. Plan is administered by the Board of Directors which designates the optionees, dates of grant and the exercise price of the options.  We have reserved 27,000 ordinary shares for the grant of options under the RiT Inc. Plan, of which, as of May 15, 2010, we have outstanding options to purchase 7,752 ordinary shares at a weighted exercise price of $11.31 per ordinary share. This plan expired in May 2009.





In 2009, we granted options to purchase an aggregate amount of 1,875 ordinary shares to our officers under the 2003 Plan at an exercise price of $5.44 per share. The options expire on the sixth anniversary of the date of grant. No options were granted to any of our directors in 2009.





The following table summarizes information about all stock options outstanding as of May 15, 2010:





Options outstandingNumber of


Weightedoptions


averageunexercised as of


remainingMay 15,


contractual2010


lifeRates of exercise prices in US$




In years2.72


27,500



4.212.96


2,500



4.714.8


13,376



3.845.12-5.44


52,167



4.658.88-9.84


21,111



2.3310.24-12.88


23,439



4.3114.88


16,343



4.120.64-25.2


7,375



3.3359


500



0.1164,311
 
 48


ITEM 7.                 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





7.A.           Major Shareholders





The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as June 9, 2010 (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."





Name
Number of Ordinary

Shares Owned Excluding

Options and Warrants
Number of Ordinary

Shares Beneficially

Owned
Number of Ordinary

Shares Beneficially Owned

as Percent of Total Shares(1)Sergey Anisimov,

Boris Granovsky(2)
2,198,817
2,198,817
68.3%Austin W. Marxe and

David M. Greenhouse3
326,771
326,771
10.15%


______________________


(1)
Based on 3,219,913 ordinary shares outstanding as of June 9, 2010. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options or warrants currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.




(2)
Based on a Schedule 13D/A filed by STINS COMAN with the SEC on June  24, 2010,  STINS COMAN is the holder of 1,558,905ordinary shares. Mr. Anisimov is the President of, and owns a majority interest in, STINS COMAN. Mr. Granovsky is the CEO of, and owns a minority interest in, STINS COMAN. Consequently, Messrs. Anisimov and Granovsky may be deemed the beneficial owners, and to share the power to vote and dispose, of these shares.




(3)
As of December 31, 2009, based on a Schedule 13G filed byAustin W. Marxe and David M. Greenhousewith the SEC on February 12, 2010. The Schedule 13G indicates that Messrs. Marxe and Greenhouse share voting and dispositive power as to (i) 141,672 ordinary shares and 0 warrants owned by Special SituationsPrivate Equity Fund, L.P., (ii) 156,135 ordinary shares owned by Special Situations Technology Fund II, L.P. and (iii)  28,964 ordinary shares owned by Special Situations Technology Fund, L.P. Messrs.Marxe and Greenhouse are members ofMG 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.




Significant Changes in the Ownership of Major Shareholders





In June 2008, STINS COMAN completed the purchase of 640,315 our ordinary shares (5,122,521 shares prior to the reverse stock split effected on August 24, 2009; figures in parentheses  refer to the period prior to this reverse stock split), representing approximately 34.9% of our outstanding shares, for an aggregate purchase price of $4,405,368, or $6.88 ($0.86) per share, from Yehuda Zisapel, our then Chairman of the Board of Directors and its co-founder, Zohar Zisapel, the brother of Mr. Yehuda Zisapel, and Dr. Meir Barel, one of our directors. As part of the transaction, the selling shareholders granted STINS COMAN a right of first refusal with respect to their existing warrants to purchase a total of 37,835 (302,679) ordinary shares at an exercise price of $14.0 ($1.75) per share. Under such right of first refusal, STINS COMAN is entitled to purchase such warrants at the then current value Black-Scholes Value prior to the exercise or transfer of such warrants by any of the selling shareholders.





49





Concurrently with the closing of said purchase, STINS COMAN also acquired, through a partial tender offer, a total of 128,477 (1,027,815) of our ordinary shares, representing approximately 7.0% of our outstanding shares, at $6.88 ($0.86) per share, such that, following these two transactions, STINS COMAN beneficially owned an aggregate of 768,792 (6,150,336) ordinary shares, representing approximately 41.9% of our outstanding shares, becoming our largest shareholder.





In September 2008, we completed a private placement transaction in which we issued to STINS COMAN 769,231 (6,153,846) of our ordinary shares at $5.220 ($0.65) per share, for aggregate proceeds of $4 million. Following these transactions, STINS COMAN owned 1,538,023, 558,905 (12,304,182) ordinary shares, representing 59.1% of our outstanding shares.





In June 2010, we issued an additional 615,485 ordinary shares to STINS COMAN in connection with the conversion of approximately $1.5 million from the loan given to us by STINS COMAN from debt into equity.  Following such issuance and as of the date of this annual report, STINS COMAN owns 2,198,817 of our ordinary shares representing 68.3% of our outstanding shares.




For more information, see “Item 7B – Related Party Transactions.”





Record Holders




Based on a review of the information provided to us by our transfer agent, as of May 13, 2010, there were 17 holders of record of our ordinary shares, of which record holders, holding approximately 45% of our ordinary shares, had registered addresses in the United States.  These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co.).




Change of Control




As described above, we are controlled by STINS COMAN. To our knowledge, we are not directly or indirectly owned or controlled by any foreign government. We are not aware of any arrangements of the operation of which may at a subsequent date result in a change of our control.




7.B.           Related Party Transactions





STINS COMAN, which became our largest shareholder in June 2008, has served as our distributor in Russia for our enterprise products since 1994 and has worked with us consistently since that date. In May 2005, more than three years before STINS COMAN became a principal shareholder of RiT, we entered into an International Distributor Agreement with STINS Corp., an affiliate of STINS COMAN, whereby STINS Corp. was appointed as our non-exclusive distributor of enterprise products in Russia. The term of the Distributor Agreement has expired and, following approval of our Audit Committee, Board of Directors and shareholders, we renewed its term initially until July 14, 2009, and in June 10, 2010 we extended the term until July 14, 2011 (the “Extended Term”), such Extended Term shall automatically renew for additional one year terms each time, unless terminated by either party.




·
Under the Distributor Agreement, STINS Corp. undertook a series of obligations, such as to maintain an adequate and aggressive sales organization to distribute and procure sales, to actively promote and create a demand for our products, and to assure adequate advisory, installation and support services. We undertook a series of obligations, such as to supply STINS Corp., at no cost, with such aids and technical assistance as we deem necessary to aggressively pursue product sales. The prices at which STINS Corp. is entitled to buy our products is, like most of our distributors, at a 50% discount on our recommended price list existing at the time we accept each purchase order. In 2009, 2008 and 2007, we generated approximately $306,000, $969,000 and $395,000, respectively, in revenues from orders placed by STINS COMAN under the Distributor Agreement.




50




·
In June 2008, we entered into a short-term loan agreement with STINS COMAN, under which STINS COMAN will extend us an unsecured loan of up to $4 million at an annual interest rate of 2.47%. Under the loan agreement, we were required to repay the outstanding principal amount and the interest accrued thereon in one payment 12 months after receipt of the funds. In July 2008, we entered into a binding Memorandum of Understanding for a private issuance by the Company of newly issued ordinary shares to STINS COMAN, whereby the outstanding loan amount and the interest accrued thereon will convert, at the closing, into ordinary shares at a conversion price of $0.65 per share. The closing was subject, among others, to the execution of a definitive agreement and was approved by our shareholders in the annual meeting held in August 2008.In September 2008, we completed the private placement transaction and we issued to STINS COMAN 769,231 (6,153,846 pre- reverse stock split) of our ordinary shares at $5.2 ($0.65) per share, for aggregate proceeds of $4 million, which replaced the $4 million already committed under the loan agreement. Pursuant to the securities purchase agreement, we also agreed to make reasonable commercial efforts to register for resale all the newly issued ordinary shares under the Securities Act of 1933, as amended, within six months following demand by STINS COMAN. The purchase agreement included customary representations and warranties by STINS COMAN with respect to its status and limited representations by us regarding the transaction and the validity of the shares.




·
Mr. Sergey Anisimov is the Chairman of our Board of Directors and is the founder and President of STINS COMAN. In July 2008, our Audit Committee and Board of Directors approved the employment of Mr. Anisimov's son at a monthly gross salary of approximately NIS 12,000 (approximately $3,000) and additional social benefits in accordance with our policy. Our Audit Committee and Board of Directors also approved, subject to shareholder approval, a framework arrangement, pursuant to which any modifications or amendments to be made in Mr. Anisimov’s son employment terms or position by our officers in the future are approved; provided that any such modification or amendment is conditioned upon the following: (i) any increase in the gross salary will not exceed 20% per year, (ii) any bonus will not exceed the equivalent of one monthly salary per year, (iii) any change in position is permitted as long as he is not appointed as one of our office holders; and (iv) the further approval by the Audit Committee and the Board of Directors. Following said approvals by the Board and Audit Committee, the shareholders approved the foregoing compensation and framework arrangement at the annual meeting held in August 2008.




·
In September 2008, we entered into an International Distributor Agreement with STINS Corp., a subsidiary of STINS COMAN, whereby STINS Corp. was appointed as our non-exclusive distributor of carrier products in the CIS market until, initially, September 2009, with automatic renewals for additional one year terms each time, unless terminated by either party. We refer to this agreement as the Carrier Distributor Agreement. The Carrier Distributor Agreement is an umbrella agreement that provides a framework for future deals in the carrier market, the terms of each of which would require further approval of our Audit Committee and Board of Directors and, if required under Israeli law, our shareholders. The prices at which STINS Corp. is entitled to buy carrier products is at the recommended price list existing at the time we accept the purchase order, unless otherwise agreed by the parties with respect to each deal, on a case-by-case basis which would require further approval of our Audit Committee and Board of Directors. In December 2008 our Audit Committee and Board of Directors approved a proposed carrier transaction in Russia through STINS COMAN, as distributor.




·
On June 11, 2009, we entered into a Loan Agreement with STINS COMAN, our controlling shareholder. On June 17, 2009, we entered into an Addendum to the Loan Agreement (the Loan agreement and the Addendum together, the "Convertible Loan Agreement"). On June 17, 2009, our Audit Committee and Board of Directors approved the Loan Agreement and the Addendum thereto, which were approved by our shareholders at our annual general meeting held on September 14, 2009. Pursuant to the Convertible Loan Agreement, STINS COMAN agreed to extend to the Company an unsecured loan of up to $10 million, within 14 days following the request of the Company, at an annual interest rate of 2.47%. At any time commencing October 1, 2009, and originally until June 2010 (the “Term”), we may call and receive any portion the loan from STINS COMAN, but no more than $5 million at a time (up to the said maximum of $10 million) and at intervals of at least 30 days between each call request. Under a later Addendum signed on February 17, 2010, the Loan Agreement’s term was extended by an additional 12 months (aggregate of 24 months), until June 11, 2011. During this extended period, RiT may call for any additional portion of the loan up to its maximum amount. Such Addendum was approved by our Audit Committee in March 2010 and by our Board of Directors in April 2010, and, rather than seeking shareholder approval, determined to rely on the Israeli Companies Regulations (Relief for Interested Party Transaction), 2000 (the “Relief Regulations”), which exempts the Company from such shareholder approval subject to certain conditions that were met.




51





Under the Convertible Loan Agreement, we are required to repay the outstanding principal amount and the interest accrued thereon after 36 months from receipt of each part of the funds respectively. STINS COMAN has the right to convert any outstanding principal amount of the loan and the interest accrued thereon, in whole or in part, into our ordinary shares at a conversion price per share equal to the market price of our ordinary shares on NASDAQ on the day we received the funds from STINS COMAN, plus a premium of 10% thereon. The conversion is subject to a 30 days prior notice and to the execution of a definitive purchase agreement to be substantially similar to the Securities Purchase Agreement entered between the parties on September 11, 2008.




As of June 23, 2010, we had drawn approximately $2.85 million of the principal of the loan under the Convertible Loan Agreement, which we received in installments. The market price of our ordinary shares on NASDAQ on the day we received each part of the funds from STINS COMAN ranged between $1.74 and $3.00 (the "Base Price”).




On May 17, 2010, our Board of Directors approved a conversion of an amount of approximately $1.5 million of the loan, representing principal and interest accrued until such date, into 615,485 of our ordinary shares, which were issued to STINS COMAN pursuant to the terms of the Convertible Loan Agreement. Consequently, on May 17, 2010, we entered into a Securities Purchase Agreement with STINS COMAN effecting the conversion of $1.5 million of the loan into 615,485 ordinary shares, reflecting an average conversion price of $2.465 per share (i.e., with a 10% premium on the Base Price of each part of the funds received). The issuance of such shares was completed on June 9, 2010.




·
In June 2009, the Company entered into a Representative Agreement with IntElorg Pte Ltd., a Singapore company affiliated with STINS COMAN ("IntElorg"). Under the Representative Agreement, IntElorg agreed to act as our sales agent in Singapore and other countries in Asia where we do not have a local presence, in consideration for a monthly retainer fee of approximately 8,531 Singapore Dollars and a commission on sales of products in the amount of 5.0% of the net invoice price of such products. The initial term of the Representative Agreement is one year and, thereafter, the agreement is automatically renewed for additional one year terms, unless terminated by either party, for any reason, upon 30 days notice.




IntElorg is a trading company with strong regional presence in the Asian Pacific and 20 years of experience in projects with big corporations and government linked companies. IntElorg is controlled by Mr. Yuri Riabtchenko, which has business relations with STINS COMAN.




In light of the relationship between IntElorg and STINS COMAN, the agreement may have been deemed an "extraordinary transaction" in which our "controlling shareholder" had a "personal interest" (as such terms are defined in the Israeli Companies Law). Accordingly, our Audit Committee and Board of Directors approved the agreement on June 26, 2009, and, rather than seeking shareholder approval, determined to rely on the Relief Regulations, as promulgated under the Israeli Companies Law, which exempt us from such shareholder approval, subject to certain conditions that were met.





·
On November 26, 2009, we entered into an additional short term loan agreement with Newcon International Ltd., (“Newcon”), a Canadian corporation affiliated with STINS COMAN. Newcon is a Canadian company engaged in producing and supplying optical systems and other products. STINS COMAN holds 46% of the issued and outstanding share capital of Newcon, and Mr. Sergey Anisimov, our Chairman of the Board of Directors, also serves as a director of Newcon.




The practical need for this loan agreement derived from the regular course of requesting from STINS COMAN an additional part of the loan under the Loan Agreement dated June 11, 2009, between us and STINS COMAN, in connection with which STINS COMAN approached Newcon to assist us by granting us a short term loan in the sum of $250,000. Under the short term loan agreement with Newcon, Newcon agreed to lend us a sum of $250,000, for a maximum term of three months.  The loan amount bears no interest during the term, but is subject to a penalty interest in the event of default on repaying the loan amount on time. The full $250,000 loan amount received by us was repaid to Newcon in January 2010.





52





In light of the relationship between Newcon and STINS COMAN, the agreement may have been deemed an “extraordinary transaction” in which our “controlling shareholder” had a “personal interest” (as such terms are defined in the Israeli Companies Law). Accordingly, our Audit Committee and Board of Directors approved the agreement on January 16, 2010, and, rather than seeking shareholder approval, determined to rely on the Relief Regulations, which exempt us from such shareholder approval, subject to certain conditions that were met.
  ·
On February 19, 2010, we entered into a Product Alliance Agreement with STINS COMAN. On March 30, 2010 and on April 9, 2010 our Audit Committee and Board of Directors approved, respectively, the Product Alliance Agreement (the "Product Alliance Agreement") and the transaction contemplated thereunder. On June 14, 2010, our shareholders approved this transaction at a special shareholders meeting.
  The Product Alliance Agreement provides for cooperation between STINS COMAN and we with regard to a laser speed camera (the “Product”) developed by STINS COMAN, for a term of three years, unless extended by mutual agreement of the parties. Pursuant to the Product Alliance Agreement, STINS COMAN will grant us the exclusive rights to, primarily: (a) manufacture the Product in accordance with the Manufacturing File (as defined therein) furnished to us by STINS COMAN and (b) sell the Product worldwide, except for Russia and the CIS countries. Additional key terms of the Product Alliance Agreement include the following:




Our obligation to pay STINS COMAN part of the Product’s sales proceeds, equal to 50% of an amount equal to the excess of (i) the proceeds from sales of the Product over (ii) the costs of manufacturing the Product. Such payments to STINS COMAN are to be paid not later than three years after actual receipt of the sales proceeds by us.




o
STINS COMAN has the option to convert the debt into our ordinary shares at a conversion price equal to the NASDAQ price of our ordinary shares on the last day prior to the signing of a definitive share purchase agreement for the issuance and sale of our ordinary shares upon such conversion.




o
We have the right to purchase the Product at an agreed upon Purchase Price.




o
STINS COMAN undertook to indemnify us in respect of all damages actually incurred or suffered by us as a result of a claim by a third party that the use or sale of the Product infringes a valid patent, trademark, copyright or other intellectual property right.




We believe that the terms of the transactions in which we have engaged and are currently engaged with STINS COMAN are beneficial to us and no less favorable to us than terms which might be available to us from unaffiliated third parties.




7.C.           Interests of Experts and Counsel





Not applicable.





ITEM 8.                    FINANCIAL INFORMATION





8.A.           Consolidated Statements and Other Financial Information





See Item 18.





Export Sales





See "Item 4.B–Sales".





Legal Proceedings





We are, or may be, from time to time named as a defendant in certain routine litigation incidental to our business. However, we are currently not, and have not been in the recent past, a party to any legal proceedings which may have or have had in the recent past significant effects on our financial position or profitability.





53





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. See also "Item 10.B. - Memorandum and Articles of Association - Dividends."




8.B.           Significant Changes





Except as otherwise disclosed in this annual report, no significant changes have occurred since December 31,2009





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 U.S. dollars).





High


Low2005 Full Year


36



17.762006 Full Year


23.44



6.42007 Full Year


14.72



2.642008 Full Year


7.52



2.4First Quarter 2008


6.8



2.64Second Quarter 2008


6.08



4.88Third Quarter 2008


7.52



2.8Fourth Quarter 2008


6.64



2.42009 Full Year


6



1.81First Quarter 2009


6



2.8Second Quarter 2009


3.84



2.72Third Quarter 2009


3.92



2Fourth Quarter 2009


3.25



1.81December 2009


2.5



1.81January 2010


2.39



1.73February 2010


2.2



1.74March 2010


2.73



2April 2010


2.27



1.93May 2010


2.37



1.92June 2010 (through June 25)


2.5



2




On June 25, 2010, the last reported sale price of our ordinary shares on the NASDAQ was $2.0  per share.




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




9.B.           Plan of Distribution





Not applicable.





9.C.           Markets





Our ordinary shares trade exclusively on the NASDAQ Capital Market under the symbol “RITT.”





54





9.D.           Selling Shareholders





Not applicable.





9.E.           Dilution





Not applicable.





9.F.           Expenses of the Issue





Not applicable.




ITEM 10.                      ADDITIONAL INFORMATION





10.A.           Share Capital





Not applicable.





10.B.            Memorandum and Articles of Association





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




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





Objects and Purposes





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





Limitation on Rights to Own Shares





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





Directors





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





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





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





55





Approval of Specified Related Party Transactions under Israeli Law





Fiduciary Duties of Office Holders





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





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





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





·
all other important information pertaining to these actions.





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





·
refrain from any conflict of interest between the performance of his or her duties in the company and the performance of his or her other duties or his or her personal affairs;





·
refrain from any activity that is competitive with the company;





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





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





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





Disclosure of Personal Interests of an Office Holder





The Companies Law requires that an office holder of a company disclose to the company any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first discussed.A personal interest of an office holder includes an interest of a company in which the office holder is, directly or indirectly, a 5% or greater shareholder, director or general manager or in which the office holder has the right to appoint at least one director or the general manager. In the case of an extraordinary transaction, the office holder's duty to disclose applies also to a personal interest of the office holder’s relative, which term is defined in the Companies Law as the person's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouses of any of the foregoing.





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





·
other than in the ordinary course of business;





·
otherwise than on market terms; or





·
that is likely to have a material impact on the company's profitability, assets or liabilities.





Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve the transaction, unless the articles of association provide otherwise. Nevertheless, a transaction that is adverse to the company’s interest may not be approved.





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





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Duties of Shareholders





Under the Companies Law, the disclosure requirements, which apply to an office holder, also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company, but excluding a shareholder whose power derives solely from his or her position as a director of the company or any other position with the company.





Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. The shareholder approval must be by majority vote, provided that either:





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





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





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





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





Exculpation, Insurance and Indemnification of Office Holders





Exculpation of Office Holders




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





Insurance of Office Holders




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





·
a breach of his or her duty of care to us or to another person;





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





·
a financial obligation imposed upon him or her in favor of another person.





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Indemnification of Office Holders




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




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





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





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





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





Limitations on Exculpation, Insurance and Indemnification





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





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





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





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





·
any fine imposed against the office holder.





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





Indemnity and Insurance




We have undertaken to indemnify our office holders to the fullest extent permitted by law by providing them with a Letter of Indemnification, substantially in the form approved by our shareholders in 2006 (See Exhibit 4.6 in Item 19). We currently maintain directors and officers liability insurance with a per claim and aggregate coverage limit of $10 million including legal costs incurred.




Share Capital





Our share capital is divided into two classes of shares,  (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.





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Dividends





Dividends on our ordinary shares may be paid only out of profits, as defined in the Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher. Our board of directors is authorized to declare dividends, provided that there is not reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surpluses, as evidenced by financial statements prepared no more than six months prior to the date of distribution.





Shareholder Meetings





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





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. If there is no quorum within an hour of the time set, the meeting is postponed until the following week, or any other time that the chairman of the board of directors and the shareholders present agree to. At the postponed meeting, any two shareholders will constitute a quorum.





Unless otherwise required by the Companies Law, resolutions at shareholder meetings are deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon.




Anti-Takeover Provisions; Mergers and Acquisitions





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




The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to a merger have the transaction approved by its board of directors and a vote of the majority of its shares. For purposes of the shareholder vote of each party, unless a court rules otherwise, the merger will not be deemed approved if shares representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger, or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party, vote against the merger. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposals for approval of the merger have been filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company.





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





Several of our related party agreements (i.e. the Convertible Loan Agreement of June 11, 2009 and the related Share Purchase Agreement of May 17, 2010), may be deemed "Material Contracts", and are attached as exhibits hereto, please see Item 19, List of Exhibits. For more details about such contracts, please see Item 7.B "Related Parties Transactions".





10.D.           Exchange Controls





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





10.E.           Taxation





Israeli Tax Considerations





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





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





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General Corporate Tax Structure




Israeli companies are generally subject to corporate tax on their taxable income at the rate of 26% for the 2009 tax year and 25% for the 2010  tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the "Tax Ordinance"), which came into effect on January 1, 2009, the corporate tax rate is scheduled to decrease as follows: 25% for the 2010 tax year,,24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and as from the 2016 tax year the company tax rate will be 18%.





Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003, and such tax rate is scheduled to be equal to the corporate tax rate for future tax years.  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.




Following a Temporary Order, which came into effect on January 1, 2009, and expired at the end of one year, an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for income from dividend distributions in 2009 received from a foreign subsidiary which is used in Israel in 2009, or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel.




Law for the Encouragement of Capital Investments, 1959




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





The Investments Law provided (prior to its amendment in 2005) that upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel ("Investment Center"), a proposed capital investment in eligible facilities may be designated as an Approved Enterprise.





Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, such as the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The benefits under the law are usually not available with respect to income derived from products manufactured outside of Israel. The law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.





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 start of the year in which approval was obtained, 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.





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





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





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





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





Income arising from our "Approved Enterprise" is subject to zero tax rates under the Alternative Benefits Program and reduced tax rates based on our level of foreign ownership for specific period. The period of benefits in respect of most of our approved enterprise programs will terminate by the year 2011. No new approvals have been received since 1997. See Note 7(B) to the Consolidated Financial Statements included elsewhere in this annual report.





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




Amendment of the Investments Law




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





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





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




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





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





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





The amendment applies to approved enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such programs received approval from the Investment Center on or prior to March 31, 2005 in which case the amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval





Law for the Encouragement of Industry (Taxes), 1969




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





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





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





·
accelerated depreciation rates on equipment and buildings;





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





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





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





Israeli Transfer Pricing Regulations





On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “TP Regs”). Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length principle basis and will be taxed accordingly.





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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 non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between the inflationary surplus and the real gain. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price that is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.





The tax rate generally applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a "significant shareholder" at any time during the 12-month period preceding such sale (i.e. such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company), the tax rate will be 25%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed shares.. However, the foregoing tax rates will not apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).




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




Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock market outside of Israel (such as the NASDAQ), provided however that such capital gains are not derived from a permanent establishment in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering (in which case a partial exemption may be available). In addition, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are 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.





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Tax on Dividends





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




U.S. Federal Income Tax Considerations




The following summary describes the material U.S. federal income tax considerations relating to an investment in our 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. In particular, this discussion does not address the tax treatment of U.S. holders who own, directly , indirectly  or constructively , 10% or more of our outstanding voting stock. Furthermore, the discussion below is based upon the Code, existing and proposed Treasury regulations promulgated thereunder, and applicable administrative rulings and judicial decisions now in effect, all of which are subject to change, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those discussed below.




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




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




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




65





Distributions on Ordinary Shares




Subject to the discussion under the headings "Passive Foreign Investment Companies", 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 on or before December 31, 2010 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 we are not a passive foreign investment company (please see discussion below) and (i) we are eligible for benefits under the United States-Israel income tax treaty or (ii) our ordinary shares are listed on an established securities market in the United States (which includes the NASDAQ Capital Market).  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 during the 121-day period starting on the date which is 60 days before, and ending 60 days after the ex-dividend date, (b) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar or related property or (c) with respect to any portion of a dividend that is taken into account by the U.S. Holder as investment income under Section 163(d)(4)(B) of the Code.  Any days during which the U.S. Holder has diminished its risk of loss with respect to the ordinary shares (for example, by holding an option to sell the ordinary shares) are not counted towards meeting the 61-day holding period.  Non-corporate U.S. Holders should consult their own tax advisors concerning whether dividends received by them qualify for the reduced rate of tax.




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




The amount of a distribution with respect to our ordinary shares equals the amount of cash and the fair market value of any property distributed plus the amount of any Israeli taxes withheld therefrom. The amount of any cash distributions paid in NIS equals the U.S. dollar value of the NIS on the date of distribution based upon the exchange rate in effect on such date, and U.S. holders who include such distribution in income on such date 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. 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 heading "Passive Foreign Investment Companies", 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, income from certain commodities transactions and from notional principal contracts and gains from the disposition of passive assets.An asset will generally be characterized as a passive if it has generated (or is reasonably expected to generate in the reasonabley foreseeable future)"passive income" in the hands of the foreign corporation. 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.




66





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




We do not belive we were a PFIC for the fiscal year ended December 31, 2009.However, due to legal and factual uncertainties such conclusion is not free from doubt and no assurances can be given in this regard. 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.




Information Reporting and Backup Withholding




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




Non-U.S. Holders of Ordinary Shares




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




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




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




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




67





10.F.           Dividends and Paying Agents





Not applicable.





10.G           Statement by Experts





Not applicable.





10.H.           Documents on Display





We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the SEC. You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Certain of our SEC filings are also available to the public at the SEC's website at http://www.sec.gov.  Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. In addition, all corporate documents are available for review at our headquarters, 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel.





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




10.I.           Subsidiary Information





Not applicable.




ITEM 11.                     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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




Impact of Inflation and Currency Fluctuations




Most of our revenues are denominated in U.S. dollars or are U.S. dollar-linked.  We collect a portion of our revenues in Europe in Euros while most purchases of materials and components, and most marketing costs, are denominated in U.S. dollars or U.S. dollar-linked. The currency of the primary economic environment in which our operations are conducted is, therefore, the U.S. dollar, which is our functional currency.




Since we pay the salaries of our Israeli employees in NIS, the U.S. dollar cost of our operations is influenced mainly 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 U.S. dollar. Inflation in Israel will have a negative effect on our profits from contracts under which we are to receive payment in U.S. dollars or are U.S. 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 U.S. dollar.




For some time, until 1997, inflation in Israel exceeded the devaluation of the NIS against the U.S. dollar and we experienced increases in the U.S. 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 2009, on an average yearly basis, there was an increase of approximately 10% in value of the U.S. dollar in relation to the NIS (from 3.588 to 3.933) and there was an increase of approximately 5% in the value of the U.S. dollar in relation to the Euro (from 0.682 to 0.719). These changes in the U.S. dollar rate had an immaterial effect on our results in 2009. We cannot assure you that we will not be materially affected in the future from currency exchange rate fluctuations or the rate of inflation in Israel. If the value of the NIS or the Euro starts to rise in value relative to the U.S dollar, our business and financial condition could be negatively impacted.




The effects of foreign currency re-measurements are reported in our financial statements as financial income or expense.




68




ITEM 12.                    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





None.





PART II




ITEM 13.                      DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





None.




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





On August 24, 2009, we effected a one-for-eight reverse split of our ordinary shares, and accordingly the par value of our ordinary shares was changed to NIS 0.8 per share.




ITEM 15.                   CONTROLS AND PROCEDURES





Disclosure controls and procedures




Our management, including our chief executive officer, or CEO, and our chief financial officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). These controls and procedures were designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of December 31, 2009. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective.




Management's annual report on internal control over financial reporting




Our management is responsible for establishing and maintaining adequate internal control over financial reporting for us. We performed an evaluation of the effectiveness of our internal control over financial reporting that is designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:




·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;




·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and




·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.




Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.




69





Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework for Internal Control-Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission.




Based on such evaluation, our management, including the CEO and CFO, has concluded that our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of December 31, 2009 is effective. Notwithstanding the foregoing, there can be no assurance that our internal control over financial reporting will detect or uncover all failures of persons within RiT to comply with these procedures.




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





Changes in internal control over financial reporting




There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2009 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 Israel Frieder is an audit committee financial expert, as defined by applicable SEC regulations. Mr. Frieder is "independent," as that term is defined under NASDAQ’s rules.





ITEM 16B.                   CODE OF ETHICS





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




ITEM 16C.                  PRINCIPAL ACCOUNTANT FEES AND SERVICES





In the annual meeting held on September 14, 2009, our shareholders re-appointed Somekh Chaikin, Certified Public Accountants (Isr.), a member of KPMG International, or KPMG, to serve as our independent registered accounting firm until the next annual meeting. The following table sets forth, for each of the years indicated, the fees paid or payable to KPMG for the period indicated.




2009


2008Audit Fees (1)

$
91,550


$
127,506Tax Fees (2)


5,000



5,000All Other Fees


-



-Total


96,550



132,506





(1)
Audit fees consist of services that have been provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide.




(2)
Tax fees relate to services performed by the tax division for tax compliance and advice.




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




70





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





None.




Item 16F.                    CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT





None.





Item 16G.                   CORPORATE GOVERNANCE





We are a foreign private issuer whose ordinary shares are listed on the NASDAQ Capital Market.  As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the NASDAQ rules, including the NASDAQ corporate governance requirements.  The NASDAQ rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC.  Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:




The NASDAQ rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Israeli Companies Law and Israeli practice, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person. In addition, we have chosen to follow our home country practice in lieu of the requirements of NASDAQ Rule 4350(b)(1)(A), relating to an issuer’s furnishing of its annual report to shareholders. However, we post our Annual Report on Form 20-F on our web site (www. rittech.com) as soon as practicable following the filing of the Annual Report on Form 20-F with the SEC.




71




PARTIII








ITEM17.                      FINANCIAL STATEMENTS





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




ITEM18.                      FINANCIAL STATEMENTS





Index to Financial Statements




PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets as of December 31, 2008 and 2009
F-3Consolidated Statements of Operations for the Yearsended December 31, 2007, 2008 and 2009
F-4Consolidated Statements of Shareholders’ Equity and ComprehensiveLoss for te Years ended December 31, 2007, 2008 and 2009
F-5Consolidated Statements of Cash Flows for the Yearsended December 31, 2007, 2008 and 2009
F-6Notes to the Consolidated Financial Statements
F-7




72




ITEM19.                      EXHIBITS




(b)           List of Exhibits




1.1
Memorandum of Association.





1.2
Articles of Association.





2.1
Form of Share Certificate Representing Ordinary Shares. (1)





4.1
Lease agreements with related parties and executive summaries thereof. (2)





4.2
RiT Technologies Ltd. 2003 Share Option Plan (3) and Amendment No. 1 (4) and Amendment No. 2 thereto.





4.3
Form of Letter of Indemnification. (5)





8.1
List of Subsidiaries. (6)





4.4
Convertible Loan Agreement dated June 11, 2009 (7)





4.5
Addendum to the Convertible Loan Agreement dated February 17, 2010 (8)





4.6           Share Purchase Agreement dated May 17, 2010




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





12.2
Certification of the Chief Financial Officer 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 Chief Financial Officer 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.


_____________




(1)
Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A filed with the SEC on July 26, 1997.


(2)
Incorporated by reference to the Annual Report on Form 20-F for the year ended December 31, 2001, filed with the SEC on June 24, 2004.


(3)
Incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed on with the SEC July 26, 2004.


(4)
Incorporated by reference to the Annual Report on Form 20-F for the year ended December 31, 2006, filed with the SEC on March 29, 2007.


(5)
Incorporated by reference to Annex B to the Registrant’s Proxy Statement filed on the Registrant’s Report of Foreign Private Issuer on Form 6-K filed with the SEC on March 8, 2006.


(6)
Incorporated by reference to Exhibit 8.1 to the Annual Report on Form 20-F for theYear ended December 31, 2004, filed with the SEC on March 30, 2004.


(7)
Incorporated by reference to Annex B of Exhibit 99.3 to the Company's Form 6-K filed with the SEC on August 11, 2009.


(8)
Incorporated by reference to Exhibit 99.2 to the Company's Form 6-K filed with the SEC on April 29, 2010





73





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/ Avi KovarskyAvi KovarskyPresident and Chief Executive Officer


June 28, 2010





74





RiT Technologies Ltd.
 and Subsidiaries
  Consolidated Financial Statements
  December 31, 2009
 RiT Technologies Ltd.
 and Subsidiaries
 
 Consolidated Financial Statements as of December 31, 2009
 
 
 Contents
 
 PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
F-3Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
F-4Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the years ended December 31, 2009, 2008 and 2007
F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
F-6Notes to the Consolidated Financial Statements
F-7
 
 
 
 
 Report of Independent Registered Public Accounting Firm
 
 The Board of Directors and Shareholders
 RiT Technologies Ltd.
 
 We have audited the accompanying consolidated balance sheets of RiT Technologies Ltd. and subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders' equity and comprehensive loss and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
 /s/ Somekh Chaikin
 Certified Public Accountants (Isr.)
 Member firm of KPMG International
 
 Tel-Aviv, Israel, June 28, 2010
 
 F - 2
 
 RiT Technologies Ltd.
 and Subsidiaries
 Consolidated Balance Sheets
 
 December 312009


2008US$ thousands


US$ thousandsAssetsCurrent Assets (Note 8A)Cash and cash equivalents


1,610



6,111Trade receivables, net *


2,044



3,737Other current assets


462



536Assets held for severance benefits (note 4)


112



-Inventories


3,355



3,978Total Current Assets


7,583



14,362Other AssetsLong-term trade receivable


181



351Assets held for severance benefits (Note 4)


1,409



1,5791,590



1,930Property and Equipment, net (Note 3)


382



544Total Assets


9,555



16,836Liabilities and Shareholders' EquityCurrent LiabilitiesShort term loan (note 9A)


250



-Trade payables


1,322



3,101Other payables and accrued liabilities (Note 8A5)


1,340



2,286Liability in respect of employees' severance benefits (Note 4)


143



-Total Current Liabilities


3,055



5,387Other liabilitiesPrinciple shareholder convertible loan (Note 9A)


1,805



-Liability in respect of employees' severance benefits (Note 4)


1,633



2,0763,438



2,076Total Liabilities


6,493



7,463Commitments and Contingencies (Note 5)Shareholders' Equity (Note 6)Share capital


559



559Treasury stock


(27
)


(27
)Additional paid-in capital


36,820



36,681Accumulated deficit


(34,290
)


(27,840
)Total Shareholders' Equity


3,062



9,373Total Liabilities and Shareholders' Equity


9,555



16,836
 
 *
Includes balances in the amounts of $52 thousand and $315 thousand with related parties as of December 31, 2009 and 2008, respectively (see also note 9A).
 
 
 /s/ Israel Frieder

/s/ Avi KovarskyDirector

President and Chief Executive Officer
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 3
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Consolidated Statements of Operations
 
 Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsSales (Notes 8B1) *


8,655



22,556



23,369Cost of sales (Notes 5A and 8B2) *


4,710



11,080



14,156Gross profit


3,945



11,476



9,213Operating expenses:*Research and development, gross


3,158



3,781



4,722Less – royalty-bearing participation (Note 5A)


(206
)


(104
)


(110
)Research and development, net


2,952



3,677



4,612Sales and marketing


5,268



6,351



7,633General and administrative


2,065



2,718



2,334Total operating expenses


10,285



12,746



14,579Operating loss


(6,340
)


(1,270
)


(5,366
)Financing income (loss), net (Note 8B3) *


(110
)


52



64Loss before income tax expense


(6,450
)


(1,218
)


(5,302
)Taxes on income (Note 7)


-



-



-Net loss for the year


(6,450
)


(1,218
)


(5,302
)Net loss per share (Note 2Q):Basic and diluted net loss per ordinary share (US$)


(2.48
)


(0.59
)


(2.89
)Weighted average number of ordinary shares used tocompute basic and diluted net loss per ordinary share **


2,604,428



2,060,697



1,833,772
 
 *           See Note 9B for transactions with related parties.
 **         During 2009, the Company performed reverse split (See Note 6A1).
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 4
 
 RiT Technologies Ltd.
 and Subsidiaries
 Consolidated Statements of Shareholders’ Equity and Comprehensive Loss
 
 Share capital **





AdditionalDeferred


Ordinary


Treasury


Ordinary


Treasury


paid-in


Accumulated


Totalshares*


shares*


stock*


shares


stock


capital


deficitUS$


US$


US$


US$


US$Number of shares


(in thousands


(in thousands


(in thousands)


(in thousands)


(in thousands)Balance as of January 1, 2007


17,030



1,830,197



2,125



388



(27
)


32,127



(21,320
)


11,168Changes during 2007Exercise of options


-



5,000



-



1



-



45



-



46Stock compensation expense


-



-



-



-



-



408



-



408Net loss for the year and total comprehensive loss


-



-



-



-



-



-



(5,302
)


(5,302
)Balance as of December 31, 2007


17,030



1,835,197



2,125



389



(27
)


32,580



(26,622
)


6,320Changes during 2008Issuance of shares to a principle shareholder (Note 9)


-



769,231



-



170



-



3,830



-



4,000Stock compensation expense


-



-



-



-



-



271



-



271Net loss for the year and total comprehensive loss


-



-



-



-



-



-



(1,218
)


(1,218
)Balance as of December 31, 2008


17,030



2,604,428



2,125



559



(27
)


36,681



(27,840
)


9,373Changes during 2009Stock compensation expense


-



-



-



-



-



139



-



139Net loss for the year and total comprehensive loss


-



-



-



-



-



-



(6,450
)


(6,450
)Balance as of December 31, 2009


17,030



2,604,428



2,125



559



(27
)


36,820



(34,290
)


3,062
 
 *
Ordinary Shares – NIS 0.8 par value

Authorized shares: 4,997,471 as of December 31, 2009 and 2008; issued 2,606,553 as of December 31, 2009 and 2008 (including 2,125 of which are held by a subsidiary) and  outstanding  2,604,428 as of December 31, 2009 and 2008.

Deferred Shares – NIS 0.1 par value

Authorized shares: 20,230, issued and outstanding 17,030 shares as of December 31, 2009 and 2008.
 
 
  **
During 2009 the Company performed reverse split (See Note 6A1).
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 5
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Consolidated Statements of Cash Flows
 
 Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsNet loss for the year


(6,450
)


(1,218
)


(5,302
)Adjustments to reconcile net loss to net cashused in operating activities:Severance pay benefits, net


(242
)


32



(14
)Depreciation and write off of property and equipment


254



276



653Stock compensation expense


139



271



408Changes in operating assets and liabilities:Decrease (increase) in trade receivables, net


1,693



799



(51
)Decrease (increase) in long-term trade receivable


170



(351
)


-Decrease (increase) in other current assets


74



(166
)


104Decrease (increase) in inventories


623



(294
)


3,661Increase (decrease) in accounts payable and accruals:Trade


(1,734
)


(788
)


(2,246
)Interest over principle shareholder convertible loan


3



-



-Other


(946
)


(173
)


371Net cash used for operating activities


(6,416
)


(1,612
)


(2,416
)InvestingPurchase of property and equipment


(137
)


(127
)


(295
)Net cash used for investing activities


(137
)


(127
)


(295
)FinancingProceeds from short term loan


250



-



-Proceeds from principle shareholder loan (Note 9)


-



2,000



-Repayment of principle shareholder loan (Note 9)


-



(2,000
)


-Issuance of shares to a principle shareholder (Note 9)


-



4,000



-Proceeds from principle shareholder convertible loan


1,802



-



-Proceeds from exercise of options


-



-



46Net cash provided by  financing activities


2,052



4,000



46Net increase (decrease) in cash and cash equivalents


(4,501
)


2,261



(2,665
)Cash and cash equivalents, beginning of year


6,111



3,850



6,515Cash and cash equivalents, end of year


1,610



6,111



3,850Non cash investing activities:Purchase of property and equipment


20



65



14Cash paid during the year for:Interest


15



30



29
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 6
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 1 - General
 
 RiT Technologies Ltd. (the “Company” or “RiT”), an Israeli company, which was incorporated and commenced operations in 1989, pioneered the development of intelligent physical layer solutions, designed to provide superior control, utilization and maintenance of networks. In the enterprise market, RiT’s solutions are designed to help customers to maximize control and maintenance efficiency and reduce an enterprise’s network infrastructure ownership costs.  In the carrier market, the Company’s solutions enable reliable mass verification and qualification by telcos.
 
 The Company has a wholly-owned subsidiary in the United States, RiT Technologies Inc. (the “US subsidiary”), which was incorporated in 1993 under the laws of the State of New Jersey.  The US subsidiary is primarily engaged in the selling and marketing in the United States of the Company’s  products.
 
 In May 1997, the Company incorporated a wholly-owned subsidiary in Israel, RiT Tech (1997) Ltd. (the “Israeli subsidiary”), intended to make various investments including in securities.  As at the balance sheet date, the Israeli subsidiary holds part of the Company’s outstanding shares. As of December 31, 2009 the Israeli subsidiary is inactive.
 
 The Company had significant losses attributable to its operations. The Company has managed its liquidity during this time through a series of cost reduction initiatives, expansion of its sales into new markets and private placement transactions. Based on the most current sales and spending projections, the Company’s estimated liquidity during the remainder of 2010 will be adequate to satisfy its liquidity requirements to meet the Company’s operating and loan obligations as they become due through calendar year 2010; however, these may be at or near the minimum amount necessary. The Company’s ability to continue as a going concern is substantially dependent on the successful execution of the sales and spending projections referred to above. There is no assurance that if required, the Company will be able to raise additional capital or reduce discretionary spending to provide the required liquidity in order to continue as a going concern. In addition, the Company received a line of credit from its major shareholder (see Notes 9 and 10) in the amount of $10 million, of which to date approximately $2.9 million has been utilized. These financial statements do not include any adjustments that might result from an outcome if the Company does not continue in existence.
 
 Note 2 - Summary of Significant Accounting Policies
 
 The financial statements are presented in accordance with United States generally accepted accounting principles (GAAP).
 
 In June 2009, the FASB issued SFAS No. 168 (“SFAS 168”), “Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles”. The FASB Accounting Standards CodificationTM (“Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our year ending December 31, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, does not have an impact on our financial position, results of operations and cash flows.
 
 F - 7
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 The significant accounting policies followed in the preparation of the financial statements, applied on a consistent basis, are as follows:
 
 A.           Financial Statements in US dollars (“dollars”)
 
 Most of the Company’s sales are made outside Israel.  Most sales outside Israel are denominated in dollars. Most purchases of materials and components, and most marketing costs, are denominated in dollars or dollar-linked. Therefore, the currency of the primary economic environment in which the operations of the Company are conducted is the dollar, which is used as the functional currency of the Company.
 
 Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies have been remeasured as follows:
 
 -
Monetary items – at the current exchange rate at balance sheet date.
 -
INon–monetary items – at historical exchange rates.
 -
Income and expenditure items – at the current exchange rate as of date of recognition of those items (excluding depreciation and other items deriving from non-monetary items).
 
 All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of operations when they arise.
 
 Amounts in the financial statements representing the dollar equivalent of balances denominated in other currencies do not necessarily represent their real or economic value and such amounts may not necessarily be exchangeable for dollars.
 
 B.           Estimates and assumptions in the financial statements
 
 The preparation of the financial statements in conformity with United States generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. These are management's best estimates based on experience and historical data.  Actual results, however, may vary from these estimates.
 
 C.           Principles of consolidation
 
 The consolidated financial statements include those of the RiT Technologies Ltd. and its subsidiaries, all of which are wholly-owned. All intercompany transactions and balances were eliminated in consolidation.
 
 D.           Cash equivalents
 
 The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
 
 E.           Allowance for doubtful accounts
 
 Accounts receivable are recorded at cost, less related allowance for doubtful accounts receivable.  Management considers current information and events regarding customers’ ability to repay their obligations and judge accounts receivable to be impaired when it is probable that the Company will not be able to collect all amounts due.
 
 The balance sheet allowance for doubtful accounts for all periods through December 31, 2009 is determined as a specific amount for those accounts, the non-collection of which is probable.
 
 F - 8
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 F.           Inventories
 
 Inventories are valued at the lower of cost or market value, except for raw materials where market is replacement cost.  Cost is determined as follows:
 
 Raw materials – on the "moving average" basis.
 
 Work in process and finished products:
 
 Costs in inventory include direct materials, labor and overhead incurred.
 
 Labor and overhead – on the basis of actual manufacturing costs based on the normal capacity of the production facility.
 
 Inventory write-downs are provided to cover technological obsolescence, excess inventories, discontinued products and market prices lower than cost.
 
 G.           Assets held for severance benefits
 
 Assets held for employees severance benefits represent cash surrender of managers' insurance policies that are recorded at their current redemption value.
 
 H.           Property and equipment
 
 Property and equipment are stated at cost less accumulated depreciation.  Maintenance and repair expenses are charged to operations as incurred.
 
 Depreciation is recorded using the straight-line method based on the estimated useful lives of the assets, and commences once the assets are ready for their intended use.
 
 Annual rates of depreciation are as follows:
 
 %Research and development equipment
25Manufacturing equipment
15 – 20Office furniture and equipment
7 – 33Leasehold improvements
*
 
 *
Over the shorter of the relevant lease period or their useful lives (mainly at 25%)
 
 I.           Revenue recognition
 
 Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection of the resulting receivable is reasonably assured.
 
 Most of the Company’s sales are sold through distributors, OEM partners, as well as through value added resellers, system integrators and installers. These distribution channels are the Company’s end users and therefore sales occur when products are sold to these channels.
 
 F - 9
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 I.           Revenue recognition (cont’d)
 
 The Company applies the guidance in “ASC Topic 605 Revenue Recognition” 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 (See also Notes 2U3 and 2U4).
 
 When the sale arrangement includes customer acceptance provisions, revenue is not recognized before it is demonstrated that the criteria specified in the acceptance provisions have been satisfied.
 
 The Company does not, in the normal course of business, provide a right of return to any of its customers.
 
 J.           Research and development costs
 
 Research and development costs are charged to the statements of operations as incurred.
 
 K.           Government grants
 
 When the Government of Israel has approved a grant for research and development (see Note 5A) the grants are recognized as receivables as and when the related research and development costs are incurred.
 
 The grants are reflected as a reduction of research and development expenses.  Royalty expenses in respect of such grants are classified as part of cost of sales when the related sales are recognized.
 
 L.           Allowance for product warranty
 
 It is the Company's policy to grant a warranty for certain products.  The balance sheet provision for warranties for all periods through December 31, 2009 is determined based upon the Company’s experience regarding the relationship between sales and warranty expenses.
 
 The following are the changes in liability for product warranty:
 
 US$ (thousands)Balance at December 31, 2007


105Accrual for warranties issued during the year


126Warranty costs incurred (actual warranty claims)


(102
)Balance at December 31, 2008


129Accrual for warranties issued during the year


1Warranty costs incurred (actual warranty claims)


(64
)Balance at December 31, 2009


66
 
 F - 10
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 M.           Stock option plans
 
 At December 31, 2009, the Company has several employee compensation plans, which are described more fully in Note 6. Effective January 1, 2006, the Company adopted the fair value recognition method in “ASC Topic 718 Compensation – Stock Compensation” (“ASC Topic 718”) using the modified prospective transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of ASC Topic 718, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718.
 
 The Company’s option awards are primarily subject to graded vesting over a service period.  In those cases, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.
 
 The Company applies the fair value-based method of accounting set forth in “ASC Topic 505 Equity” (“ASC Topic 505”) 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 fully vested.
 
 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 
 1.
The current price of the share is the market value of such shares at the date of issuance.
 
 2.
Dividend yield of zero percent for all relevant periods.
 
 3.
Risk free interest rates are as follows:
 
 Year ended December 31

%2009


1.872008


2.752007


4.51
 
 4.
Expected term of 4 years for each option granted.
 
 5.
Expected volatility of 88.54% for the year ended December 31, 2009 (81.9% and 68.7% for the years ended December 31, 2008 and 2007, respectively).
 
 The exercise price for options granted to employees generally at not less than the value of the Company’s ordinary shares at the date of grant.
 
 F - 11
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 N.           Impairment of Long-Lived Assets
 
 The Company accounts for the impairment of long-lived assets in accordance with the provisions of “ASC Topic 360 Property, Plant and Equipment”. 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. No impairment charges were recorded during 2009 and 2008. In 2007 as a result of change in development strategy the Company wrote off certain redundant development property and equipment in the amount of $257 thousand.
 
 O.           Deferred income taxes
 
 The Company accounts for income taxes in accordance with “ASC Topic 740 Income Taxes” (“ASC Topic 740”). Deferred tax asset and liability account balances are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date. The Company provides a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
 
 P.           Income tax uncertainties
 
 The Company accounts for income tax uncertainties in accordance with ASC Topic 740. ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC Topic 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Interest and penalties related to unrecognized tax benefits are classified as a component of income tax expense.
 
 Q.           Net loss per share
 
 Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with “ASC Topic 260 Earnings Per Share (“ASC Topic 260”)”.
 
 The total number of shares related to the outstanding options excluded from the calculations of diluted net loss per share due to their anti-dilutive effect was 190,366 stock options for the year ended December 31, 2009 (for the year ended December 31, 2008 – 235,125 stock options and 139,504 warrants; for the year ended December 31, 2007 – 183,404 stock options and 139,504 warrants).
 
 F - 12
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 R.           Information about geographical areas
 
 Disclosure about segments of an enterprise and related information requires the disclosure of information about geographical areas. Company sales as reported to management are divided into geographical areas based on the location of customers.  This information is provided in Note 8B1.
 
 S.           Treasury Shares
 
 Holdings of the Company’s shares by a consolidated subsidiary are presented as treasury stock, and are excluded from the calculation of loss per share.
 
 T.
Fair value measurements
 
 ASC 820-10-65-4, Fair Value Measurements and Disclosures, required the Company to apply its provisions to fair value measurements of non-financial assets and non-financial liabilities that were recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
 
 It also provided guidance for estimating fair value in accordance with the guidelines of Fair Value Measurements, when the volume and level of activity for the asset or liability havesignificantly decreased. It also included guidance on identifying circumstances that indicated a transaction was not orderly. It also emphasized that even if there had been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remained the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
 
 The Company adopted ASC 820-10-65-4 but it did not have a material impact on its balance sheet or statement of operations.
 
 U.
Recently issued Accounting Pronouncements
 
 1.
ASU 2009-13 - Multiple-Deliverable Revenue Arrangements
 
 ASC Subtopic 605-25, Revenue Recognition—Multiple-Element Arrangements, sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. One of those current requirements is that there be objective and reliable evidence of the standalone selling price of the undelivered items, which must be supported by either vendor-specific objective evidence (VSOE) or third-party evidence (TPE).
 
 ASU 2009-13 amends ASC Subtopic 650-25 to eliminate the requirement that all undelivered elements have VSOE or TPE before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered.  In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements.
 
 F - 13
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 U.
Recently issued Accounting Pronouncements
 
 1.
ASU 2009-13 - Multiple-Deliverable Revenue Arrangements
 
 The Consensus is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.  If a company elects early adoption and the period of adoption is not the beginning of its fiscal year, the requirements must be applied retrospectively to the beginning of the fiscal year. Retrospective application to prior years is an option, but is not required.  In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impact of the changes.
 
 The Company does not expect the adoption of ASU 2009-13 to have a material impact on its balance sheet or statement of operations.
 
 2.
ASU 2009-14 - Certain Revenue Arrangements that Include Software Elements
 
 ASC Subtopic 985-605, Software-Revenue Recognition,addresses the accounting for revenue transactions involving software.  Currently, that guidance applies to revenue arrangements for products or services that include software that is “more-than-incidental” to the products or services as a whole.
 
 ASU 2009-14 amends ASC Subtopic 985-605 to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality.
 
 The Consensus will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If a company elects early adoption and the period of adoption is not the beginning of its fiscal year, the requirements must be applied retrospectively to the beginning of the fiscal year. Retrospective application to prior years is an option, but is not required.  In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impact of the changes.
 
 The Company does not expect the adoption of ASU 2009-14 to have a material impact on its balance sheet or statement of operations.
 
 F - 14
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 V.
Recently Adopted Accounting Pronouncements
 
 1.
ASC 320-10-65-1 Recognition and Presentation of Other-Than-Temporary Impairments
 
 ASC 320-10-65-1, Recognition and Presentation of Other-Than-Temporary Impairments, provided that the objective of an other-than-temporary impairment analysis under existing U.S. GAAP was to determine whether the holder of an investment in a debt or equity security for which changes in fair value were not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment was impaired. An investment is impaired if the fair value of the investment is less than its amortized cost basis. It also amended the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.
 
 This guidance was effective for interim and annual reporting periods ending after June 15, 2009.
 
 The Company adopted ASC 320-10-65-1 but it did not have a material impact on its balance sheet or statement of operations.
 
 2.
ASC 470-20 – Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)
 
 ASC 470-20, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement), was issued clarifying that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should be separately accounted for with regards to the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  ASC 470-20 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
 
 The Company adopted ASC 470-20 but it did not have a material effect on its balance sheet or statement of operations.
 
 3.
ASU 2009-05, Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value
 
 ASU 2009-05, Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value, allows companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset, according to ASU 2009-05 that amends ASC Topic 820, Fair Value Measurements.  The update addresses practice difficulties caused by the tension between fair-value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place.
 
 The new guidance iseffective for interim and annual periods beginning after August 27, 2009,and applies to all fair-value measurements of liabilities required by GAAP.  No new fair-value measurements are required by the standard.
 
 The Company adopted ASU 2009-05 but it did not have a material impact on its balance sheet or statement of operations.
 
 F - 15
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 2 - Summary of Significant Accounting Policies (cont’d)
 
 V.
Recently Adopted Accounting Pronouncements (cont’d)
 
 4.
Retrospective Accounting Changes in Financial Statements That Are Amended to Correct an Error
 
 At the June 23, 2009 meeting of the CAQ SEC Regulations Committee, the SEC staff indicated that once a registrant files interim financial statements that reflect a retrospective accounting adjustment (e.g., to reflect a discontinued operation, a change in segments, or the retrospective application of a new accounting principle), any subsequent amendment to previously issued financial statements to correct an error should also reflect that retrospective accounting change. This guidance represents a change in the SEC staff’s previous view.
 
 5.
In December 2007, the FASB issued “ASC Topic 805 Business Combination (“ASC Topic 805”)” and “ASC Topic 810 Consolidation (“ASC Topic 810”)”. ASC Topic 805 and 810 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. ASC Topic 805 will be applied to business combinations occurring after the effective date. ASC Topic 810 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. Adopting ASC Topic 805 and ASC Topic 810 had no impact on the Company's results of operations and financial position.
 
 Note 3 - Property and Equipment
 
 Property and equipment, net, consist of the following:
 
 December 312009


2008US$ thousands


US$ thousandsCostResearch and development equipment


1,283



1,431Manufacturing equipment


526



531Office furniture and equipment


1,235



1,332Leasehold improvements


208



2083,252



3,502Less accumulated depreciationResearch and development equipment


1,146



1,226Manufacturing equipment


451



447Office furniture and equipment


1,107



1,131Leasehold improvements


166



1542,870



2,958382



544
 
 Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $254 thousand, $276 thousand and $396 thousand, respectively.
 
 F - 16
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 4 - Liability In Respect of Employees’ Severance Benefits
 
 Under Israeli law and labor agreements, the Company is required to make severance payments to dismissed employees and those leaving the Company in certain other circumstances.  The Company's severance pay liability to its employees, which is calculated on the basis of the salary of each employee for the last month of the reported period multiplied by the years of such employee's employment, is reflected by the balance sheet accrual and classified as a short-term or long-term liability according to the information held by the Company. The Company partially funds this liability by the purchase of managers' insurance policies. The current redemption value of such insurance policies is included in the balance sheet as assets held for severance benefits.
 
 Severance pay expense for the years ended December 31, 2009, 2008 and 2007 was $449 thousand, $424 thousand and $580 thousand, respectively.
 
 Note 5 - Commitments and Contingencies
 
 A.           Royalty commitments
 
 The Company is obligated to pay royalties to the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (the "OCS") on revenues from certain of product sales, where the research and development in respect of these products was undertaken with royalty bearing participations (“grants”) from the OCS.
 
 The Company’s obligation to pay royalties is as follows:
 
 Projects approved prior to January 1999: 3.5% of the net sales until the cumulative amount of royalties paid equals 100% of the dollar-linked amount of grants received.
 
 Projects approved after January 1999: 3.5% of the net sales until the cumulative amount of royalties paid equals 100% of the dollar-linked amounts of grants received, plus interest at the LIBOR rate.
 
 Royalties are payable from the commencement of sales of each of these products until the cumulative amount of the royalties paid equals 100% of the dollar-linked amounts of the grants received, plus interest at the LIBOR rate.
 
 As of December 31, 2009, total commitment payable to the OCS, including interest to date at the above rate, amounted to approximately $1 million.
 
 Royalties expenses to the OCS are classified as part of cost of sales (see Note 8B2).
 
 F - 17
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 5 - Commitments and Contingencies (cont'd)
 
 B.           Lease commitments
 
 1.
Premises occupied by the Company and the US subsidiary are rented under various operating leases with former 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 2011 and June 2011, respectively. The lease agreement for the premises in New Jersey is month-to-month and can be terminated upon 30 days notice. The lease agreement for the representative office in Beijing, China, expires in December 2010. The lease agreement for the representative office in Moscow expires in November 2010. Minimum future rental payments due under the above leases (except for New Jersey), at rates in effect on December 31, 2009, assuming no options are exercised, are as follows:
 
 Year ending December 31

US$ thousands2010


3882011


319707
 
 Part of the lease agreements in Israel are secured by a bank guarantee in the amount of $26 thousand.
 
 Lease expense was $521 thousand, $542 thousand and $612 thousand for the years ended December 31, 2009, 2008 and 2007, respectively.
 
 2.
The Company has several operating leases in respect of motor vehicles. These lease agreements expire on various dates to 2012. Minimum future lease payments due under the above leases on December 31, 2009, assuming no options are exercised, are as follows:
 
 Year ending December 31

US$ thousands2010


2802011


1882012


59527
 
 Lease expense was $345 thousand, $364 thousand and $461 thousand for the years ended December 31, 2009, 2008 and 2007, respectively.
 
 C.           Other commitments
 
 As of December 31, 2009, bank guarantees in the amount of $18 thousand have been issued, for VAT commitments and customs duty on importation.
 
 F - 18
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 5 - Commitments and Contingencies (cont'd)
 
 D.           Concentration of credit risk
 
 Financial instruments that may subject the Company to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.
 
 Cash and cash equivalents are deposited with major financial institutions in Israel and in the United States.
 
 The Company grants credit to customers without generally requiring collateral or security. The Company performs ongoing credit evaluations of the financial condition of its customers. The risk of collection associated with certain trade receivables is reduced by The Israeli Credit Insurance Company (ICIC), the large number and geographical dispersion of the Company's customer base.
 
 On significant carrier sales and on sales in areas where there is a risk of collection, the Company secures the payment by customer bank guarantee (L.C.)
 
 See also Note 8B1 for principal customers and Note 9 for related party transactions.
 
 E.           Concentrations of business risk
 
 Although the Company generally uses standard parts and components for products, certain key components used in the products are currently available from only one source, and others are available from a limited number of sources. The Company believes that it will not experience delays in the supply of critical components in the future. If the Company experiences such delays and there is an insufficient inventory of critical components at that time, the Company's operations and financial results would be adversely affected.
 
 F.           Indemnification agreement
 
 The Company undertakes to enter into an indemnification agreement with each of the Company's present and future serving directors and officers.
 
 The indemnification covers certain events and shall be no greater than the amount of coverage available to the Company's applicable liability insurance policy in effect at the time.
 
 F - 19
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 6 - Shareholders’ Equity
 
 A.           Share Capital
 
 1.
On July 20, 2009, the Board of Directors approved a one-for-eight reverse split of the Company’s ordinary shares, to become effective during August 2009.
 
 The split became effective on August 24.
 
 The number of ordinary shares outstanding was decreased from 20,835,420 to 2,604,428 and the number of treasury stock was decreased from 17,000 to 2,125, reflecting the rounding off of fractional shares. The par value per ordinary share was increased from NIS 0.1 to NIS 0.8. All share and per share amounts in these financial statements have been restated to reflect this reverse split.
 
 2.
See Note 9 regarding issuance of shares to a principle shareholder.
 
 B.           Share options
 
 1.
RiT Technologies Ltd. 2003 Option Plan
 
 On July 20, 2003, the Board of Directors of the Company adopted the RiT Technologies Ltd. 2003 Share Option Plan (“The 2003 Plan”), pursuant to which an aggregate of 342,083 Ordinary shares of the Company have been reserved for the grant of options under the 2003 Plan together with the former Key Employee Share Incentive Plan (1996) and the Directors Share Incentive Plan.
 
 On October 19, 2003, the Board of Directors approved the grant of 3,750 options to a director at an exercise price of $14.8 vesting in equal amounts over three years. The grant of these options was ratified by the shareholders at the Annual shareholders’ Meeting on December 1, 2003. As of December 31, 2009, these options were forfeited.
 
 On November 4, 2005, the Board of Directors approved the grant of 26,250 options to the Company’s directors at an exercise price of $22.56 and vested one third on February 2, 2006 and one third every year thereafter. The grant of these options was ratified by the shareholders at the Annual Meeting in December 2005. As of December 31, 2009, 3,750 options were remaining.
 
 On February 1, 2006, the Board of Directors of the Company resolved to reserve 62,500 additional shares for the grant of options under the 2003 Plan. The resolution was ratified by the shareholders at the Annual Shareholders’ Meeting on April 5, 2006.
 
 As of December 31, 2009, the number of options granted under the 2003 Plan is 417,397 options and the number of options outstanding under the 2003 Plan is 178,864 options. As of December 31, 2009, 191,752 options are available for future grant.
 
 2.           RiT Technologies Inc. Employee Stock Option Plan
 
 In May 1999, the Board of Directors of the Company adopted RiT Technologies Inc. Employee Stock Option Plan (the “RiT Inc. Plan”) pursuant to which 10,750 options to purchase shares of nominal value of New Israeli Shekels (“NIS”) 0.8 of the parent were allocated for the employee share option plan.
 
 The plan is administered by the Board of Directors which designates the optionees, dates of grant and the exercise price of the options.
 
 F - 20
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 6 - Shareholders’ Equity (cont'd)
 
 B.           Share options (cont'd)
 
 2.           RiT Technologies Inc. Employee Stock Option Plan (cont'd)
 
 The exercise price of each stock option is one hundred percent (100%) of the fair market value of the underlying share on the day of grant, however the exercise price of an incentive stock option granted to an individual who owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or the parent shall be one hundred and ten percent (110%) of the fair market value of the share of the Company on the day of grant.
 
 In January and October 2001, the Board of Directors resolved to reserve additional options to purchase ordinary shares in the amount of 6,250 and 10,000 respectively, for use in the RiT Inc. Plan.
 
 As of December 31, 2009, the number of options granted under the RiT Inc. Plan is 44,375 options and the number of options outstanding under the RiT Inc. Plan is 7,752 options. Rit Inc. Plan expired during May 2009.
 
 3.           RiT Directors' Share Incentive Plan (1997)
 
 In June 1997, the RiT Directors' Share Incentive Plan (1997) (the “Directors' Plan”) was adopted by the Board.
 
 On October 10, 2001, the Board of Directors of the Company resolved to reserve 13,750 shares. At that date, 26,250 options were granted to certain directors at an exercise price of $9.2 and vested in equal amounts over three years.
 
 Commencing with adoption of The 2003 Plan, the Company ceased to grant options under the Directors Plan. As of December 31, 2009, the number of options outstanding under the Directors plan is 3,750 options.
 
 F - 21
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 6 - Shareholders’ Equity (cont'd)
 
 B.           Share options (cont'd)
 
 4.
Stock Options granted under the Employees' and Non-employee's Share Option Plans are as follows:
 
 WeightedNumber of


Weighted

average


average

grant dateoptions


exercise price


fair valueUS$


US$Options unexercised as of January 1, 2007


203,867Granted


19,187



10.32



5.84Exercised


(5,000
)


8.96



5.76Expired


(1,250
)


16.4



12.4Forfeited


(33,400
)


13.2



8Options unexercised as of December 31, 2007


183,404Granted


104,625



7.92



3.04Exercised


-



-



-Expired


-



-



-Forfeited


(52,904
)


14.24



8.8Options unexercised as of December 31, 2008


235,125Granted


8,000



4.46



1.83ExercisedExpired


(500
)


20



12.3Forfeited


(52,259
)


16.93



10.65Options unexercised as of December 31, 2009


190,366
 
 F - 22
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 6 - Shareholders’ Equity (cont’d)
 
 B.           Share options (cont'd)
 
 4.
Stock Options granted under the Employees' and Non-employee's Share Option Plans are as follows: (cont’d)
 
 At December 31, 2009, total compensation cost related to option awards not yet recognized amount to $61 thousand and will be recognized in the statements of operations during fiscal years 2010 – 2012.
 
 The following table summarizes information about stock options outstanding as of December 31, 2009:
 
 Options outstanding


Options exercisableNumber of


Weighted





Number ofoptions


average





exercisableunexercised as of


remaining


Average


options as of


AverageDecember 31


contractual


exercise


December 31


exerciseRates of exercise

2009


life


price


2009


priceprices in US$




In years


US$





US$2.72-2.96


31,750



4.67



2.74



13,819



2.734.8


17,459



4.3



4.8



6,546



4.85.12-5.44


57,208



5.43



5.21



37,094



5.28.88-8.96


21,610



2.63



8.95



21,610



8.959.2-9.84


7,814



3.21



9.44



7,814



9.4410.24-11.84


4,230



3.57



10.8



3,043



10.7712.8-12.88


20,501



4.84



12.8



20,501



12.814.88


21,544



4.77



14.88



21,544



14.8820.64-25.2


7,750



4.93



22.89



7,750



22.8959


500



0.46



59



500



59190,366











140,221
 
 At December 31, 2009, options with an average exercise price of $9.64 were exercisable for 140,221 shares (at December 31, 2008, options with an average exercise price of $14.56 were exercisable for 127,164 shares).
 
 Weighted average exercise prices for the options outstanding at December 31, 2009 and 2008 were $8.26 and $11.92, respectively.
 
 Weighted average remaining contractual life of outstanding options at December 31, 2009 was 4.58 years and the intrinsic value as of December 31, 2009 is 0.
 
 The BlackScholes assumptions used in valuing the options are presented in Note 2M.
 
 F - 23
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 6 - Shareholders’ Equity (cont’d)
 
 B.           Share options (cont'd)
 
 4.
Stock Options granted under the Employees' and Non-employee's Share Option Plans are as follows: (cont’d)
 
 A summary of the status of the Company nonvested options as of December 31, 2008 and changes during the year ended December 31, 2009 is presented below:
 
 WeightedAverage grantDateNonvested options

Options


Fair valueNonvested at December 31, 2008


107,961



3.49Granted


8,000



1.83Vested


(55,833
)


3.86Forfeited


(9,983
)


3.94Nonvested at December 31, 2009


50,145
 
 5.           Options to non-employees
 
 The Company applies the fair value-based method of accounting set forth in ASC Topic 505 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 fully vested. The Company granted a total of 31,188 options during the years 2003-2009. Such options granted to non-employees were granted as part of The 2003 Plan.
 
 C.           Warrants to investors
 
 As part of an agreement for a private placement signed on June 21, 2004, the Company issued to the investors warrants to purchase up to 158,254 Ordinary shares at an exercise price of $14 per share. The warrants were exercisable until June 21, 2009. As of June 21, 2009, 18,750 of these warrants had been exercised, the rest of the warrants expired.
 
 The Company’s agreement with the investors calls for registration of the shares and keeping a registration statement effective through July 2009. If sales cannot be made pursuant to the registration statement, the Company will be required to pay liquidation charges equal to 1.5% of the aggregate amount invested per month. There is no limitation to the maximum potential consideration to be transferred. The warrants expired and no liquidation charges were incurred.
 
 The Company accounted for the issuance of warrants as an equity transaction, and separately evaluated the potential for liability for liquidated damages under the free standing registration right agreement (”RRA”) based on the guidance in ASC Topic 810. At the date of issuance, the Company believed that the likelihood of achieving effectiveness of a registration statement, and maintaining its effectiveness in accordance with the RRA, was and would continue to be highly probable. The Company filed the registration statement and believes it is highly probable it will maintain its effectiveness as required under the RRA, and that no penalties for non-performance under the RRA (i.e. liquidated damages) will arise. Accordingly, no accrual for such is recorded. The Company’s treatment is consistent with the guidance in “ASC Topic 825 Financial Instruments”.
 
 F - 24
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 6 - Shareholders’ Equity (cont’d)
 
 D.           Dividends
 
 Dividends may be paid by the Company only out of the Israeli Company’s earnings and other surpluses as calculated in Israeli currency and as defined in the Israeli Companies Law as at the end of the most recent fiscal year or as accrued over a period of the last two years whichever is higher.  Such dividends will be declared and paid in NIS.  There are no restrictions on the ability of the US subsidiary to transfer funds to its parent, and there are no restrictions on the transfer of funds to foreign shareholders for the payment of dividends.
 
 The distribution of cash dividends out of retained earnings as of December 31, 2009, would subject the Company to a 25% tax in respect of the income from which it was distributed, according to the terms of the tax exemption due to its "approved enterprise" status, as explained in Note 7B.
 
 The Company has decided not to distribute the said tax exempt income as dividends.  In the event of a dividend distribution as above, the tax amount would be charged as an expense in the statement of operations.
 See also Note 7B1(b).
 
 Note 7 - Taxes on Income
 
 A.
Israel tax reform
 
 As of January 1, 2003, an Israeli resident taxpayer will be taxed on income produced and derived both in and out of Israel.
 
 B.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (hereafter - the "Law")
 
 1.
Rates
 
 a.
Pursuant to the above Law, the Company is entitled to tax benefits relating to investments in "Approved Enterprises" in accordance with letters of approval received.
 
 A major part of the production facilities of the Company has been granted the status of an "Approved Enterprise" under the above Law.
 
 Income arising from the Company's "Approved Enterprise" is subject to zero tax rates commencing in the year in which the "Approved Enterprise" first earns taxable income under the "Alternative Benefit Method" and reduced tax rates based on the level of direct or indirect ownership for specific period. The period of benefits in respect of most of the Company's production facilities will terminate in the years 2010 – 2011 (the period of benefits in respect of the first approval was terminated in 2005). No new approvals have been received since 1997.
 
 The duration of tax benefits, for each of the programs is subject to limitations of the earlier of 12 years from commencement of investment, or 14 years from receipt of approval, as an "Approved Enterprise" under the Law.
 
 F - 25
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 7 - Taxes on Income (cont’d)
 
 B.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (hereafter - the "Law") (cont’d)
 
 1.
Rates (cont’d)
 
 b.
In the event of distribution by the Company of a cash dividend out of its retained earnings that were taxed at a zero rate due to the "Approved Enterprise" status, the Company would be subjected to 25% corporate tax on the amount distributed, and the recipients would have to pay 15% tax (to be withheld at source) on the amounts of such distribution received by them.
 
 The Company has no intention to pay a dividend in the foreseeable future and, additionally, there is a tax strategy available whereby a distribution in liquidation will not create additional taxes for the Company.
 
 c.
Should the Company derive income from sources other than the "Approved Enterprise" during the relevant period of benefits, such income will be taxable at the regular corporate tax rate - see d below for rates.
 
 d.
On July 25, 2005, the Israeli Parliament passed the Law for the Amendment of the Income Tax Ordinance (No. 147 and Temporary Order) - 2005. This Amendment provides for a gradual reduction in the company tax rate in the following manner:  in 2006 the tax rate was 31%, in 2007 the tax rate was 29%, in 2008 the tax rate was 27%, in 2009 the tax rate is 26% and from 2010 onward the tax rate will be 25%. Real capital gains are subject to tax of 25%. These rates are used in the computation of the gross deferred tax assets.
 
 On July 24, 2009, the Israeli Parliament passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) – 2009, which provided, inter alia, and additional gradual reduction in the company tax rate to 18% as from the 2016 tax year.  In accordance with the aforementioned amendments, the company tax rates applicable as from the 2009 tax year are as follows: In the 2009 tax year – 26%, in the 2010 tax year – 25%, in the 2011 tax year – 24%, in the 2012 tax year – 23%, in the 2013 tax year – 22%, in the 2014 tax year – 21%, in the 2015 tax year – 20% and as from the 2016 tax year the company tax rate will be 18%.
 
 2.           Accelerated depreciation
 
 The Company is entitled to claim accelerated depreciation for a period of five years, in respect of property and equipment of an "Approved Enterprise".  The Company has not utilized this benefit to date.
 
 3.           Conditions for entitlement to the tax benefits
 
 Entitlement to the tax benefits of the Company’s “Approved Enterprise” status is dependent upon the Company complying with the conditions stipulated by the Law and the regulations published thereunder, as well as the criteria set forth in the approval for the specific investment in the Company’s “Approved Enterprise”.
 
 In the event of failure to comply with these conditions, the tax benefits may be canceled and the Company may be required to refund the amount of the canceled benefits, with the addition of linkage differences and interest.
 
 As of the date of these financial statements, the Company believes it is in compliance with these conditions, although no benefits have been utilized by the Company to date.
 
 F - 26
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 7 - Taxes on Income (cont’d)
 
 B.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (hereafter - the "Law") (cont’d)
 
 4.
Amendments to the Law
 
 On March 30, 2005, the Israeli Parliament approved a reform of the above Law. The primary changes are as follows:
 
 a.
Companies that meet the criteria of the Alternate Path of tax benefits will receive those benefits without prior approval. In addition, there will be no requirement to file reports with the Investment Center. Companies will be required to notify the Israeli Tax Authorities regarding the implementation of the Alternative Path of tax benefits. Audit of such eligibility will be the responsibility of the Income Tax Authorities and would occur as part of the income tax audit.  Request for pre-ruling is possible.
 
 b.
Tax benefits of the Alternate Path include lower tax rates or no tax depending on the area and the path chosen, lower tax rates on dividends and accelerated depreciation.
 
 c.
In order to receive the tax benefits in the Grant Path or the Alternate Path, the "Industrial Company" must contribute to the economic independence of Israel’s economy in one of the following ways:
 
 1.
Its primary activity is in the Biotechnology or Nanotechnology fields and pre-approval is received from the head of research and development at the Office of the Chief Scientist;
 2.
Its revenue from a specific country is not greater than 75% of its total revenues that year;
 3.
25% or more of its revenues are derived from a specific foreign market of at least 12 million residents.
 
 d.
Upon the establishment of an "Approved Enterprise", an investment of at least NIS 300 thousand in production machinery and equipment within three years is required.
 
 e.
For an expansion, a company is required to invest within three years the higher of NIS 300 thousand in production machinery and equipment or a certain percentage of its existing production machinery and equipment.
 
 The amendments to the Law do not retroactively apply for investment programs having an "Approved Enterprise" approval certificate from the Investment Center issued up to December 31, 2004.  Therefore, the amendments do not impact an existing "Approved Enterprise" that received prior written approval.  The new tax regime shall apply for a new "Approved Enterprise" and for an "Approved Enterprise" expansion for which the first year of benefits is 2004 and thereafter. The Company has not applied for approvals pursuant to the amendments to the Law.
 
 F - 27
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 7 - Taxes on Income (cont’d)
 
 C.
Measurement of results for tax purposes under the Income Tax Inflationary Adjustments Law ("the Inflationary Adjustments Law")
 
 Under the Inflationary Adjustments Law, until December 31, 2007 the Company’s results for tax purposes are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index.
 
 On February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of Application) - 2008 ("the 2008 Amendment") was passed by the Israeli Parliament. According to the 2008 Amendment, the Inflationary Adjustments Law will no longer be applicable subsequent to the 2007 tax year, except for certain transitional provisions.
 
 Further, according to the 2008 Amendment, commencing with the 2008 tax year, the adjustment of income for the effects of inflation for tax purposes will no longer be calculated. Additionally, depreciation on fixed assets and tax loss carry forward will no longer be linked to future changes in the CPI, such that these amounts will continue to be linked only to the CPI as of the end of the 2007 tax year and will not be linked to CPI changes after this date.
 
 D.           Tax benefits under the Law for Encouragement of Industry (Taxation), 1969
 
 The Company believes that it currently qualifies as an "Industrial Company" under the above law.
  As such it is entitled to certain tax benefits, mainly the right to deduct share issuance costs over three years for tax purposes in the event of a public offering, and to amortize know-how acquired from a third party over eight years for tax purposes. The Company utilizes certain such provisions in its tax filings.
 
 E.           Tax assessment and tax loss carryforwards
 
 The Company has not received final tax assessments since its incorporation.  In accordance with the provisions of the Income Tax Ordinance, tax returns submitted up to and including the 2005 tax year can be regarded as final. The Company's Israeli tax loss carry forward are denominated in NIS and approximates $38,145 thousand as of December 31, 2009, and can be carried forward indefinitely against future taxable income.
 
 The U.S. subsidiary is taxed under the U.S. Federal and State income tax rules. As of December 31, 2009, the U.S. subsidiary has Federal tax loss carry forwards of approximately $5,307 thousand, which will expire between 2010 and 2029. Following the change in control which occurred in the parent company in June 2008, the U.S. subsidiary might be exposed to an ownership change as defined in the Internal Revenue Code Section 382. An ownership change occurs when the ownership percentage of 5% or greater stockholders changes by more than 50% over a three-year period. As a result, the utilization of a significant portion of the tax loss carry forwards in the U.S. subsidiary might be severely limited.
 
 F - 28
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 7 - Taxes on Income (cont’d)
 
 F.           Deferred tax assets and liabilities
 
 Deferred tax assets and liabilities 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 assets and liabilities are as follows:
 
 December 312009


2008US$ thousands


US$ thousandsDeferred tax assets:Allowance for doubtful accounts


7



4Severance pay


48



124Vacation pay


80



121Research and development


65



101Tax loss carryforwards


8,386



9,257Total gross deferred tax assets


8,586



9,607Valuation allowance


(8,586
)


(9,607
)Net deferred tax assets


-



-
 
 The net change in valuation allowance for the year ended December 31, 2009 was a decrease of $1,021 thousand and increases of $632 thousand and $2,046 thousand for the years ended December 31, 2008 and 2007, respectively.
 
 Deferred tax assets for future benefits are included where their realization is more likely than not.
 
 Because of history of taxable losses, management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income to realize the deferred tax assets. As such, the Company has recorded a full valuation allowance in regard of all its tax loss carryforwards as well as for other deductible temporary differences at December 31, 2009 and 2008.
 
 G.
Loss before income tax expense and reconciliation of the theoretical income tax expense and the actual income tax expense
 
 The components of loss before income tax expense are as follows:
 
 Year ended December 312009


2008


2007Israel


(6,273
)


(968
)


(5,200
)United States


(177
)


(250
)


(102
)Loss before income tax expense


(6,450
)


(1,218
)


(5,302
)
 
 F - 29
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 7 - Taxes on Income (cont’d)
 
 G.
Loss before income tax expense and reconciliation of the theoretical income tax expense and the actual income tax expense (cont’d)
 
 A reconciliation of the theoretical income tax expense, assuming all loss is taxed at the Israeli statutory income tax rate of 26% for the year ended December 31, 2009, 27% for the year ended December 31, 2008 and 29% for the year ended December 31, 2007, and the actual income tax expense, is as follows:
 
 Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsLoss before income tax expense


(6,450
)


(1,218
)


(5,302
)Theoretical income tax benefit at Israelistatutory tax rates


(1,677
)


(329
)


(1,538
)Non-deductible expense


13



77



58Stock compensation expense


36



73



118Change in valuation allowance


(1,021
)


632



2,046Adjustments arising from differences on thetax rate


2,686



-



-Financial reporting purposes and other**


(37
)


(453
)


(684
)Income tax expense for the reported year


-



-



-
 
 **
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.
 
 H.           Accounting for uncertainty in income taxes
 
 The Company and its subsidiaries adopted the provisions of ASC Topic 740 as of January 1, 2007, and there was no material effect on the financial statements. As a result, the Company did not record any cumulative effect adjustment related to adopting ASC Topic 740.
 
 The total amount of gross unrecognized tax benefits as of January 1, 2007, was $0.6 million. There was no change in the unrecognized tax benefits during the years ended December 31, 2007, 2008 and 2009. The entire balance of the unrecognized tax benefits, if recognized, would not affect the effective tax rate as this amount would be offset by compensating adjustments in the Company's deferred tax assets that would be subject to a valuation allowance based on the conditions existing at the Company's reporting date.
 
 The Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next year.
 
 The Company and its subsidiaries account for interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 1, 2007, and for the years ended December 31, 2007, 2008 and 2009, no interest and penalties related to unrecognized tax benefits had been accrued.
 
 The Company and its subsidiaries file income tax returns in Israel and in the U.S.  The Israeli tax returns of the Company and its Israeli subsidiary are open to examination by the Israeli Tax Authorities for the tax years beginning in 2006.  The U.S. tax returns of the U.S. subsidiary are open to examination by the U.S. tax authorities for tax years beginning in 2006.
 
 F - 30
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 8 - Supplementary Financial Statements Information
 
 A.           Balance Sheets
 
 1.           Cash and cash equivalents
 
 Comprised of:
 December 312009


2008US$ thousands


US$ thousandsCash and deposits *


1,610



6,111
 
 *
As of December 31, 2009, $146 is deposited in NIS bearing an average annual interest of 0.85%. $44 was pledged against the Company's bank guarantees.
 
 The deposits for December 31, 2008 are composed of:
 
 a.
$1,559 - Deposit in NIS and bearing an average annual interest of 3.14%.



As of December 31, 2008, $69 was pledged against the Company's bank guaranties.
 
 b.
$2,795 - Deposit in US Dollars and bearing an average annual interest of 2.79%.
 
 c.
$490 - Deposit in Euro and bearing an average annual interest of 3.88%.
 
 d.
$511 - Deposit in British Pound and bearing an average annual interest of 3.98%.
 
 The deposits are in thousands.
 
 2.           Trade receivables, net
 
 Trade receivables, net, consist of the following:
 
 December 312009


2008US$ thousands


US$ thousandsTrade receivables


2,073



3,758Less allowance for doubtful accounts


(29
)


(21
)2,044



3,737
 
 F - 31
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 
 Note 8 - Supplementary Financial Statements Information (cont'd)
 
 A.           Balance Sheets (cont'd)
 
 2.           Trade receivables, net (cont'd)
 
 The following are the changes in the allowance for doubtful accounts:
 
 
 US$ thousandsBalance as of January 1, 2007


310Additions


23Deductions


(50
)Write-downs charged against the allowance


(260
)Balance as of December 31, 2007


23Additions


9Deductions


(11
)Write-downs charged against the allowance


-Balance as of December 31, 2008


21Additions


16Deductions


(8
)Write-downs charged against the allowance


-Balance as of December 31, 2009


29
 
 3.           Other current assets
 
 Other current assets consist of the following:
 
 December 312009


2008US$ thousands


US$ thousandsReceivables from the Government of Israel:OCS


206



24Value added tax authorities


60



143Prepaid expenses


136



284Other


60



85462



536
 
 4.
Inventories
 
 Inventories consist of the following:
 
 December 312009


2008US$ thousands


US$ thousandsRaw materials and subassemblies


1,838



1,253Work in process


162



238Finished products


1,355



2,4873,355



3,978
 
 F - 32
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 8 - Supplementary Financial Statements Information (cont'd)
 
 A.           Balance Sheets (cont'd)
 
 5.
Other payables and accrued liabilities
 
 Other payables and accrued liabilities consist of the following:
  December 312009


2008US$ thousands


US$ thousandsEmployees and employee institutions


845



1,086Government of Israel:OCS in respect of royalty payments


3



86Accrued expenses


424



783Provision for product warranty


66



129Deferred revenues


-



197Other


2



51,340



2,286
 
 6.           Fair Value Measurements
 
 The fair values of the financial instruments as of December 31, 2008 and 2009 represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.
 
 The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
 
 a.
Cash and cash equivalents, trade receivables, other current assets, short term loan, trade and other payables. The carrying amounts approximate fair value because of the short maturity of these instruments.
 
 b.
Long term trade receivables: The fair value is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. The difference between the carrying amounts and fair value is not material.
 
 F - 33
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 8 - Supplementary Financial Statements Information (cont'd)
 
 B.           Statements of operations
 
 1.           Sales (1)
 
 (a)           Classification of sales by geographical destination:
 
 Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsUnited States


1,723



2,911



6,764Europe


3,461



13,445



8,289Israel


1,155



1,728



1,565South and Latin America


351



944



3,092Asia Pacific


1,494



2,728



3,289Rest of the world


471



800



3708,655



22,556



23,369
 (1)  Sales are attributed to geographical areas based on location of customers.
  The Company’s property and equipment is primarily located in Israel.
 
 (b)           Sales by major product lines:
  Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsEnterprise Solution


8,129



18,919



20,015Carrier Solution


526



3,637



3,3548,655



22,556



23,369
  (c)
Principal customers:
 
 During fiscal years 2009 and 2008, there were no sales to customers individually exceeding 10% of total sales.
 
 During fiscal year 2007, sales to customers individually exceeding 10% of total sales were $5,328 thousand.
 
 Customers who accounted for over 10% of the total consolidated revenue:
 
 Year ended December 312009


2008


2007Customer


%


%


%A



-



-



-B



-



-



10.60C



-



-



12.20
  F - 34
  RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 8 - Supplementary Financial Statements Information (cont'd)
 
 B.           Statements of operations (cont’d)
 
 2.           Cost of sales
 
 Cost of sales consists of the following:
  Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsPayroll and related benefits


878



975



1,272Materials purchased


1,922



7,293



6,887Subcontracted work


732



2,189



1,776Royalties to the OCS


32



129



117Write-down of inventories


121



181



* 1,764Other production costs


477



944



8174,162



11,711



12,633Decrease (increase) in inventories


548



(631
)


1,5234,710



11,080



14,156
 
 *
Following sales weaker than originally projected, especially of the Carrier products, the Company wrote-off excessive and slow-moving inventories.
 
 3.
Financing income, net
 
 Financing income, net, consists of the following:
  Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsExpenses:Interest on short-term credits and bank charges


(53
)


(27
)


(59
)Interest on long-term principle shareholder loan


(3
)


-



-Exchange translation (expenses) income, net


(65
)


(23
)


18(121
)


(50
)


(41
)Income:Interest from banks and others


11



102



105Financing income, net


(110
)


52



64
 F - 35
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
 Note 9 - Related Parties Balances and Transactions
 
 On June 12, 2008, the Company’s then principal shareholders completed the sale of their entire shareholdings in the Company to STINS COMAN, a Russian corporation headquartered in Moscow, Russia, who has been the Company’s distributor since 1994. Under the agreement entered in March 2008, the selling shareholders sold to STINS all of the 640,315 (5,122,521 before reverse split, see Note 6A1) RiT shares held by them (or their affiliates), representing approximately 34.9% of the Company’s outstanding share capital at that date. STINS acquired additional shares of the Company through a cash tender offer also completed in June 2009. Following the consummation of these transactions, STINS was the owner of approximately 768,792 (6,150,336 before reverse split) RiT shares, representing approximately 41.9% of the outstanding ordinary shares of the Company.
 
 On June 13, 2008, the Company’s Board of Directors approved a short-term loan agreement with STINS, according to which, STINS will extend to the Company a loan of up to $4 million at the request of the Company.  The key terms of the loan agreement were as follows:
 
 ·
At any time through December 31, 2008, the Company may draw the loan from STINS, but no more than $2 million at one draw (up to a maximum of $4 million) and at intervals of at least 30 days between each draw.
 ·
The outstanding principal amount will accrue interest at an annual rate of 2.47%.
 ·
The outstanding principal amount and the interest accrued thereon are due and payable in one payment 12 months after receipt of the funds.
 ·
The loan is unsecured.
 
 The Company drew $2 million out of the $4 million loan.
 
 On July 22, 2008, the Company entered into a binding Memorandum of Understanding ("MOU") with STINS, for a private issuance by the Company of newly issued ordinary shares of the Company. Pursuant to the MOU, the outstanding loan amount and the interest accrued thereon should have been converted at the closing into ordinary shares of the Company at a conversion price of $0.65 per share (before reverse split). The conversion price represented a premium of 25% over the closing price of the ordinary shares as reported on NASDAQ on July 18, 2008, the last trading day before the approval of the transaction by the Audit Committee and Board of Directors of the Company. The closing of the transaction was subject, among others things, to the approval of the Company's shareholders, which was obtained at the 2008 Annual General Meeting, held in August 2008. On September 15, 2008, the Company completed the private placement and issued 769,231 (6,153,846 before reverse split) ordinary shares to STINS for a total investment of $4 million, reflecting a $5.2 ($0.65 before reverse split) purchase price per share. Rather than converting the $4 million short term loan that STINS agreed to extend to the Company in June 2008, the purchase agreement provided for a direct investment of $4 million. In conjunction with the closing, the $2 million short term loan that was previously extended to the Company was repaid in full and the loan agreement was terminated. Immediately following the closing of the transaction, STINS held 1,538,023 (12,304,182 before reverse split) of the Company’s shares, representing approximately 59.1% of the Company’s outstanding shares. As of December 31, 2008, STINS held 1,558,880 (12,471,242 before reverse split) of the Company's shares representing approximately 59.86% of the Company’s outstanding shares.
 
 As of December 31, 2009, STINS holds 1,579,788 (12,638,302 before reverse split) of the Company’s shares representing approximately 60.7% of the Company’s outstanding shares.
  F - 36
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
  Note 9 - Related Parties Balances and Transactions (cont'd)
 
 On November 4, 2008 – the Company announced that it has appointed STINS COMAN Corporation, an affiliate of STINS COMAN Incorporated, RiT’s principal shareholder, to be its non-exclusive distributor of carrier solutions in the CIS market, until, initially, September 2009.
 STINS COMAN has served as RiT’s distributor of enterprise solutions in Russia since 1994.
 
 On June 11, 2009, the Company entered into a Loan Agreement with STINS COMAN, our controlling shareholder, subject to receipt of approvals of Audit Committee Board of Directors and shareholders, as required by the Companies Law. On June 17, 2009, the Company entered into an Addendum to the Loan Agreement. On June 17, 2009, our Audit Committee and Board of Directors approved the Loan Agreement and the Addendum thereto (together, the “Convertible Loan Agreement”).
 
 According to the loan agreement, STINS COMAN agreed to extend to the Company a loan of up to $10 million. Other key terms of the loan agreement are as follows:
 
 ·
At any time beginning with October 1, 2009, RiT may call the loan from STINS COMAN, but no more than $5 million at one call (up to a maximum of $10 million) and at intervals of at least 30 days between each call.
 ·
The outstanding principal amount will accrue interest at an annual rate of 2.47%.
 ·
The outstanding principal amount and the interest accrued thereon are due and payable 36 months following receipt of the funds drawn at each call (the “Maturity Date”).
 ·
The loan is unsecured.
 ·
STINS COMAN has the right to convert, at any time, the outstanding principal amount and the interest accrued thereon, in whole or in part, into ordinary shares of RiT at a conversion price per share equal to the market price of RiT shares on NASDAQ on the day RiT had received the funds, plus a premium of 10%. The conversion is subject to a 30 days prior notice and to the execution of a definitive purchase agreement to be substantially similar to the Securities Purchase Agreement entered between the parties, dated September 11, 2008.
 
 As of December 31, 2009, the Company called and received $1,802 thousand.
 
 On November 26, 2009, the Company entered into a short term loan agreement with a related party.
  The Company received $250 thousand to be repaid no later than three months following the loan date.
 
 The loan bears no interest, but if the Company is late in repaying the loan, then the loan shall bear an interest of 1% for every month of lateness.
 
 All transactions with related parties were in the ordinary course of business and at terms comparable to those applied to transactions with other customers or suppliers and are mainly sales of the Company's products, purchases from related parties, human resource and administrative services received and leasing of premises occupied by the Company and the US subsidiary (See Note 5B).
 
 F - 37
 
 RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
  Note 9 - Related Parties Balances and Transactions (cont'd)
 
 A.           Balances with related parties
 
 The following related parties’ balances are included in the balance sheets:
  December 312009


2008US$ thousands


US$ thousandsAccounts receivable:Trade


52



315Accounts payable:Short term loan


250



-Principle shareholder convertible loan


1,805



-
 
 B.           Income from or expenses to related parties
 
 The following related parties transactions are included in the statements of operations.
 
 Year ended December 312009


2008


2007US$ thousands


US$ thousands


US$ thousandsIncome:Sales


306



1,111



1,118Costs and expenses:Purchases


-



7



-Services


-



42



92Research and development costs


-



156



256Sales, marketing, general and administrativeexpenses


-



283



561Financing expense


3



11



-C.           Purchases of property and equipment


-



5



-
  Note 10 - Subsequent Events
 
 The short term loan in the sum of $250 thousand was repaid on January 18th 2010 (see Note 9).
 
 On February 17, 2010, STINS COMAN and the Company extended the term of their convertible loan agreement by an additional 12 months, until June 11, 2011. During this extended period, the Company may call for any additional portion of the loan. The extension of the loan term has been approved by the Company’s Audit Committee and Board of Directors.
  F - 38
  RiT Technologies Ltd.
 and Subsidiaries
 
 Notes to the Consolidated Financial Statements as of December 31, 2009
  Note 10 - Subsequent Events (cont’d)
 
 On February 19, 2010, the Company entered into a Product Alliance Agreement with STINS COMAN, its controlling shareholder, subject to receipt of approvals of the Audit Committee, Board of Directors and shareholders, as required by the Israeli Companies Law. On March 30, 2010 and on April 9, 2010 the Audit Committee and Board of Directors approved, respectively, the Product Alliance Agreement (the "Product Alliance Agreement" or the “Agreement”) and the transaction contemplated thereunder (the “Transaction”). On June 14, 2010, the shareholders approved this transaction at a special shareholders meeting convened for that matter.
 
 The Product Alliance Agreement provides for cooperation between STINS COMAN and the Company with regard to a laser speed camera (the “Product”) developed by STINS COMAN. Pursuant to the Agreement, STINS COMAN will grant the Company the exclusive rights to, primarily: (a) manufacture the Product in accordance with the Manufacturing File (as defined therein) furnished to the Company by STINS COMAN and (b) sell the Product in the Territory (defined to be worldwide except for Russia and the CIS countries). Additional key terms of the Agreement include, without limitation, the following:
 
 The Company's obligation to pay STINS COMAN part of the Product’s sales proceeds, which is fifty percent (50%) of an amount equal to the excess of (i) the proceeds from sales of the Product over (ii) the costs of manufacturing the Product (Clause 6.2. of the Agreement). Such payments to STINS COMAN are to be paid no later than three (3) years after actual receipt of the sales proceeds by the Company (Clause 7.1).
 
 The conversion right given to STINS COMAN (option to convert the debt into the Company's Ordinary shares) (Clause 7.5) at a conversion price equal to the NASDAQ price of the Company's shares on the last day prior to the signing of a definitive Share Purchase Agreement (“Definitive Agreement”) for the issuance and sale of the Company's shares upon such conversion.
 
 The Company's right to purchase the Product at an agreed upon Purchase Price (Clauses 8.1-8.2).
 
 STINS COMAN representation and Warranty that the Product, once manufactured according to the Manufacturing File, will perform correctly at its intended work environment and will function successfully as planned for during the development process (Clause 9.1.3).
 
 STINS COMAN undertaking to indemnify the Company in respect of all damages actually incurred or suffered by the Company as a result of a claim by a third party that the use or sale of the Product infringes a valid patent, trademark, copyright or other intellectual property right (Clause 11); and the Agreement’s Term for a period ending at the expiry of the third Contractual Year (unless extended by mutual written agreement) (Clause 13).
 
 On May 17, 2010, the Company’s Board of Directors approved a conversion of $1.5 million loan amount (plus interest accrued for that period) into 615,485 the Company’s ordinary shares to be issued to STINS COMAN upon such conversion, at a price and under the terms provided for in the executed Loan Agreement dated June 11, 2009. Accordingly, the Company and STINS COMAN executed an appropriate definitive Share Purchase Agreement, and on June 9, 2010, the Company issued the 615,485 shares to STINS COMAN Incorporated. Following the conversion of debt to equity, and as intended to by the conversion resolution, the Company’s shareholders’ equity was increased by approximately $1.5 million which is above the $2.5 million shareholders’ equity needed by the NASDAQ CM continued listing requirements.