UNITED STATES DISTRICT COURTEASTERN DISTRICT OF VIRGINIA (ALEXANDRIA)

In re ECI Telecom Ltd. Securities LitigationCiv. No. 01-913-A

PLAINTIFFS’ SECOND AMENDED AND CONSOLIDATEDCLASS ACTION COMPLAINT

1. Lead Plaintiffs Ozma Provident Fund, Ltd. and Sion Provident Fund, Ltd.

(“plaintiffs”), by their attorneys, for their Second Amended and Consolidated Class Action

Complaint allege the following upon personal knowledge as to themselves and their own acts, and

upon information and belief based upon the investigation of their attorneys as to all other matters.

Such investigation included a thorough review and analysis of public statements, documents publicly

filed on behalf of ECI Telecom Ltd. (“ECI” or the “Company”), press releases, news articles and

analyst reports, as well as interviews with dozens of witnesses, including former employees of ECI.

Following the issuance of the Court’s Opinion of November 21, 2001, plaintiffs’ attorneys undertook

additional investigation to respond to the concerns raised by the Court. New allegations set forth

herein and summarized in paragraph 8 below, describe in greater detail: (1) specific sales and sales

practices which were violative of Generally Accepted Accounting Principals (“GAAP”) and (2)

defendants’ scienter, as demonstrated, in part, by the magnitude of the GAAP violation with respect

to ECI’s statement of net income for the restated quarters, Q1 2000-Q3 2000, as well as their

decision to accrue sales revenue during these quarters against the advice of their outside accountants,

KPMG. There is dramatic new evidence in this Complaint that goes to the core of the issues raised

by the Court in its Memorandum and Order dated November 21, 2001, that demonstrates a consistent

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and pervasive practice to violate GAAP, issue erroneous financial reports to the investing public and

to ignore the advice of ECI’s outside auditors as to the manner of properly recording revenue.

NATURE OF THE ACTION

2. This is a securities class action brought on behalf of public investors who purchased

the common stock of ECI between May 2, 2000 and February 14, 2001 (the “class period”). This

action seeks remedies under the Securities Exchange Act of 1934 (the “Exchange Act”). Plaintiffs

complain of a fraudulent scheme, a deceptive course of business and the dissemination of false and

misleading financial statements that injured purchasers of ECI stock during the class period.

3. ECI, an Israeli corporation founded in 1961 and a holding of Koor Industries

(“Koor”), designs and develops digital communications and data transmission systems for the

telecommunications industry. ECI systems are utilized in 140 countries around the globe. ECI’s

worldwide headquarters are located just outside Tel Aviv, Israel; its North American headquarters

are located in Herndon, Virginia.

4. Throughout the Class period, ECI was portrayed as a growing company which was

experiencing and would continue to experience increased revenues and demand for its products and

services, which ECI described as “cutting edge” technology in the areas of telecommunication

networking, access and transmission. In reality, ECI was less able than its larger competitors to react

to the lightning-paced evolution of telecommunications technology within the last five years. After

achieving great success with its Digital Circuit Multiplication Equipment (“DCME”) products in the

mid- to late-1990s, ECI “rested on its laurels” and found itself with a technology deficit by 1999,

when DCME sales leveled off. In order to keep pace with its competitors, defendants used a merger

and acquisition strategy to obtain new products and access to new markets. However, these

1 The five divisions in question which were developing and selling ECI’s newer“core” products are Inovia (“Access” division, primary products: xDSL), Enavis (“Digital CrossConnect” division, primary product T::DAX), InnoWave (“Wireless Local Loop” division),Lightscape (“Optical” division) and NGTS (“Next Generation Telephony Solutions”). ECI’solder DCME products utilized compression technology which was being replaced in themarketplace by voiceover IP technology. Both the older DCME products and the new IPtelephony were to be included in the NGTS spin-off. ECI’s remaining older business divisions,Business Systems and Integrated Network Solutions, which represented approximately 10% ofECI’s revenues in 2000 were deemed “non core” to ECI’s future development. In August 2001,ECI announced an agreement to sell the Business Systems division to a newly formed company,Tadiran Business Systems, Ltd.

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transactions were not the synergistic combinations defendants claimed they were. Indeed, the 1999

merger between ECI and Tadiran Telecommunications, a subsidiary of Koor, of which Jonathan

Kolber is a controlling shareholder, allowed Koor and its shareholders to dump a business with

highly questionable products, i.e., which did not have big growth potential and/or a big enough

attainable market, on ECI and its shareholders.

5. Eager to raise capital for development of its own optical technology, considered by

analysts to be the “jewel in the [ECI] crown,” and even more eager to generate income for Koor,

defendants decided to break apart ECI’s operations into five separate companies, each of which ECI

planned to take public during calendar year 2001.1 Koor would then be able to recoup its substantial

investment losses in ECI through stock sales in the five planned initial public offerings.

6. Specifically, Kolber had borrowed heavily, on loans for which he is personally liable,

to finance his investment in Koor. In turn, Koor’s purchases of ECI shares, to amass the 33% stake

in ECI it held during the class period, were very costly. In an article which appeared on July 8, 2001

in Globes Business Arena (the English language version of Israel’s Globes business

daily)(hereinafter “Globes”), shortly after the close of the class period, it was reported that Koor’s

book value for its investment in ECI was $17 per share – 76% above its then-current trading price

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of $4.15. Consequently, author Nir Goldberg concluded: “It now appears that all the efforts of

Somekh Chaikin, Koor’s accounting firm, Koor management, and Hapoalim to evade a writeoff of

over NIS 1 billion [$238 million], will not meet the market test.” According to Goldberg, once ECI

posted its second-quarter losses, the gap between Koor’s valuation of its ECI stock and its actual

value was likely NIS 1.5 billion [$357 million]. (Conversion figures based upon July 2001 rate of

NIS 4.2 to 1 USD). Given the fact that Koor describes itself as “Israel’s leading investment holding

vehicle,” during the class period, defendants were aware that a decline in the share price of ECI

would cause substantial ripples in Israel’s economy. Defendants’ scheme was not devised to enable

them to turn a quick profit on stock sales based upon inside information, but to prevent Kolber and

Koor from suffering tremendous losses. Thus, although other industry giants, such as British

Telecom and AT&T had begun to announce sales slow downs by May 2000, ECI could not afford

to allow any possible weakness in the industry be reflected in its results of operations. ECI needed

to continue to appear successful until the Company could raise funds through the five planned IPOs.

7. ECI announced the break-up to employees in early 2000. However, before ECI could

publicly announce the break-up, defendants recognized that they needed to give investors the

impression that the business units to be spun off were gaining rapid market acceptance of their

products. Consequently, in a May 8, 2000, interview, defendant Inbar falsely denied ECI had plans

to break apart the Company. Several months later, on August 2, 2000, after ECI announced more

“successes” for the proposed new companies, ECI announced the proposed restructuring. Between

the time of Inbar’s initial denial and the date the restructuring was publicly announced, ECI’s price

per share rose more than 25%, from $29 (May 8, 2000, close) to $36.31 (August 2, 2000, close).

2 The aggregate amount of the overstatement was obtained by comparing the figuresset forth in the attachment to ECI’s February 14, 2001, press release announcing its 2000 fiscalyear audited results, entitled “Table 3: ECI Telecom Ltd. and Subsidiaries Breakdown of theCompany’s Revenues,” with the attachment to ECI’s November 7, 2000, press releaseannouncing ECI’s third quarter unaudited results, entitled “Table 3: ECI Telecom Ltd. andSubsidiaries Breakdown of the Company’s Revenues By Divisions.” (Exhibits A and B hereto). Apparently, whereas ECI claimed to have “moved” only $61 million in revenues into 2001,$7.61 million of the $61.61 million in revenues removed from the first three quarters wasrecognized in the fourth quarter of 2000.

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8. Throughout the class period, defendants generated interest in ECI and its new

business units, thereby artificially inflating the price of ECI, by engaging in a scheme which falsely

and recklessly misrepresented the Company’s operations and financial results for the first three

reporting periods of 2000. Defendants did so by virtue of improper sales and revenue recognition

practices as well as false statements, all designed to make the five divisions ECI planned to spin off

appear to be successful and growing. Various actions taken by defendants in furtherance of their

scheme include:

� Overstating ECI’s company-wide revenues for the first three quarters of 2000 by

$68.61 million, which amount was removed from the books for those quarters when ECI

filed its audited financial statements for 2000;2

� Overstating revenues in each of three quarters for the five business units which were

going to be spun off. (In other words, ECI was forced to restate 15 different revenue figures.)

Although defendants publicly stated that this was a mere accounting technicality, caused by

the implementation of SEC Staff Accounting Bulletin (“SAB”) 101, ECI’s revenue figures

do not exhibit an across-the-board adjustment: Multiple divisions of ECI did not change their

reported revenue when ECI restated. In sharp contrast to the new product divisions to be

3 It is important to note that SAB 101 provides in its text that the statementscontained therein “are not rules or interpretations of the Commission, nor are they published asbearing the Commission’s official approval. They represent interpretations and practice followedby the Division of Corporation Finance and the Office of the Chief Accountant in administeringthe disclosure requirements of the Federal Securities laws. SAB 101 reflects the basic principlesof revenue recognition in existing generally accepted accounting principles. SAB 101 does notsupercede any existing authoritative literature.”

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spun off, ECI’s older product lines, the divisions which comprised “non core” businesses

representing about 10% of ECI’s revenues in 2000 (represented by the line “Other” on Exhs.

A and B), showed the same amount of revenues for the first three quarters of 2000 both

before and after the restatement. Similarly, according to both Exhs. A and B and to ECTel’s

Form 20-F, filed June 29, 2001, the revenues earned by ECI subsidiary ECTel for the first

three quarters of 2000 did not change after ECTel adopted SAB 101, even though the two

companies shared the same outside auditors, Somekh Chaikin (KPMG group). Thus,

contrary to defendants’ claim that the application of SAB 101 caused company-wide

revenues to shift, it was manipulation of certain divisions’ operating results and not others’

which was at the root of the restatements;

� Arguing with their accountants throughout fiscal 2000 about the application of SAB

101,3 which was issued in late 1999. According to several former ECI employees involved

with order processing and accounting, before SAB 101 was issued, ECI booked revenue

upon shipment. To confirm such sales, ECI’s outside auditors, KPMG, reviewed air freight

bills and contracts to determine who bore the risk of loss prior to delivery. Once SAB 101

was issued, according to a former vice president for customer service, at the end of each

quarter, KPMG had very heated meetings at ECI’s Fort Lauderdale offices with ECI’s Chief

4 Defendants claim that they were not required to apply SAB 101 until Q4 2000. However, at the time SAB 101 was first issued, no such grace period existed.

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Financial Officer for the United States, Tom Sennott.4 According to another ECI employee,

an accounting manager who also attended these regular quarter-end meetings, other attendees

included Gary Davison, the president of ECI’s United States operations, and controller

Kristen Budden. During one meeting, Sennott called defendants Inbar and Ben- Assayag on

the telephone in Israel to explain KPMG’s position regarding why various transactions could

no longer be booked as revenue because installation, a contractual obligation of ECI’s was

not complete. Per this accounting manager, Inbar and Ben-Assayag “had a hard time”

accepting the guidance provided by SAB 101. They refused to believe that noncompliance

with SAB 101 would lead to ECI having to restate its results of operations. During one such

meeting, Sennott was overheard by this accounting manager saying over the telephone to

Israel: “Listen Avi [Ben-Assayag], here are the auditors, and they’re saying, it ain’t gonna

be a sale.” The United States accounting personnel did not argue as much with the auditors

as did the top management in Israel. The accounting manager indicated that eventually,

about one year ago, Inbar and Ben-Assayag were so adamant in their opposition to the

application of SAB 101, that KPMG asked either the drafter of SAB 101, or someone else

at the SEC staff accounting office, to personally explain the guidance to Inbar and Ben-

Assayag.

� Following the heated discussions with the outside auditors, defendants made the

knowing determination to continue to recognize revenue upon shipment (in violation of

GAAP on those contracts where installation and delivery issues existed) until it officially

5Importantly, as stated by Robert A. Bayless, Chief Accountant of the SEC’s division ofCorporation Finance in a speech given on September 18, 2001: “A staff bulletin is not a rule. The Commission doesn’t issue or approve a SAB. A SAB is informal guidance issued by thestaff describing how we believe public companies should address particular accounting anddisclosure issues based on existing accounting guidance. SABs don’t change generally acceptedaccounting principles.”

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adopted SAB 101 in late 2000.5 A former manager of invoicing and order processing, who

prepared weekly reports for ECI’s top accounting personnel for North American sales --

including CFO Sennott and Assistant Vice President for Finance, Lionel Marquis -- was

instructed by ECI’s finance department that in preparing the reports, revenue was eligible for

recognition if there was a valid purchase order and the products had been shipped FOB

origin. The determination to actually record the revenue was then made by management,

including Tom Sennott, Avi Ben-Assayag and, possibly, Doron Inbar. When ECI prepared

its revenue figures for the end of each quarter, KPMG was provided with order files -- which

could include invoices, shipment information, receipts, and installation billing and

completion documents. However, although SAB 101's issuance and guidance was discussed,

the auditors did not specifically request to see installation information until Q4 2000, in

earlier quarters relying upon ECI’s report of revenue eligible for recognition under the rule

promulgated by ECI’s finance department. Once SAB 101 was applied in Q4 2000, this

manager was asked by superiors to go back two or three quarters to determine whether

installation had occurred with respect to sales for which revenue was recognized during the

quarter. Some of these orders, particularly those shipped during the last two weeks of each

quarter (for which installation could not have occurred), had to be redone to reflect the

6 Proof that this practice existed was provided by a former accounts receivableprocessor, who indicated that there were times that the invoice numbers referenced on the checksbeing processed were different from the numbers on the invoices that the processor was workingfrom. Sometimes, overseas customers, mostly in Israel, Korea, Singapore and Taiwan were notinvoiced at all.

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correct accounting principles of not recording or billing installation charges until they were

completed. Sennott and Marquis knew which customers’ sales were required to be restated;

� Dramatically overstating revenues for the division considered to be the jewel in the

ECI crown by many analysts (such as Jonathan Haft of UBS Warburg, Rami Rosen at Oscar

Gruss and Barry Sine of Kaufman Brothers), the Optical Networks (Lightscape) division.

According to statements by defendant Inbar, quoted in ECI press releases, ECI’s optical

networks division reportedly earned $226.8 million during the first three quarters of 2000,

an increase of $58.9 million in revenues, more than 35%, over the same three quarters in

1999 (See Exh. A, at “Optical Networks”). However, when those three quarters were

restated, the Optical Networks division only had revenue of $203.4 million, an increase of

only $35.5 million. Consequently, ECI inflated the year-over-year revenue increase for the

optical division by $23.4 million, a whopping 66%. A former employee, senior in ECI’s

marketing and sales organization in Israel, confirmed that Lightscape was the division which

most frequently engaged in: (1) “short shipments,” wherein empty or partially filled boxes

were shipped and invoiced and $0 invoices were later sent when all of the products originally

invoiced were finally shipped;6 (2) “order advancement,” whereby ECI obtained purchase

orders from customers for products not currently needed, shipped the product to storage (one

such location was Frankfort Airport), and did not require payment until the product was

delivered; and (3) obtaining customer approval for early delivery of equipment. Another

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former senior executive employed by ECI in Israel confirms that these schemes occurred

company-wide and that the scheme was devised by Inbar. These sources point to Zamir

Segev and Rephael Ben Asher as persons who implemented the fraudulent schemes.

According to one of the sources, these methods by which ECI manipulated revenue

recognition were, at first, only known to a handful of senior management personnel.

Eventually, knowledge spread throughout the Company such that one day a clerk at ECI’s

headquarters called to ask about something the clerk explicitly referred to as the “fake order”;

� Engaging in “bill and hold” transactions, a form of “order advancement,” wherein

ECI would accrue revenue once products were delivered to shippers, even though the

customers did not take delivery or pay for or install the products. A former regional sales

manager in the United States indicated that such transactions were customary during the class

period and that the freight forwarding companies which shipped the goods to warehouses

were Fritz, BAX Global and Jordan;

� Overstating the revenues of the four other new product divisions to be spun off --

Access (Inovia), Transport (Enavis), InnoWave and NGTS (the successor products to

DCME) -- by a combined total of more than $27 million for the same three quarters;

� Writing off sales which did not materialize at the end of the year. According to a

former senior sales and marketing employee in Israel, when products were not requested by

customers by the end of the year -- on orders where revenues were prematurely recognized

under the “short shipment” and “order advancement” schemes – the sales would be written

off at the end of the fourth quarter. Thus, with respect to the $68.61 million in revenues

removed from the first three quarters of 2000, only $7.61 million of these revenues (11%)

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were actually realized by the end of 2000. 89% of revenues purportedly removed only

temporarily -- until after the completion of installation and customer acceptance – did not

make their way back onto the books even though at least three, and as much as nine, months

had passed since the time of the alleged sale.

� Overstating the sales of ECI’s older Legacy DCME products -- which were already

portrayed as sharply declining during 2000, but which still made up a substantial portion of

ECI’s revenues -- during the first three quarters of 2000 by more than $18.1 million;

� Booking revenues upon receipt of purchase orders, rather than upon shipment to the

customer and/or installation of products, contrary to both ECI’s stated revenue recognition

policies and Generally Accepted Accounting Procedures (“GAAP”). An example of this is

an order for $780,000 for T::DAX equipment for Arbinet, Inc. Even though the customer

could not accept delivery for installation because its Los Angeles site was not yet ready, the

purchase order was dated June 30, 2000, so that ECI could recognize the entire contract

amount in Q2 2000. (A July 6, 2000, sales report containing this information is attached as

Ex. C hereto);

� Shipping products to customers and booking revenues even before the customers had

committed to purchase the product. According to a former sales manager, prior to 1999, ECI

would ship equipment to a customer if there was a 70% or greater chance that the customer

would pay for it. (This sales practice in and of itself violated the GAAP requirement that

revenue cannot be recorded if payment is not reasonably assured.) However, in 1999 and

2000, ECI began shipping equipment to customers even if the sales representative involved

placed the likelihood of payment below the 70% mark. Indeed, ECI starting shipping

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products to customers who had not even issued purchase orders. One such company was

TeleGlobe, which complained about receiving unwanted equipment it had never ordered.

Other companies also handled by that regional sales manager (besides TeleGlobe) also

received equipment for which they had never issued a purchase order.

� Falsely announcing an agreement/memorandum of understanding with Last Mile

Media (“LMM”), to be worth tens of millions of dollars -- when the only writing ever signed

was a non-binding term sheet, not even a memorandum of understanding – in a press release

which also falsely described LMM as having customers (when it did not) and failed to

disclose that LMM had no assets, with the exception of future loans from ECI. (Exh. D

hereto is the Amended Complaint, and exhibits thereto, filed in LMM’s action against ECI).

The announcement of the LMM deal on August 17, 2000, caused ECI’s share price to rise

from $28.87 (August 16 close) to $30.50 on August 18 -- an increase of 5.6% -- on a volume

of 1,226,500 shares – more than 300,000 shares greater than the second-highest trading

volume day during the entire month;

� Shipping units to customers which they either did not request or were not prepared

to accept, so that ECI could book the revenue during that quarter, in accordance with its

policy of recognizing revenue upon shipment. For example, according to a former employee

of LMM, ECI asked LMM to take delivery of a $100,000 demonstration unit at the end of

Q3 2000, even though LMM had neither office space nor the ability to pay for the unit.

Similarly, in September 2000, at the end of Q3 2000, $100,000 worth of DTX 60E hardware

was shipped to an ECI warehouse on behalf of IDT, a customer which had not issued a

purchase order and was not ready to receive delivery of the products. Other examples of

7 The book-to-bill ratio is the ratio of business "booked" (orders taken) to business"billed" (products shipped and bills sent). A book-to-bill of 1.0 implies incoming business isequal to outgoing product. A book-to-bill ratio of 1.1 or higher is “very encouraging.” (Source:http://invest-faq.com). A study which demonstrates that “book-to-bill” announcementssignificantly impacted stock price increases/decreases – 22% of the announcements studied werefollowed by price increases/decreases of 10% – is attached as Exh. L hereto.

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premature shipping include sales to Arbinet, Inc. and TriVergent. (Sales reports, attached

as Exh. E hereto, indicate that these two customers were displeased with attempts at early

delivery of products which they were not prepared to accept.);

� Shipping empty boxes to customers with invoices for the revenues ECI booked at the

time of the shipment. According to a quality assurance supervisor (“QAS”) for ECI in Fort

Lauderdale, Florida, from the end of 1999 until the QAS left ECI in September 2000, these

boxes were returned unopened. Another former ECI employee in Israel indicated that empty

boxes were sometimes shipped with invoices for products not yet sent so that ECI could book

the revenue; later, if the product at issue was actually shipped to the customer, it was

accompanied by an invoice for $0, because ECI had already booked the revenue;

� Boosting ECI’s book-to-bill ratio,7 which was successively touted as 1.2, 1.25, and

1.4 for the first three quarters of 2000, by improperly including mere letters of intent as firm

orders. For example, according to a former employee of LMM, even though LMM had no

actual customers, ECI pressured LMM to obtain letters of intent from potential customers

during the third quarter of 2000;

� Backdating contracts, such as the service contract with ITC Deltacom, for which a

purchase order was not issued until October 16, 2000. According to Bart Jordan, an engineer

at ITC Deltacom, the maintenance agreement was executed by the two companies in the

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latter half of August 2000, but backdated to July 1, 2000. ECI improperly booked half of the

revenue on the $437,000 contract based upon the fact that it was backdated to July, even

though the purchase order was not received in the third quarter and the contract was a one-

year contract which should have been prorated over four quarters (Exhibit F are the biweekly

sales and marketing reports for the ITC Deltacom transaction);

� Booking revenue on sales which were made contingent upon ECI obtaining financing

for the purchase. One such sale was reported to United States Senior Vice President of Sales,

Mark Vida on October 11, 2000 by M. C. Falletti: “Startec - Bethesda MD (T::DAX): They

have $500k in projects but want a $500k financing package. The recent $100k PO is also

subject to this agreement.” (Emphasis in original)(A copy of M.C. Falletti’s “Sales -Weekly

Activity Report” is contained in Exh. G hereto.);

� Falsely announcing a book-to-bill ratio of 1.4 on November 7, 2000, which indicated

that for every dollar of product shipped and billed, there was $1.40 of new orders. In reality,

as demonstrated by the very poor sales figures for Q4 2000 and Q1 2001 – and the fact that

the preannouncement shortfall warning for Q4 2000 had to be revised downward twice –

there was no such an increase in demand. To the contrary, instead of having product fly out

the door at an increasing pace, ECI’s inventories more than doubled during fiscal 2000, from

$185.8 million to $391 million. (By comparison, the increase in inventories between 1998

and 1999 was only $23.1 million, from $162.7 million to $185.8 million). Defendants were

reckless in announcing the false book-to-bill figures on November 7, 2000, and investors

were injured by this material misrepresentation. (Exhibit H hereto is a series of messages

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from the Yahoo! Message board for ECI, posted between November 14, 2000, and December

15, 2000, discussing investors’ strong reactions to ECI’s book-to-bill figures.)

9. Defendants’ above-described actions, undertaken in a scheme to inflate ECI’s stock

well above its true value, drove ECI’s stock price to a class period high of approximately $39 per

share.

10. On December 14, 2000, just one month after announcing favorable results for the

third quarter and the first nine months of 2000, and record book-to-bill ratio of 1.4, defendants pre-

warned that ECI would not meet its revenue target for the fourth quarter and that ECI expected to

incur an operating loss for the quarter of $15-$25 million before restructuring and other one-time

charges. The Company blamed the loss primarily on a revenue shortfall attributable to an

unexpectedly sharp decline in revenues from its former flagship product, DCME, and less-than-

expected growth in all other divisions, particularly, its fibre optics products. During the week

following this announcement, ECI’s share price tumbled 24%, from $19.25 (on December 13, 2000,

the day before the announcement) to $14.625 per share (on December 21, 2000, one week following

the announcement). Investors were shocked by revelations of poor sales, particularly in light of the

“record” book-to-bill ratio announced just five weeks earlier. (See Exh. H).

11. On January 22, 2001 -- in a move which sent the Company’s stock tumbling 13%,

from the trading day high of $16.6875 on January 22, 2001, to a close of $14.50 on January 23, 2001

– defendants issued yet a second warning for ECI’s fourth quarter and year-end results, informing

investors that the Company’s losses would be wider than initially stated. Citing even worse

performance than initially estimated in all operating divisions, ECI also attributed the massive

shortfall to one-time charges associated with the Company’s plan to break up into five separate

8 SAB 101 did not establish new accounting rules. Rather, drafted as responses tohypothetical situations, SAB 101 sets forth SEC staff opinions concerning the application ofGenerally Accepted Accounting Principles (“GAAP”) to revenue recognition issues, i.e., whetherand when revenue on sales may be properly accrued. Both before and after the issuance of SAB101 companies could not recognize revenues that were not “earned.” Specifically, in accordancewith Financial Accounting Standards Board, Statement of Concepts 5 (“FASB 5"), ¶83(b), acompany could only recognize revenue when it had “substantially accomplished what it must doto be entitled to the benefits represented by the revenues.” Indeed, prior to ECI’s adoption ofSAB 101, ECI’s stated policy was not to recognize revenue unless, inter alia, “collection isprobable” and “any future obligations of the Company regarding the product are insignificant.” ECI Form 8-K, May 1, 2000, Notes to Consolidated Financial Statements, at Policy ¶ L1.

ECI cryptically explained that the basis for its restatement as follows: “Changes primarilyaffected the reporting of sales of products under agreements that contained customer acceptancecriteria or payment terms that were linked to the timing of the installation of the product at thecustomer specified location.” Form 8-K, filed March 30, 2001, at Notes to ConsolidatedFinancial Statements, Note 1 ¶T. Both before and after the issuance of SAB 101 ECI hadsignificant contractual obligations concerning installation and customer acceptance criteria, ECIfailed to comply with either FASB 5 or its own stated policy when it recognized revenues uponshipment with respect to products where full payment depended upon either customer acceptanceor future installation. In other words, ECI had accrued revenues which it had not yet “earned” – and the issuance of SAB 101 had nothing to do with ECI’s need to take these unearned sums offits books.

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companies and the Company’s implementation of SAB 101 in the compilation of its financial

statements.8

12. ECI’s January 22, 2001, announcement advised for the first time that ECI would

restate its financial statements for the first three quarters of fiscal and calendar 2000, purportedly

based upon the retroactive application of SAB 101 to its financial results for the entire year. This

was the second year in a row in which ECI tried to cover up declining sales by blaming shortfalls on

the unexpected application of an accounting rule. Exactly one year earlier, on January 27, 2000,

defendants issued a warning stating that ECI’s earnings for the fourth quarter of 1999 would fall

short by $14 million “due mainly to the inability of the company to recognize revenues associated

with a large long-term contract signed with an Asian government in November.” According to the

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Company, “ECI had expected to recognize such revenues and income under the percentage of

completion accounting method.” Curiously, even though Inbar described the contract as “large,” ECI

had not issued a press release about it in November 1999. (See Exh. I, list of 1999 press releases

published on the website “www.ecitele.com”). Later, when asked in a May 8, 2000, interview

whether the income from this particular contract had in fact been accrued during the first quarter of

2000, CEO Inbar replied: “This order did not come through in the end.” Thus, defendants had

previously blamed accounting rules for a shortfall which had, in reality, occurred because of a lack

of sales.

13. On February 14, 2001, the last day of the class period, ECI announced that the

Company’s previously announced restatement of its financial results was expected to “move” $38

million in revenue from 1999 to 2000, and $61 million from 2000 to 2001. In this announcement,

defendants again falsely and misleadingly blamed “initial implementation of SAB 101,” i.e., new

accounting rules, as the cause of ECI’s restatement of its financial results for the year. However,

according to a former ECI accounting manager, it was KPMG’s refusal to issue an audit opinion

unless ECI reversed the revenues it recognized in defiance of existing accounting principles, such

as FASB 5, ¶83(b), as embodied in SAB 101, caused ECI to finally relent and restate its financial

results for the first three quarters of 2000.

14. ECI’s share price dropped even further following the February 14, 2001,

announcement. Whereas ECI shares traded as high as $12.50 on the day its fourth quarter and

calendar year 2000 results were announced, by February 22, 2001, ECI’s price dropped to $9.71 per

share, a 75% decline from its class period high. ECI now trades at approximately $5.00 per share.

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15. Whereas SAB 101 is merely a refinement of existing accounting principles, its

implementation should not have resulted in a material restatement which “moved” $61 million in

unearned revenues off ECI’s books for the year 2000. Moreover, the $61 million removed from

2000 ledgers was likely not recognized in 2001: ECI’s improper revenue accrual practices (including

shipment of products to customers who have not even committed to purchasing them), the

Company’s announcement of a $95 million inventory write-off and an operating loss of more than

$255 million in Q1 2001, and, most recently, the write-off of $46.8 million in good will in

connection with reduced forecasts for Enavis sales, all strongly suggest that the improperly booked

revenues were not just prematurely recorded but that they did not exist at all. For example, in the

January 27, 2000, press release described above, defendants gave the impression that the accrual of

revenues from a long-term contract executed in November 1999 (with an Asian government) would

be moved from the fourth quarter to a later quarter due to accounting rules. After being asked

whether the accrual in fact occurred in Q1 2000, Inbar admitted that there was no order at all.

16. Even before the staggering $95 million inventory write-off was announced in Q1

2001, ECI’s financial reporting for 2000 was publicly denounced as a mixture of aggressive revenue

accrual and pure fiction. Writing for Globes, in a January 23, 2001, article entitled “It Never Rains

But It Pours at ECI,” Avishai Ovadya dismissed ECI’s attempt to place the blame on SAB 101:

“Capital market sources today said that ECI simply was not conservative enoughabout revenue recognition. Now that the financial year has ended and the companymust submit a statement audited by an accountant, the moment of truth came about.It might also be argued that ECI . . . is now striking off its statements sales that havenever taken place (or were paid through one-time loans) . . .One way or the other, in line with the SAB, the company revised its statements forthe first nine months as well, not recognizing revenues of up to $40 million ofreported revenues of $923 million. This is highly significant. It means that recentstatements were simply bluff, based as they were on accounting cosmetics in theform of revenue recognition.” (Emphasis supplied.)

19

ECI’s CEO, Doron Inbar, quoted later in the article, did not disagree with this assessment.

Confronted with the fact that SAB 101 was not a new pronouncement, Inbar acknowledged that other

companies had been following SAB 101 for a while, but noted that ECI was not required to do so

until the fourth quarter of 2000. Inbar then confessed: “I am putting everything on the table, and

admit we should have act[ed] differently.”

17. After another very disappointing year, during which ECI was forced to write off tens

of millions of dollars of inventory and good will, on December 2, 2001, an Israeli newspaper

reported that a private investment group will purchase a 12.5% stake in ECI for $50 million. Shlomo

Dovrat, a member of the group, will reportedly replace Jonathan Kolber as Chairman.

JURISDICTION AND VENUE

18. This action arises under §10(b) of the Exchange Act and Rule 10b-5 promulgated

thereunder (17 C.F.R. §240.10b-5), §20(A) of the Exchange Act. The Court has jurisdiction over

the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, §27 of the Securities

Exchange Act of 1934 (15 U.S.C. §78aa).

19. Venue is proper in this district pursuant to §27 of the Exchange Act. At all times

herein mentioned, ECI is an Israeli-based business with its North American Headquarters in

Herndon, Virginia, and many of the acts alleged herein, including the dissemination of materially

false and misleading information, occurred in this District.

20

20. In connection with the wrongs alleged herein, defendants directly or indirectly used

the instrumentalities of interstate commerce, including the United States mails, interstate wire and

telephone facilities, and the facilities of the national securities markets.

PARTIES

21. Plaintiffs purchased shares of ECI common stock during the Class period, as

evidenced by the sworn certifications previously submitted to the Court, and were damaged thereby.

22. On June 12, 2001, an action styled David Tamir and Aharon Cohen v. ECI Telecom,

Ltd. et al., Case No. 1:2001cv00319, was filed in the United States District Court for the Eastern

District of Virginia. Shortly thereafter, five related actions, i.e. actions asserting the same legal

claims arising from the same set of facts, were filed in the same Court by named plaintiffs Richard

Albrecht, Mamoud Khan, Shimon Lahar, Kalman Korbin, and Isak Karasik.

23. Upon motion by plaintiffs, on August 24, 2001, an Order was entered by the

Honorable T. S. Ellis, III, consolidating the related actions under the caption and case number: “In

re ECI Telecom Ltd. Securities Litigation, Civ. No. 01-913-A.”

24. Following a hearing on September 21, 2001, the Court entered an Order on September

28, 2001, appointing the Ozma and Sion Funds of Bank Leumi Provident Funds as the Lead

Plaintiffs in the consolidated action.

25. Defendant ECI provides network solutions for digital communications and data

transmission systems. The Company’s products, segregated into five operating divisions during the

Class period, reportedly create bandwidth, maximize revenues for network operators, expand

capacity, improve performance and enable new revenue-producing services for existing networks

to support voice, data, video and multimedia services. ECI was incorporated in Israel in 1961 and

21

the Company’s corporate headquarters and principal offices are located outside Tel Aviv, in Petah

Tikva, Israel. ECI’s North American headquarters are 12950 Worldgate Drive, Herndon, Virginia.

26. ECI became a public company in 1982 and its shares trade only on NASDAQ under

the ticker symbol “ECIL.” As of June 1, 2000, approximately 51% of the outstanding Ordinary

Shares of the Company were held of record by approximately 890 holders of record with addresses

in the United States. During the Class period, Koor Industries (“Koor”), a large Israeli holding

company, held approximately 33% of the outstanding shares of ECI.

27. Defendant Doron Inbar (“Inbar”) has been employed by the Company since 1983, and

became its President in November 1999 and its Chief Executive Officer in February 2000. From

June 1996 until his appointment as ECI’s president, Inbar was ECI’s Chief Financial Officer.

Defendant Inbar was quoted in and/or responsible for the preparation, approval or release of each

statement plaintiff alleges was false and misleading, including all press releases and regulatory

filings. In addition, by virtue of his position as President and Chief Executive Officer, Inbar was

under a continuing duty to direct and control the operations of ECI, to exercise due care and

diligence in those operations, and to oversee and review all corporate operations, including the filing

of documents with the SEC and the making of public statements.

28. Defendant Avi Ben-Assayag (“Ben-Assayag”) was ECI’s Chief Financial Officer

from December 1999 until March 2001. From January 1998 until December 1999, he was ECI’s

Controller and Associate Vice President of Finance. Defendant Ben-Assayag was quoted in and/or

responsible for the preparation, approval or release of each statement plaintiff alleges was false and

misleading, including all press releases and regulatory filings. In addition, by virtue of position as

Chief Financial Officer, Ben-Assayag was under a continuing duty to direct and control the

22

operations of ECI, to exercise due care and diligence in those operations, and to oversee and review

all corporate operations, including the filing of documents with the SEC and the making of public

statements.

29. By virtue of their positions as officers and/or directors of the Company, and/or of the

Company’s prime shareholder, Koor Industries Ltd., defendants Inbar and Ben-Assayag (collectively,

the “Individual Defendants”) had the authority and ability to and, in fact, controlled the contents of

the Company’s annual and quarterly reports filed with the SEC and press releases. Further, the

actions of the Individual Defendants during the Class period caused the material misstatements of

the Company’s financial condition and results alleged herein. The Individual Defendants were aware

of the contents of the Company’s publicly disseminated reports and press releases alleged herein to

be misleading prior to their issuance and had the ability and opportunity to prevent their issuance or

cause them to be corrected, but failed to do so. The Individual Defendants are each liable for the

false statements pleaded herein, as those statements were the results of the collective action of the

Individual Defendants and thus constitute “group published” information.

30. As officers, directors and/or controlling persons of a publicly-held company whose

common stock is registered with the SEC, traded on the NASDAQ National Market System and

governed by provisions of the Exchange Act, defendants had a duty to promptly disseminate accurate

and truthful information with respect to the Company’s operations, business, markets, management,

earnings and present and future business prospects, to correct any previously issued statements from

any source that had become untrue, and to disclose any trends that would materially affect earnings

and the present and future financial operating results of ECI, so that the market price of the

Company’s publicly traded securities would be based upon truthful and accurate information.

23

31. It is appropriate to treat defendants as a group for pleading purposes under the federal

securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading

information complained of herein was disseminated through the collective actions of all defendants.

Defendants were involved in the drafting, producing, reviewing and/or disseminating of the false and

misleading information detailed herein, knew or recklessly disregarded that such materially

misleading statements were being issued by the Company and/or approved or ratified these

statements in violation of the federal securities laws. Defendants’ false and misleading statements

and omissions of fact consequently had the effect of, both on their own and in the aggregate,

artificially inflating the price of the common stock of ECI during the Class period.

STATEMENT IN ANALYST REPORTS

32. Several securities firms and their analysts followed ECI throughout the Class period,

including UBS Warburg, Oscar Gruss, Kaufman Brothers, Goldman Sachs, Hambrecht and Quist,

Lehman Brothers and Merrill Lynch. Defendants are responsible and liable for materially false and

misleading representations made in the analyst reports disseminated throughout the Class period by

these securities firms, some of which are described herein, because those statements were either

directly attributed to defendants or adopted and/or ratified by defendants.

33. At all times relevant to this action, defendants directly met or communicated with

analysts and provided detailed and direct guidance to them regarding ECI’s business condition and

future prospects.

CLASS ACTION ALLEGATIONS

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34. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and 23(b) of the

Federal Rules of Civil Procedure, individually and on behalf of all other persons or entities who

purchased or acquired ECI stock during the Class period and were damaged thereby, excluding the

defendants herein, their affiliates and any officers or directors of ECI or its affiliates, and any

members of their immediate families and their heirs, successors and assigns (the “Class”).

35. The Class is so numerous that joinder of all the members of the Class is

impracticable. Plaintiffs believe there are hundreds of record holders of the Company’s common

stock located throughout the United States.

36. Plaintiffs’ claims are typical of the claims of absent Class members. Members of the

Class have sustained damages arising out of defendants’ wrongful conduct in violation of the federal

securities laws in the same way as plaintiffs sustained damages from the unlawful conduct.

37. Plaintiffs will fairly and adequately protect the interests of the Class. Plaintiffs have

retained counsel competent and experienced in class and securities litigation.

38. A class action is superior to other available methods for the fair and efficient

adjudication of the controversy. The Class is numerous and geographically dispersed. It would be

impracticable for each member of the Class to bring a separate action. The individual damages of

any member of the Class may be relatively small when measured against the potential costs of

bringing this action, and thus make the expense and burden of this litigation unjustifiable for

individual actions. In this class action, the Court can determine the rights of all members of the

Class with judicial economy. Plaintiffs do not anticipate any difficulty in the managing of this suit

as a class action.

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39. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. These questions

include, but are not limited to, the following: whether defendants’ conduct as alleged herein violated

the federal securities laws;

a. whether the SEC filings, press releases and statements disseminated to the

investing public during the Class period misrepresented ECI’s financial

condition and results;.

b. whether defendants acted knowingly or recklessly in omitting and/or

misrepresenting material facts;

c. whether the market price of ECI common stock during the Class period was

artificially inflated; and

d. whether members of the Class have been damaged and, if so, the proper

measure thereof.

SUBSTANTIVE ALLEGATIONS

ECI’s Failing Attempts To RemainA Full Service Telecommunications Giant

40. As explained in 1997, by ECI’s then-Chief Executive Officer, David Rubner, the

main reason for ECI’s success was its ability to get new products to market faster than its large

foreign competitors. The competitive edge enjoyed by ECI and other Israeli high-tech companies

was made possible through large government investment in research and development. Israeli

government funding enabled ECI to be a little more daring and, according to Rubner, “that makes

all the difference.”

26

41. One area in which ECI was able to become a global leader, successfully competing

with American and European competitors, is the market for DCME. In the mid-1990s, at the dawn

of the Internet age, DCME compression technology enabled users to vastly increase the capacity of

their existing satellite channels and cable networks. Because of ECI’s preeminent market position

and the product’s exceptional profit margins, DCME technology soon came to account for a

substantial percentage of ECI’s revenues during the late 1990s and into the new millennium.

42. While ECI was enjoying growth during this period, with yearly revenues increasing

from $588 million in 1996 to $1.17 billion in 2000, the Company’s ability to remain on the “cutting

edge” in a technologically explosive field was hampered by slashes in research and development

funding. In interviews given in September 1997, April 1998 and May 1999, ECI’s Rubner indicated

that cuts in government assistance to research and development efforts could endanger ECI’s

development of new products.

43. During the first quarter of 1999, as newer technologies were emerging as preferred

alternatives to DCME -- for example, voiceover IP products which ECI was slow to develop -- sales

of DCME began to slow down. (Indeed, by August 1999, Rubner admitted that by the end of the

second quarter, growth in DCME sales had “flattened”.) At that time, ECI was faced with three

related challenges: First, the Company did not have a significant presence in the United States

market. Second, the most promising products in ECI’s Synchronous Digital Hierarchy (“SDH”)

technology, Add and Drop Multiplexers (which enable efficient fibre optic transmission), did not fit

the United States standard, which instead operated on the SONET protocols. Third, while ECI was

beginning to develop new telephone system technology to replace DCME, the Company was

otherwise slow in developing products in other areas of emerging technology.

9 Individual sales figures provided by a former NGTS division managerdemonstrate DCME’s rapid decline: $29 million in 1998, $20 million in 1999 and only $8million in 2000.

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44. According to a former director of application and field engineering, employed by ECI

from mid-1998 until mid-1999, when the DCME market “started to collapse in 1999,9 ECI scrambled

to purchase other companies.” In fact, in 1999 and early 2000, ECI pursued a strategy of resolving

its problems by purchasing new technologies and markets by means of merger and acquisition.

45. During the first quarter of 1999, ECI finalized its merger with another Koor company,

Tadiran Telecommunications. The merger provided ECI with two new lines of products, wireless

local loop and cross connect technology. (These two product groups later became the core

technology for spin-offs Innowave and Enavis, respectively.) In early 2000, ECI sought to increase

its DSL presence in the United States with the acquisition of the WavePacer division of Pulsecom.

Neither transaction provided ECI with the benefits ECI touted to investors.

46. On September 8, 1998, ECI announced that the upcoming merger would add

Tadiran’s “world class” wireless local loop and cross connect products, enhancing ECI’s ability to

provide a broader range of products to customers. However, Tadiran’s products were not a “world

class” addition to ECI. Instead, they were a burden on ECI, foisted upon ECI by Koor and Kolber:

a. The merger was viewed as a boon to Tadiran shareholders, who obtained a

very favorable exchange rate in the stock-for-stock merger. (Attached as

Exh. J are copies of messages posted on the ECI chat board on

www.yahoo.com in October 1998 discussing arbitrage with respect to the

upcoming merger);

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b. Defendant Inbar told Globes that the Tadiran products absorbed by ECI did

not have big growth potential and/or a big enough attainable market;

c. A former Tadiran Vice President indicated that the merger was forced on ECI

by Kolber and that no real merger took place. Rather, within a year of the

“merger” all of Tadiran’s senior managers had left ECI.

47. During the class period, neither employees nor customers were impressed by

Tadiran’s primary cross connect product, “T::DAX”:

a. A senior systems test engineer employed during the Class period indicated

that the T::DAX equipment was “totally inadequate and not fast enough”;

b. A former director of sales and engineering, employed by ECI during part of

the Class period, indicated that “T::DAX was not going to go anywhere,”

because ECI could not compete against Alcatel’s cross connect product;

c. NewSouth Communications Corporation purchased and/or licensed $5

million worth of T::DAX products, software and services from ECI/Tadiran.

According to a complaint filed by NewSouth against ECI in September 2000

in South Carolina, minor problems with the equipment which existed in

1998, turned into “serious failures” when the level of traffic on the network

increased in 1999. According to NewSouth, in a meeting held on December

21, 1999, representatives of ECI admitted that there were “systematic

problems with the T::DAX products and software provided to NewSouth.”

According to the former director of sales and engineering quoted above,

NewSouth refused to pay ECI tens of millions of dollars owed for the

29

equipment and ECI was not able to collect this money. A former vice

president of customer service believed that NewSouth brought the action

because it decided to switch to Alcatel before it finished paying for the

T::DAX system;

d. A sales manager who worked for ECI prior to the Class period indicated that

in early 2000, Primus Telecommunications withheld payment because it

wanted to return “millions of dollars” of ECI digital cross connect product

Primus purchased from ECI sales representative Bill Gower. ECI eventually

accepted the returns;

e. In weekly activity reports prepared by sales personnel during the summer of

2000, concern was expressed about ECI’s ability to install a viable T::DAX

system for a variety of customers:

(i) Arbinet, Inc.: On July 6, 2000, one sales manager wrote: “I am a little

worried about the delivery of the OC12 and 6.94. They are expecting

this to work in 2 weeks and to turn customers on. If it does not, they

will cancel the orders . . . . We stand to lose $5-10 million if this

fails.” (Another salesperson’s report indicates that the installation

was not complete by July 20th.) The sales managers’ July 27, 2000

report states: “Much time has been spent on the OC12 issue. We

have finally verified that the box has 6.94. This took a lot in itself.

The customer is under the assumption that he is getting a quad, but

little does he know that we will install a double and put his network

30

on hold until 6.95 comes out; hopefully, this year. I will drop the

bomb on them today, I am expecting extreme repercussions. We

could lose all this business and de-install the box.”

(ii) WorldCom: An ECI vice president wrote on July 27, 2000: “They

are urging ECI to listen and respond quickly to their needs . . . They

are truly disappointed with the shipping dates on our T::DAX

roadmap.”

(iii) Cable & Wireless: “RED FLAG – The customer wants to order this

machine with double density frames. They also need the

STM4/OC12 feature. This will be an end of third or fourth quarter

order but we will need those features.”;

(iv) IDT-Rochelle Park, N.J.: On September 27, 2000, a salesman

reported: “They need a S/W upgrade and suffer from slow log

response problems. Eng. support is needed ASAP to address their

concerns.”

48. Not surprisingly, following the close of the class period, ECI finally admitted that the

Tadiran merger was far from a success. Specifically, on November 7, 2001, in a press release

commenting upon ECI’s financial results for Q3 2001, ECI announced: “During the quarter, the

Company wrote down $56.8 million, of which $46.8 million was the impairment of goodwill related

to the merger with Tadiran Telecommunications (in accordance with FAS-121). This is the result

of the significant reduction in projected revenues of the acquired businesses, mainly Enavis.”

31

49. ECI’s initial entries into the Digital Subscriber Line (“DSL”) access market, in the

second half of 1999, the Hi-FOCuS and DSLAM systems, were introduced far later than ECI’s

competitors’ products. To compensate for this late entry and to gain a foothold in the United States

market prior to the Inovia IPO, in February 2000, ECI purchased the WavePacer division of

Pulsecom. WavePacer’s RAM technology was used to provide DSL service to small businesses and

households.

50. When ECI acquired WavePacer on February 8, 2000, ECI announced that: “[T]he

new acquisition will lead to additional penetration and presence in key accounts in North America,

as well as an enhanced xDSL product portfolio.” However, ECI’s sole strategy was to leverage its

position to sell its own xDSL technology to regional phone companies in the United States. ECI did

not, as stated, seek to complement its xDSL products with WavePacer.

a. A senior product manager, who had worked for Pulsecom prior to the

acquisition and with ECI throughout the class period, indicated that ECI

wanted to sell its own equipment to WavePacer customer BellSouth and was

not interested in the RAM product it inherited. WavePacer’s RAM personnel

were fired shortly after the acquisition, which prompted complaints from

BellSouth, Pioneer and Texas Utilities, who worried that ECI would not

support or show commitment to the product. Some customers terminated

their contracts because ECI did not show dedication to WavePacer’s

Broadband XAC and IDSL platforms. One customer, Manitoba Telephone

Systems, terminated its contract because it was not interested in switching to

the ECI DSLAM. Additional RAM technicians were fired in March 2001;

32

b. A former director of sales and engineering, employed by ECI for part of the

class period, confirmed that WavePacer had “a tremendous product” but that

no effort was made to integrate the two companies after ECI purchased

WavePacer to enable it to sell its own DSLAM product to BellSouth. As a

result, ECI got “nothing” out of its acquisition of WavePacer;

c. A former technical editor of documentation for ECI’s broadband

technologies, who was employed by ECI during the Class period, confirmed

that the employees that developed the RAM product were fired, in April

2000, shortly after ECI acquired WavePacer and that 30-40 additional

employees were fired in March 2001, just after ECI had landed a bid for a

BellSouth project. BellSouth was so angry with the firings, that it almost

voided the contract.

d. On July 13, 2000, a sales representative reported:

“Qwest/US West (RAM): A major problem still exists with the

concern that Qwest has with our support or lack of or ongoing

commitment to the IDSL 128 program . . . If we cannot convince

them, by deeds not puffery, then our RAM 1400 project will be hurt.

Let’s not let this become a second Penasco Valley.

Penasco Valley Telephone Co-operative Inc. (WavePacer RAM):

They sent the equipment back. We lost this deal.”

(Emphasis in original.)

10 A July 2001 presentation to investors by Koor indicated that InnoWave was“exploring mergers in the industry.” (Exh. K)

33

The deal was lost because ECI refused to send a technician to the

customer to install the equipment, as PulseCom had done in the past.

When the customer was unable to understand installation instructions

given by ECI over the telephone, the equipment was returned.

51. Consequently, as it entered the class period, ECI was staggering. Each of the five

divisions ECI hoped to spin off had serious problems:

a. InnoWave and Enavis: The Tadiran products ECI was forced to acquire were

either inferior to competitors’ (T::DAX) or unlikely to attain a large enough

market to justify a separate corporate existence (InnoWave);10

b. Inovia: ECI’s Access division delivered its initial market entries too late and

could only hope to establish a United States market presence by converting

WavePacer’s RAM customers to ECI’s products;

c. NGTS: When DCME compression technology began to be displaced by new

voiceover IP products, ECI was not prepared for the technology shift.

According to a former sales manager, NGTS rushed its voiceover IP products

to market before they were ready. As a result, there was a great deal of

customer dissatisfaction with ECI’s ITX 1000;

d. Lightscape: According to a December 3, 1999 analyst report by Tal Liani and

Adnaan Ahmad at Merrill Lynch, ECI’s SDH technology did not fit the

United States standard.

11 A former senior director of IP telephony (NGTS division) who was hired to puttogether a $2 billion project to help large hotel chains become fully wired for the Internet toldquite a different story. After he had determined the hardware and software particulars, he couldnot get ECI’s various divisions to cooperate and the project was dropped. The corporate culturewas competitive and segmented and it was difficult to get the different divisions to “hold hands.”

34

52. For this reason, on May 8, 2000, when defendant Inbar was asked (in interviewed by

Globes concerning the relative success of ECI’s various divisions) whether one or more of the

divisions should be spun off, to create value for shareholders, Inbar rejected the idea: “ECI’s

advantage is that all its divisions are in the same place. That’s how we appeal to customers and

compete in tenders. Cooperation between all divisions brings about growth.”11 During the class

period, which began several days before this interview, defendants attempted to portray all of ECI’s

new products and divisions as experiencing rapid growth.

53. In sharp contrast to ECI’s public position, that the Company would not be split up,

a marketing director employed by ECI during the early part of the class period indicated that in early

2000, Inbar and other senior officials from ECI’s Israeli headquarters visited the Herndon, Virginia

office and announced management’s plan to split up the company because it was “worth more in

pieces.” The marketing director believed the decision was “rash” and made on the assumption that

an investor -- such as Cisco Systems, who had been “snooping around ECI” – would be more

inclined to invest in a small company, rather than a large one. Another former employee, a director

of sales and engineering, also recalled the meeting and the presence of Inbar, executive management

and the Board of Directors.

Defendants’ Class Period Scheme ToBoost Revenues Violated Existing GAAP Was Done With Scienter

12 In the May 5, 2000, interview, CEO Inbar “forecast a sharp drop in the sales of theDCME product line.” Despite this public prediction and the desire to portray declining DCMEsales as the reason that the rapid growth in sales in the newer product lines was masked, ECIcovered up the true extent of the decline in DCME sales. Because DCME products had beenhigh-margin profit producers for several years, until a new signature product emerged to taketheir place, ECI concealed the precipitous drop in DCME sales in 2000, overstating revenues intwo quarters: $49 million as opposed to $35 million (Q1); and $47.5 million as opposed to $38.8million (Q2).

13 ECI’s refusal to make public the sales figures of each division (Inbar Interview,May 8, 2000) until after the proposed break up was announced facilitated defendants’ scheme.

35

54. In order to make each of the soon-to-be spun-off divisions appear more profitable

than they were, defendants developed a scheme to artificially inflate the results of these divisions

while publicly attributing ECI’s losses during 2000 to declining sales in DCME products,12 a trend

known to the market since mid-1999.13

55. As described in greater detail either below or in ¶8, above, ECI engaged in the

following improper revenue recognition practices during the class period: (1) accruing revenue upon

-- or, even worse, before -- execution of a purchase order; (2) accruing revenue before the products

were actually shipped; (3) accruing revenue for installation of products upon shipment, even though

payment would not be made until the products were installed months later; (4) backdating purchase

orders; (5) recognizing revenues on shipments where customers had a history of non-payment, the

customer was new, and/or collectability was not reasonably assured; (6) recognizing sales contingent

upon ECI arranging for financing for the purchase; (7) shipping products out to accrue revenue when

customers did not request shipment of product; (8) shipping products to customers’ warehouses and

recognizing revenue even though customers would not pay for the products until after installation;

(9) shipping products to ECI’s own warehouses at the end of the quarter, configured for specific

customers, and returning them to ECI’s inventory when customer purchase orders mysteriously failed

36

to arrive; (10) shipping empty boxes to customers invoiced to appear as if product was sent; and (11)

shipping products to customers on a trial basis while accruing the income as if a sale had been made.

56. GAAP principles and/or ECI policies in effect prior to the issuance of SAB 101

proscribed such practices. The most relevant GAAP principle at issue, FASB 5, was issued in

December 1984. As demonstrated below, the provisions of FASB 5 which are at issue herein had

been adopted by ECI prior to the issuance of SAB 101. Moreover, when ECI restated its revenues

for the first three quarters of 2000, the reason given implicated ECI’s violation of its own revenue

recognition policy already in effect prior to the issuance of SAB 101:

a. FASB 5, ¶83(b) provides: “Revenues are not recognized until earned. An

entity’s revenue-earning activities involve delivering products or producing

goods, rendering services, or other activities that constitute its ongoing major

or central operations, ... and revenues are considered to be earned when the

entity has substantially accomplished what it must do to be entitled to the

benefits represented by the revenues.” (Emphasis supplied.);

FASB 5, ¶84(a) provides that revenues are usually earned “by the time

product or merchandise is delivered or services are rendered to customers;”

FASB 5, ¶84(g) provides: “If collectability of assets received for products,

services, or other assets is doubtful, revenues and gains may be recognized

on the basis of cash received.”

b. ECI’s revenue recognition policy in effect in 2000, which incorporated FASB

5, ¶83(b) and ¶84(g) quoted above, provided that, inter alia, revenues would

not be recognized unless “collection is probable and any future obligations

37

of the Company regarding the product are insignificant.” ECI Form 8-K,

May 1, 2000, Notes to Consolidated Financial Statements, at Policy ¶ L1;

c. ECI’s reason for its restatement of revenues for Q1-Q3 2000: “Changes

primarily affected the reporting of sales of products under agreements that

contained customer acceptance criteria or payment terms that were linked to

the timing of the installation of the product at the customer specified

location.” Form 8-K, filed March 30, 2001, at Notes to Consolidated

Financial Statements, Note 1 ¶T. (Emphasis supplied.).

Consequently, it is clear that the issuance of SAB 101 was used by ECI as a convenient cover for its

need to restate revenues based upon premature recognition of revenues in violation of FASB 5 and

ECI’s own policy not to accrue revenues when the Company had outstanding contractual obligations

to customers: Most certainly, if ECI had not installed a product or if customer acceptance criteria

had not been met, ECI had not “substantially accomplished what it must do to be entitled to the

benefits represented by the revenues.” Similarly, product installation is not

“insignificant,”particularly where, by contract, payments were conditioned upon installation.

57. Defendants’ issuance of materially false and/or misleading financial statements in

violation of GAAP (and press releases announcing those results), as alleged below, was reckless and

done with scienter which is demonstrated by the pervasiveness of the scheme and the magnitude of

the restatement on net income and profitability which had been reported by ECI:

a. The pervasive nature of defendants’ violation led to an overstatement of

revenues of $68.61 million over the first three quarters of 2000. The

revenues for each of the five operating divisions ECI sought to spin off had

38

to be revised downward in the restatement. However, the revenues of ECI’s

other operating divisions, not subject to the spin off, were not restated, nor

were the revenues of ECI subsidiary ECTel – even though ECTel employed

the same auditors and adopted SAB 101 at the same time as ECI;

b. By February 14, 2001, when the year end results for fiscal 2000 were

announced, only $7.61 million of the $68.61 million taken off the books for

the first three quarters of 2000 had been recognized. Considering the fact that

more than $25.27 million in revenues were removed for Q1, alone, the fact

that nine months after they were originally accrued at most only 30% of these

revenues were ultimately recognized (i.e. the $7.61 million accrued in Q4

2000) is strong circumstantial evidence that the revenues in question were

predicated upon phantom sales or bill and hold sales which were not

ultimately consummated. Thus, it is highly unlikely that most of the $61

million removed from the books in 2000 appeared on the books in 2001;

c. The magnitude of the restatement was substantial in terms of revenues but

especially with regard to net income and earnings reported by ECI. The

touchstone on which investors rely in making investment decisions is a

company’s profitability. Contrary to defendants’ representations that the

restatements only amounted to a 2% change, the revenue restatements were

greater for each quarter, as follows (see Exhs. A and B):

Q1: Revenues of $262,973,000 overstated by $25.27 million, or 9.6%

Q2: Revenues of $290,804,000 overstated by $26.42 million, or 9.0%

39

Q3: Revenues of $310,301,000 overstated by $16.91 million, or 5.45%

ECI’s net income restatement was vastly more significant, and far more

staggering, because of ECI’s high gross profit margin in each of the quarters

at issue (ranging from 44% to 47%). In other words, almost 50% of each

additional dollar reported went right to the bottom line to increase ECI’s net

income:

Q1: ECI’s May 2, 2000, press release indicated that ECI reported $61

million of net income. Whereas ECI’s gross profit margin for the

first quarter (gross profits divided by revenues) was 47%, more than

$11.88 million (47% of the $25.27 million overstatement) must be

subtracted from the $61 million net income figure, a reduction of

19.47% from the figure initially reported;

Q2: ECI’s August 2, 2000, press release indicated that ECI reported $6.6

million in net income. Whereas ECI’s gross profit margin for the

second quarter was 46%, more than $12.15 million (46% of the

$26.42 million overstatement) must be subtracted from the $6.6

million net income figure. Not only is this a 200% change, but

ECI’s false reporting enabled ECI to report a $6.6 million profit to

investors when ECI should have reported a $5.5 million loss;

Q3: ECI’s November 7, 2000, press release indicated that ECI reported

$14.6 million in net income. Whereas ECI’s gross profit margin for

the third quarter was 44%, more than $7.44 million (44% of the

40

$16.91 million overstatement) must be subtracted from the $14.6 net

income figure. This represents a net income decrease of more than

50% from the figure initially reported.

d. Defendants were well aware of the SEC’s issuance of SAB 101 in December

1999 and the fact that ECI’s revenue recognition practices did not comport

with either ECI’s stated policy or with then-existing accounting principles,

such as FASB 5. In particular, as a result of a series of contentious meetings

with their outside auditors, KPMG, defendants were aware that the

Company’s policy of accruing the entire amount of an invoice, covering both

products and installation costs, at the time of shipment was improper. (This

problem was exacerbated by the fact that ECI often shipped products which

customers did not order or could not yet accept for installation.) United

States CFO Tom Sennott was overheard telling defendants Inbar and Ben-

Assayag over the telephone during one of these meetings that Sennott was in

the room with KPMG and that the auditors would not approve of a particular

transaction they were discussing. The arguments with Inbar and Ben-

Assayag were repeated each quarter and were not resolved until KPMG asked

either the drafter of SAB 101 or another member of the SEC accounting staff

to personally explain SAB 101 to them. Nevertheless, defendants proceeded

to state their financial results in violation of GAAP for the first three quarters

of 2000, and then, treating SAB 101 as a new accounting rule, followed SAB

101 in the fourth quarter of 2000 (as required by the SEC) and retroactively

41

restated the first three quarters of the year to employ a consistent standard.

(However, the SEC prohibits voluntary restatements of prior periods not in

error merely to achieve consistency);

e. The systematic inflation of revenues was a scheme originated by senior

management, not by lower level employees. Specifically, a former senior

sales and marketing executive in Israel indicated that the use of “short

shipments” and “order advancement” to inflate revenues was, at first, a

scheme first known to a handful of senior executives. Eventually, others at

ECI become aware of the practices until, one day, a clerk at headquarters

called the executive to inquire about the “fake sale.” Indeed, the fact that all

five of the new divisions to be spun off had to restate three quarters of

revenues belies any notion that lower level employees in each of these

divisions simultaneously came up with the same means to falsely boost sales;

and

f. In early 2000, defendants blamed application of a particular accounting

principle as the basis for a $14 million revenue shortfall when, in reality,

there was no sale at all. Thus, defendants had already once before falsely

characterized ECI’s failure to meet revenue estimates as a recognition timing

issue when, in fact, a contract had never been executed at all.

The Class Period Begins: ECI Announces Its Financial Results For Q1 2000, PortraysCompany As Growing

42

58. On May 2, 2000, defendants announced Q1 000 results for ECI, emphasizing demand

for the Company’s new products. The press release stated in pertinent part:

ECI Telecom Announces First Quarter 2000 ResultsRevenues From Strategic Focus Businesses Rise 22%

PETAH TIKVA, ISRAEL, May 2, 2000, ECI Telecom Ltd. (Nasdaq: ECIL) todayannounced consolidated results of operations for the first quarter ended March 31,2000.

Revenues for the first quarter 2000 were $288.2 million, an increase of 6.9%compared to $269.7 million recorded in the first quarter of 1999. Gross profits were$134.6 million compared to $146.2 million in the first quarter of 1999. Operatingincome for the first quarter of 2000 was $27.8 million compared to a loss of ($50.3million) for the same period last year. Net income for the first quarter of 2000 was$61.6 million or $0.66 per share fully diluted compared to a loss of ($62.1) millionor ($0.64) per share fully diluted last year.

First quarter 2000 results include a net one-time capital gain of approximately $31million mainly in connection with the sale of the Company’s holding in Terayon.First quarter 1999 results include restructuring expenses totaling $14.9 million, andthe purchase of in-process R&D of $87.3 million in connection with the acquisitionof Tadiran Telecommunications Ltd. Excluding these non-recurring items, netincome for the first quarter of 2000 was $31.0 million or $0.34 per share fully dilutedcompared to net income of $54.2 million from continuing operations, or $0.58 pershare fully diluted from continuing operations.

Commenting on the results, Doron Inbar, President and CEO said, “In the firstquarter we saw strong demand for our products and made significant progress inimplementing our new vision and strategy.”

Mr. Inbar continued “The modest aggregate revenue growth masks strong growth inour core businesses. The strong demand for our products is reflected in the book tobill ratio, which was over 1.2 for the quarter. Our Transport cluster which consistsof SDH (Synchronous Digital Hierarchy) products, optical solutions and DigitalCross Connects, grew 24.9% to $95.9 million. The Access cluster, which consistsof a variety of copper, fiber and fixed wireless access solutions, increased 18.5% to$98.7 million. Other businesses, which include DCME (Digital CircuitMultiplication Equipment) and Business Systems among others, overall decreased14.6% to $93.6 million. DCME declined 38.7% to $49.0 million. ExcludingDCME, total revenues would have increased 26% year over year.”

43

The expected decrease in gross margins reflects the anticipate decline in DCMEsales, the significant ramp-up in ADSL (Asynchronous Digital Subscriber Line) salesand negative foreign currency translation. The planned increase in SG&A spendingfurther impacted operating profits.

Mr. Inbar continued “Within the Core Transport cluster we experienced strongdemand for our SDH products, with a significant ramp-up in our optical DWDM(Dense Wave Division Multiplexing) solutions (Luminet). We have commissionedoptical rings in Israel and Sweden and have signed significant contracts withcustomers in the Far East and Europe. We launched our new next generation opticaltransport platform, the XDM, at CeBit in Germany and plan to deliver prototypes forevaluation early this summer. We have made good progress in the development ofnext generation data-centric cross connects.

“Access had a strong quarter paced by the strong, broad-based demand for our ADSLproducts. After the close of the quarter, we announced the completion of theacquisition of WavePacer and made good progress in integrating the operations.During the quarter we received several large orders for the InnoWave fixed accesswireless products.”

Within the other activities, sales of DCME declined significantly but still contributedto revenues and profits. During the quarter, the company experienced significantsales of the Quadcoder, receiver initial ATX-600 orders and continued with fieldtrials of the DTX-600 with several key customers. ECTel, in which ECI holds 75%had a very strong quarter with sales up almost 50%. Business Systems grew 12% inthe quarter.

“Overall, the quarter reflects the strategic analytical process we have just completedand our sharpened focus on key growth areas including broadband access, transportand media gateways. We remain committed to accelerating our growth through thefocus on strategic growth areas and the divestiture of activities that are either not fastgrowing or not very profitable,” concluded Inbar.

(emphasis added.)

59. The foregoing statement, which reported, inter alia, the revenues ECI accrued during

Q1 2000, was false and misleading. Specifically, defendants knew or recklessly disregarded the

following facts which demonstrated that ECI’s practices with regard to revenue recognition were

improper and that defendants’ statements were materially false and misleading when made:

44

a. According to both a former vice president of customer service at ECI and one

of the Company’s former accounting managers, ECI’s United States’

management held accounting meetings in Fort Lauderdale, Florida, with its

external auditors, KPMG, at the end of each quarter in fiscal 2000. The

meetings were run in the United States by ECI’s Chief Financial Officer in

the United States, Tom Sennott, and the contents of the meetings were

reported to defendant Ben Assayag, ECI’s CFO. ECI’s United States

controller, Kristen Budden, and ECI’s president of United States operations,

Gary Davison, were also in attendance. Sometimes, Ben-Assayag and Inbar

would be present by telephone. The purpose of the meetings was to address

an ongoing dispute between management and the auditors concerning

revenue recognition on sales of product and installation services. ECI’s

practice was to recognize revenues on the entire amount immediately. The

accountants objected to this treatment because of the existence of the

following facts, according to the former vice president:

(i) Many customers, such as TeleGlobe, had a history of not making

payments or failing to complete payments. Additionally, a regional

sales manager handling the TeleGlobe account indicated that bill and

hold shipments to TeleGlobe were common. Finally, yet another

sales manager confirmed that TeleGlobe complained about receiving

shipments and invoices for products it did not order. For each of

these reasons, collection was far from probable on sales to TeleGlobe

45

and revenues should not have been recorded until the money was

received;

(ii) The auditors took the position that in the telecommunications

industry, installation is often delayed for some time following

shipment of the products, and revenue recognition for installation

should not occur until after the installation was completed. The

customer service vice president was asked to attend the meetings so

that he could provide actual dates of installation, i.e., to determine

whether the accountants’ position conformed with ECI’s actual

experience. According to the customer service vice president, not

only was there frequently a delay between shipment and installation,

but customers often refused to pay for either the product or the

installation until installation was completed;

(iii) Even in instances where ECI sent two separate invoices, because

installation would be delayed indefinitely, ECI recognized the

revenue on the invoice for the products immediately, even though the

customer’s payment history reflected that they were a customer which

would not make payment for the products until after the installation

was completed. Sometimes, this was as much as six months after the

initial purchase.

Over the accountants’ objections, ECI recognized revenues on more than $25.27 million in

“sales” it later removed from its Q1 figures (with no more than $7.61 million being recognized by

14 An exception to this rule occurred if there was a specific contractual provision,such as with AT&T, which granted the customer a right of return if the equipment did not workwith the customer’s software, or if the customer’s contract specified a trial period.

46

Q4). During the fiscal quarters of 2000, ECI’s outside auditors continued to rely upon the reports

provided by a former manager of invoicing and order processing, since each quarter the auditors

only performed what is known as a quarterly “review”, not a full scale audit that is conducted at year-

end. Although there was a discussion about implementing SAB 101, the former manager indicated

that it was delayed until 2000 and that until it was implemented, the manager was instructed to

continue to follow the guidelines issued by ECI’s finance department -- to record all revenue

associated with a purchase order upon shipment FOB origin14 – and that KPMG relied upon the

manager’s reports during quarter-end meetings for Q1-Q3 2000, only asking for records concerning

installation and billing therefor in Q4 and thereafter as part of the year-end audit. (Files maintained

for each order included invoices, and documentation of shipment, receipt, installation, billings and

completion.). Following implementation of SAB 101, the manager was forced to go back over the

files to determine which sales were recorded in full when installation had not yet been completed

and to designate those sums improperly accrued. In particular, sales figures for the last two weeks

in each quarter needed to be revised because installation could not have occurred during the quarter.

(Defendant Inbar specifically referred to this process in a January 23, 2001, interview with Globes,

stating that ECI had to “recheck each system and see what is due to each customer and change the

revenues.”) As with the revenues initially recorded, it was not up to the invoicing manager to actually

record the revenue deletions on ECI’s books, those final decisions were made by Tom Sennott, Avi

Ben-Assayag and, possibly, Doron Inbar. In addition to these executives, Lionel Marquis knew

which sales were partially reversed in the implementation of SAB 101;

47

b. A former area sales manager, employed by ECI during the first half of the

class period, recalled a sales meeting in early 2000 attended by then-president

of ECI in the United States, Gary Davison, vice president of sales, Paul Ellett,

regional sales vice presidents Tom Bright and Stu Santoro, controller Bob

Johnson and Mark Vida. Sales representatives attending the meeting

included Glen McDaniel, Gary Clark and Bill Gower. Many of the improper

practices discussed at that meeting continued unabated, including:

(i) Shipping product to the customer before the customer needed it, just

so that revenue could be booked:

A quality assurance supervisor (“QAS”) who worked many years for

Telematics, and later ECI, in Fort Lauderdale indicated that beginning

in 1998 and continuing until the employee left the Company in

September 2000, during the last three weeks of the last month of each

quarter, shipping increased significantly, causing the staff to work 60-

70 hours a week to get the shipments out. Although the products had

a customer configuration log, they were not sent to customers, but to

ECI’s Fort Lauderdale warehouse on Commercial Boulevard or to

rented warehouse bays at Miami airport or an executive airport near

ECI’s Fort Lauderdale office. (A former Telematics/ECI employee

from the finance department whose focus was inventory confirmed

that ECI engaged such “ship and hold” tactics, sending its products

to its own warehouses in order to make ECI’s numbers at the end of

48

the quarter.) One or two months after they were shipped, large

quantities of these boxes -- representing “millions of dollars worth of

product each quarter” -- would return from the warehouses unopened.

When the products were returned, the QAS was ordered to take the

products apart and to place the individual parts back on the storage

shelves. The parts were then used to assemble new products for other

customers. When the QAS inquired about the returns, Phyllis Adrian

and Margie Stevens, employees in ECI’s sales processing office,

merely indicated that “the purchase orders never came in.”

According to the QAS, large shipment returns were “a huge joke

among the peon employees.” (A former finance department

employee reported hearing similar jokes from her colleagues and

employees in the manufacturing department.) The customers listed

on the shipping labels were: Nortel, Bayonet, Pacific Bell, AT&T,

Bell Atlantic, MCI, Verifone, BellSouth and ICL (a European

company). The products most often involved were: TC 100, APC 50,

S100 and S 110. The QAS acted under the instructions of

manufacturing manager A.C. Ellis.

From the end of 1999, until the QAS left the company in September

2000, the QAS was instructed to put empty boxes on the skids for

shipment. While they had configuration labels on them indicating

that product was inside, the boxes were empty. Several months later,

49

the empty boxes were returned unopened. A former senior vice

president at ECI confirmed that he had heard that in the Fort

Lauderdale offices of ECI division that was formerly Telematics ECI

was shipping empty boxes to customers or recognizing revenue on

shipments made to ECI warehouses. An accounting manager in

Florida was also told about these empty box shipments;

(ii) Booking sales of product sitting in either ECI warehouses or customer

warehouses:

(A) According to a former ECI account manager in the Southeast

region, employed during the first half of the class period, as

management increased pressure on the sales staff to meet

sales projections -- which they were told to inflate by 20% –

the sales staff participated in a “widespread practice” of

pressuring customers to “purchase” equipment before they

needed it. This practice, of sacrificing sales from a later

quarter in order to boost revenues in an earlier quarter was

referred to by the sales staff as “killing babies.” The

existence of this practice was confirmed by a former senior

sales executive in Israel, who more politely referred to the

practice as “order advancement.” In fact, he commented that

ECI was proud of itself for finding a way to increase sales in

a manner which was painless to the customer – as long as

50

customers issued a purchase order and the product was

shipped to a warehouse, ECI could book the revenue and the

customer would not have to pay for the product until it took

delivery. Sometimes, ECI rented space to store the products,

other customers, such as Powertel, had their own warehouse

to store excess product. The QAS referenced above indicated

that in Florida, ECI’s warehouse space was near airports in

Miami and Fort Lauderdale. The former Israeli sales

executive recalled warehouse space ECI rented near the

airport in Frankfort, Germany. Yet another sales

representative, located in the Northeast, indicated that ECI

had warehouses in New Jersey, New York, Pittsburgh and

Atlanta.

This manager, who sold NGTS products, confirmed

all aspects of this practice in describing a pre-class period sale

to AT&T: Gary Davison wanted an order prior to the end of

the quarter; Davison pressured the representative’s superior,

a vice president of sales, to get the order signed. Even though

the district manager for AT&T explained that AT&T did not

have the budget required to purchase the equipment, “ECI

kept pushing.” After the quarter ended, the vice president had

the sales representative obtain a letter of intent for a $10

15 Defendants have maintained that warehouses were located near airports so thatproducts could be shipped quickly once orders were received. However, ECI was shippingproducts to warehouses which they had already booked as having been sold to a customer – eventhough the customer would not pay for the products unless and until they were actually deliveredand installed.

51

million equipment purchase. The letter of intent was

backdated so that it could be booked in the desired quarter,

even though the equipment was not shipped until after the end

of the quarter. When it was shipped, $7 million went directly

to an AT&T warehouse and $3 million was shipped to an

ECI warehouse in Brooklyn, New York, near Kennedy

Airport.15 A similar deal for $3-4 million of equipment was

made just two months later; AT&T was told that it could pay

for the equipment five months later, when it had the funds.

The sales representative commented that these types of deals

were made with other customers. ECI’s management’s

instructions were clear: “You do anything you could do to get

[inventory] out the door.”

(B) The former account manager in the Southeast region indicated

that sales were sometimes booked on equipment which was

still located in Israel and had not yet even been shipped to the

United States. The Northeast sales representative confirmed

that Fritz Company would then bring the equipment to the

United States and deliver it to the various warehouses;

52

(iii) Double booking sales of the same product:

(A) Because so much inventory “sold” to customers was stored in

ECI warehouses, ECI treated the equipment as its own – often

“reselling” the equipment to a customer who wished to take

immediate delivery, and booking a second sale of the same

product. One sales representative was asked to switch a

$100,000 order from IDT, from DTX 60E equipment to DTX

60D equipment, because the products – which were initially

shipped before IDT had even issued purchase order – had

been sold to another customer in the interim.

(B) In addition to double-billing for “bill and hold” inventory

which was then shipped to a second customer, the former

account manager referenced in the preceding paragraph

indicated that there was such poor inventory tracking in 2000

that a customer would be billed for inventory it returned and

another customer would be billed when it purchased the same

equipment. (Because of this problem, one customer,

Powertel, refused to accept any shipments which lacked

detailed shipping labels.) The problem was so serious that an

employee in Fort Lauderdale periodically sent out “deficiency

reports,” listing missing equipment. One such report, issued

53

in June 2000, indicated that ECI could not locate equipment

valued at $22 million.

(C) The former director of engineering and sales quoted above

indicated that he participated in weekly forecasting meetings

where he told account managers the number of units available

for sale in the upcoming period. Often, the account managers

sold more units than were available for immediate shipment.

Due to frequent component shortages, the products were not

available to be delivered when sold.

c. According to a sales manager in the NGTS division, in 1999 and

2000, what had been monthly sales forecasting conference calls

became weekly events. During these meetings, sales representatives

would indicate the percentage of likelihood that the sale would

actually be consummated. Until 1999, ECI would ship product if

there was a 70% likelihood that the customer would pay for the

equipment. During the class period, shipments would be made to

customers even when the sales representative had predicted a

commitment of less than 70%. In many cases, customers would not

have even placed a purchase order prior to shipment. Some

customers, such as TeleGlobe, were angered when they received

products they had not ordered; and

54

d. ECI did not “made good progress in integrating the operations” of

WavePacer. In fact, by May 2000, ECI had already fired the

WavePacer personnel responsible for developing its RAM unit. A

former director of sales and engineering confirmed that no effort was

made to integrate the two companies after ECI purchased WavePacer.

60. As a result of these widespread revenue recognition violations, ECI falsely reported

a 1.2 book-to-bill ratio and an increase in revenues, year-over-year, of 6.9%, from $269.7 million

to $288.2 million. However, ECI’s restated revenue figures for the first quarter of 2000, published

in February 2001, actually show a revenue decline, to just under $263 million.

61. Not only does the sheer magnitude of the misstatement $25,270,000 – 19.47% of net

income and nearly 10% of revenues, turning an actual revenue decrease to a reported revenue gain

– raise a strong inference that defendants acted with scienter, defendants’ reckless and/or knowing

behavior is demonstrated by the following:

a. Even before SAB 101 was required to be implemented in Q4 2000, in early

2000 KPMG had told defendants Ben-Assayag and Inbar that transactions

upon which ECI was recognizing revenues were not sales and that ECI could

not recognize the entire amount of a sale upon shipment when installation

and payment were months away. Thus, not only would these transactions

not comply with the guidance set forth in SAB 101, they already did not

comply with FASB 5 and ECI’s own stated revenue recognition policies.

Specifically, ECI was improperly recognizing revenues before they had

complied with their contractual obligations to install products and/or meet

55

customer acceptance criteria with respect to those products. Whereas such

contractual obligations, especially those upon which payment was contingent,

were not “insignificant,” ECI could not properly recognize revenue before the

obligations had been fulfilled;

b. According to the former customer service vice president and the former

accounting manager who were present at the fiscal 2000 quarter-end meetings

between ECI and KPMG in Fort Lauderdale, defendants ECI, Ben-Assayag

and Inbar were well aware of the existence of SAB 101 from the date of its

issuance in late 1999. Indeed, according to the former invoicing manager,

ECI personnel discussed its implementation throughout 2000: “They talked

about changing, but I kept hearing they hadn’t decided yet, it wasn’t official

yet. That’s why we continued going on the way we had, taking revenue based

on shipment.” Moreover, according to the invoicing manager, ECI already

maintained files which contained the very information necessary to determine

when shipped goods are in fact delivered, installed and paid for. Thus, once

SAB 101 was implemented by ECI, the invoicing manager and several others

were able to got back over the records of the first three quarters “to review

the revenue taken at the end of each quarter to see what had been actually

installed and what had not.” If ECI was planning to retroactively apply SAB

101 to all of fiscal 2000, by virtue of its implementation in Q4 2000, and all

of the records were already in place to properly accrue revenue when earned

(by installation, payment or the satisfaction of customer acceptance criteria)

16 Defendants suggest that this motive does not make sense because they were forcedto restate ECI’s financial reporting in February 2001, before any of the IPOs could occur, therebynot deriving the benefit of the scheme. However, their argument is made with the benefit ofhindsight. At the time that ECI was shipping its inventory to warehouses on the basis of apurchase order, a letter of intent or only a sales representative’s forecast of a possible order,defendants were recklessly booking increasingly more tenuous transactions as actual sales. Executives engaged in such conduct are seeking to delay the moment of truth, hoping thatsomething positive will happen in the interim – here, that actual orders for these products wouldincrease – so that they are not faced with having to reveal the true state of affairs. See Donald C.Langevoort, Organized Illusions: A Behavioral Theory Of Why Corporations Mislead StockMarket Investors (And Cause Other Social Harms) 146 U. Pa. L. Rev. 101, 114 & n. 43(1997)(where the admission of poor results would lead to massive layoffs – here, according to aMay 22, 2001 Globes article, ECI had to lay off 1,400 employees (25% of its workforce) sincethe beginning of 2001 – senior management would be tempted to conceal the truth in order “tobuy time to create the possibility of a turnaround.”)(Relevant pages of Prof. Langevoort’s articleare attached as Exh. M hereto). Indeed, a former ECI senior sales and marketing executive inIsrael indicated that he understood the inflation of sales figures as a way to save the Company.

56

why then did ECI go to the trouble of stating the revenues for each of the first

three quarters of fiscal 2000 incorrectly – and against the advice of KPMG

– only to have to revise these figures just a few months later. These facts and

others set forth herein support a strong inference that this time-consuming

and duplicative process would not be undertaken unless defendants sought

the temporary benefit that the inflated figures would generate – a perception

that the new products in the five soon-to-be-spun-off divisions achieved

market acceptance;16

c. ECI’s goal in purchasing WavePacer was not to “enhance[ ECI’s] xDSL

product portfolio,” as ECI claimed on February 8, 2000, when the WavePacer

purchase was announced. ECI’s sole goal was to sell its own DSLAM

product to BellSouth, and others of its xDSL products to United States

customers, displacing WavePacer’s RAM products. Having already fired

57

those responsible for development of RAM products in April 2000,

defendants knew, at the time they issued the May 2, 2000 press release, that

they were not going to integrate WavePacer’s operations into ECI’s and

enhance ECI’s product line with WavePacer’s products.

ECI Announces Results For Q2:Overstates Access Division RevenuesBy More Than $17 Million

62. In an August 2, 2000, press release, which reported, inter alia, the revenues ECI

accrued during Q2 2000, defendants announced Q2 000 results for ECI, again emphasizing demand

for the Company’s products. The press release stated in pertinent part:

ECI Telecom Announces Second Quarter 2000 Results--Revenues From Core Strategic Businesses Rise 45%--

--Company Outlines Restructuring Plan–

PETAH TIKVA, ISRAEL, August 2, 2000, ECI Telecom Ltd. (Nasdaq: ECIL) todayannounced consolidated results of operations for the second quarter ended June 30,2000.

Revenues for the second quarter of 2000 were $317.2 million, an increase of 17%compared to $271.6 million recorded in the second quarter of 1999. Gross profitswere $145.5 million compared to $147.2 million in the second quarter of 1999.Operating income for the second quarter of 2000 was $2.0 million compared to $56.1million for the same period last year. Net income for the second quarter of 2000 was$6.7 million or $0.07 per diluted share compared to $53.6 million or $0.57 perdiluted share last year. Second quarter 2000 results include a charge for in-processR&D of $28.8 million associated with the acquisition of Winnet and Wavepacer and$1.6 million associated with the disposal of HiTV.

Excluding these non-recurring items, net income from continuing operations for thesecond quarter of 2000 was $37.1 million or $0.40 per diluted share, compared to netincome from continued operations of $57.3 million, or $0.61 per diluted share for thesame period last year.

Revenues for the six months ended June 30, 2000 were $605.5 million, an increaseof 12% compared to $541.3 million for the comparable period in 1999. Gross profitswere $280.1 million compared to $293.4 million for the first half of 1999. Operating

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income for the first half of 2000 was $29.8 million compared to $5.8 million for thesame period a year ago. Net income, including one-time events was $68.3 million,or $0.73 per diluted share, compared to a net loss of ($8.5 million) or ($0.07) perdiluted share for the first half of 1999. Excluding the one-time events (in-processR&D, capital gain, and restructuring costs), net income from continuing operationsfor the first half of 2000 was $68.1 million or $0.73 per diluted share compared to$111.5 million or $1.18 per diluted share for the same period last year.

Commenting on the results, Doron Inbar, President and CEO said, “The improvedgrowth trend that started in the first quarter of this year accelerated and strengthenedin the second quarter. Our aggregate revenue growth of 17% year over year masksstronger growth in our core strategic businesses. Our Access business, whichincludes access solutions over fiber, copper and wireless, had revenues of $110.0million, an increase of 47% over last year. Similarly, core Transport, which consistsof Optical Networking products and Digital Cross Connects, grew 40% to $109.7million. Next Generation Telephony Solutions (NGTS), which consists of IPTelephony products and ATM media gateways, grew from $1.5 million in the secondquarter of 1999 to $4 million in the second quarter of this year. Our non-corebusinesses which include legacy DCME (Digital Circuit Multiplication Equipment)products and Business systems, among others, decreased 20.6% to $92.6 million.Legacy DCME declined 40% to $47.5 million.”

“Excluding non-core businesses, revenue growth for the quarter was 45%, year overyear. Demand for ECI products is very strong with our book-to-bill ratio reaching1.25. The decrease in gross margins once again reflects the anticipated decline inlegacy DCME sales, the significant acceleration of lower margin ADSL(Asynchronous Digital Subscriber Line) sales and negative foreign currencytranslation.”

“Within the Core Transport cluster, we experienced strong demand for our OpticalNetworking products and Digital Cross Connects and penetrated major new accountsin Europe.”

“Our Broadband Access business continues to gain momentum with ADSL sales up80% sequentially and we made good progress in the integration of WavePacer intothe ADSL division. During the quarter, we announced receipt of a $165 millionorder for Innowave from GVT, an emerging service provider in Brazil. The contractis expected to reach $215 million. We also announced the acquisition of Winnet, aUS LMDS company, which positions Innowave to offer a full range of fixed accesswireless local loop solutions.” (Emphasis added.)

63. The foregoing statement was, however, false and misleading in the following

respects:

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a. As set forth in ECI’s restated figures for the quarter, ECI’s revenues increased

only 7%, not 17% as reported. Most of the difference in revenues, as

between the $317 million originally reported and the actual figure of $290

million, is attributed to the Access division (later Inovia and InnoWave).

While Inbar reported revenues of $110 million for this division, actual

revenues were only $92.8 million.

b. As set forth above, ECI had not “made good progress in the integration of

WavePacer into the ADSL division.” In fact, ECI had already fired

WavePacer employees and attempted to displace WavePacer RAM products

with ECI’s own products at several of WavePacer’s customers, such as

BellSouth and Manitoba Telephone Systems – with the latter canceling its

contract as a result. Nor did ECI continue to support WavePacer’s RAM

products already in place at BellSouth, Pioneer and Texas Utilities,

engendering customer complaints;

c. In order to accrue revenue on shipment, products were shipped at the end of

the quarter to customers who were not ready to receive equipment for

installation by ECI:

(i) A July 6, 2000, “Sales - Weekly Activity Report” sent from Kurt

Martinson to Stu Santoro and Mark Vida states: “The purchase order

for Arbinet’s LA site was received on 6/30 for the amount of $780k.

We may be required to assist Arbinet with storage until the LA site is

complete.” (Kurt Martinson’s July 6, 2000, report is attached as Exh.

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C hereto). A follow-up item in Martinson’s July 20, 2000, report

indicates, with respect to customer Arbinet, Inc.: “[The customer]

also keeps getting contacted by the trucking company in LA in

attempts to deliver[] the DCS. We must hold the system until the site

is complete.” (Kurt Martinson’s July 20, 2000, report is contained in

Exh. E hereto);

(ii) A “Sales - Weekly Activity Report” from Ray Cummings to Tom

Bright and Mark Vida, dated July 20, 2000, described a T::DAX

equipment shipment to customer TriVergent: “TriVergent refused

shipment to Memphis and Charleston because the sites were not

ready. This is the second time this has happened in the last two

months. They had told project management not to ship the equipment

but it was shipped anyway.” (Ray Cummings’s report is contained in

Exh. E hereto);

d. In early 2000, customers were informed that major production lines would be

closed and that technical support staff would be laid off. In anticipation of

the shut down, customers were informed that they should purchase large

quantities of PC board assembly parts and memory or functional cards.

These products were offered at one-third of their normal sales price and ECI

offered to hold the product until needed. Many of these “last time buy” deals

were shipped out but returned by customers one or two quarters later. The

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former QAS quoted above recalled that one such customer who ordered and

returned “last time buy” parts was British Telecom.

e. ECI claimed a book-to-bill ratio of 1.25, i.e. the Company realizes $1.25 in

current orders for every $1.00 billed suggests a 25% increase in anticipated

sales. However, Defendants were reckless in disseminating this stated ratio

because they lacked the ability to ascertain such a ratio due to the difficulties

ECI had in ascertaining crucial financial data. Specifically, ECI’s rampant

“bill and hold” practice made it impossible for ECI to determine which

warehoused products were “sold” to customers, such that two sales of the

same product would occur if a product on “hold” was suddenly ordered by

another customer there was an insufficient supply; the product would be

shipped to the second customer with a second invoice. Additionally, whereas

ECI was booking orders based upon far less tangible evidence than a valid

purchase order, e.g., a letter of intent or a sales representative’s statement

during a conference call that there was X% probability of a sale, ECI’s book

to bill ratio could not validly predict the next quarter’s sales.

64. For the reasons set forth in ¶61 above (and incorporated herein), defendants were

reckless when they compiled and announced their financial results for the second quarter of 2000.

Additionally, a strong inference of scienter is raised by the following:

a. The sheer magnitude of defendants’ overstatement, $26,413,000 – a 200%

change in net income and 9% of revenues;

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b. Concerning ECI’s second announcement of “good progress” in integrating

WavePacer to ECI’s ADSL division, ECI’s firing of the employees who

developed WavePacer’s RAM product in April 2000 was not viewed as

successful integration by customers such as BellSouth, Pioneer and Texas,

who complained that ECI was not showing support or commitment to the

product. Some customers terminated their contracts because ECI did not

show dedication to WavePacer’s Broadband XAC and IDSL platforms.

Defendants were aware of or had access to these facts at the time they issued

the August 2, 2000 press release describing the WavePacer acquisition in a

positive light, inconsistent with the true facts;

c. With respect to defendants’ announcement of a 1.25 book-to-bill ratio, if

ECI’s senior management were not the architects of the sales practices,

former sales executives in Israel have indicated that were aware of or had

access to facts which demonstrated that ECI was obtaining purchase orders

from customers “painlessly,” e.g., there was no requirement that products be

installed and paid for as long as ECI could ship them somewhere and

recognize revenues. Therefore, this quarter’s orders could not be relied upon

to be translated into next quarter’s sales.

ECI Announces Its Planned Breakup AndIntensifies Its Efforts To Promote The IPOs

65. After boosting its stock price to more than $36 by August 2, on August 7, 2000, ECI

announced that it would be splitting the company into five divisions, each of which will be publicly

offered. Commenting upon ECI’s strategy, Avishai Ovadya of Globes wrote:

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“ECI’s “new” pitch is an “old” pitch on Wall Street. The company is in effect askinginvestors to forget its financial performance and consider only its dreams and futuregrowth . . .

* * *“In all the fuss about the split, the financial statements themselves have beenforgotten . . . Sales may be growing handsomely, but profitability is declining, andwill continue to descend, due to the heavy expenses of the split.”

This analysis indicates that the only highlight in ECI’s dismal financial reporting was its 17%

revenues increase. Given the importance the market placed upon the sole positive pronouncement,

the materiality of the misstatement, an overstatement of Q2 revenues by $27 million, looms even

larger, especially when coupled with the fact that this overstatement allowed ECI to report a profit

for the quarter of $6.6 million, when in reality it should have reported a loss of $5.5 million, the

difference causing a dramatic difference in perception to the market as to the true state of affairs at

ECI.. Additionally, such press coverage placed even more pressure on ECI to demonstrate that its

products were sought-after in the marketplace. With its share price falling, ECI was eager to

announce a big deal which would regain momentum for the IPOs.

66. On August 17, 2000, ECI announced a memorandum of understanding to provide

“tens of millions” of dollars of Hi-FOCuS DSL equipment to Last Mile Media Corporation

(“LMM”). The Company’s press release states as follows:

New Agreement valued tens of millions of dollars enhances ECI Telecom’spenetration of the Multi-Tenant Property market in the US

PETAH TIKVA, ISRAEL, August 17th, 2000, ECI Telecom Ltd. (NASDAQ/NMsymbol: ECIL) announced today a Memorandum of Understanding with Last MileMedia Corporation (LMM), to become its primary DSL equipment vendor. LastMile Media located in Austin Texas, is an emerging provider of high-speed Internetconnections to multi-tenant properties. The Multi-Tenant Property market is a $2.5Bmarket consisting of over 21 million apartments. LMM expects to purchase tens ofmillions of dollars worth of ECI Telecom’s Hi-FOCuS™ DSL equipment. Duringthe first 18 months of this agreement, ECI Telecom will be the exclusive providerof xDSL equipment to LMM.

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“ECI Telecom is already a principal supplier of xDSL broadband access solutions inEurope and Asia-Pacific”, says Pinny Chaviv, ECI Telecom’s Corporate VicePresident and General Manager of the Access Solutions Unit. “This new agreementfurther enhances our position as an emerging leader of xDSL solutions in the US”.

ECI Telecom’s Hi-FOCuS™ xDSL solution is uniquely featured to address thisimportant DSL market segment. ECI Telecom is continuously adding excitingapplications to its Broadband Access service offering. In this case, Hi-FOCuS willenable advanced services such as Digital Cable TV, VoDSL, and other entertainmentservices including music and games to LMM’s residential and commercial multi-tenant customers.

“ECI Telecom’s Hi-FOCuS™ offers us an end to end complete carrier-gradesolution, from sophisticated management, to the DSLAM and Customer PremiseEquipment”, says Jeff Levine, CEO of Last Mile Media.” The advancedfunctionality and remote capabilities of Hi-FOCuS™ will enhance LMM’s offering,improve customer service, speed implementation, and reduce operating costs.

Dan Doczy, Vice President, Marketing and Business Development of ECI Telecom’sBroadband Access Solutions Unit, explains: “The multi-tenant market place is verylarge and very under served. This partnership with Last Mile Media creates anexciting new way to address this market from a comprehensive service perspective,enabled by world class DSL technologies. LMM’s marketing channels and manyyears of experience, combined with the multi-service capabilities of ECI Telecom’sHi-FOCuS™ Next Generation xDSL platform, provides a powerful solution thataddresses this multi-billion dollar multi-tenant market.”

ECI Telecom’s Hi-FOCuS™ xDSL broadband access portfolio incorporatinginnovative FractalLinkTM architecture is designed to enable co-existence of differenttransmission technologies (e.g. ADSL, ADSL lite, SDSL, and VDSL) within a singleplatform. This ability broadens the variety of services that can be provided throughthe system. Its ATM to the Subscriber architecture enables to differentiate servicepackages by supporting four Quality of Service (QoS) classes. The systemadditionally features ATM-OA&M (Operation, Administration and Maintenance)capabilities.

ECI Telecom’s Hi-FOCuS™ is managed by a powerful Operator Station (OPS)customized to provide total control over the wide range of features and DSL servicesfor up to hundreds of thousands of subscribers.

Last Mile Media’s CIO, Sam Musslewhite concluded: “The pricing, technology, andsoftware management of Hi-FOCuS most closely meet our immediate needs, and ECITelecom’s DSL product roadmap appears to be flexible enough to take into accountour developmental requirements.”

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* * * *About Last Mile Media Last Mile Media Corporation is an emerging National Supplier of high-speed Internet

services and infrastructure to Residential and Commercial multi-tenant properties.

The Company installs ECI Telecom DSLAM equipment right on the property,

thereby ensuring up to 26MB throughput to each tenant. There is no cost to the

property owner, but Last Mile Media shares revenue. Last Mile Media handles all

customer service, billing, and provisioning issues via ECI Telecom's OPS

Management Software. (Emphasis added.)

67. Following the issuance of the press release, ECI’s share price, which had dipped to

$28.87 on August 16, 2000, just two weeks after the earnings release – a drop of $7.44 or 20% – rose

above $30 per share again, closing at $30.50 on August 18, 2000, on trading of more than $1.22

million shares (the highest volume trading day for ECI in all of August 2000, by more than 300,000

shares)

68. However, a lawsuit filed by LMM in Texas state court alleges that LMM, a start-up

which had not yet begun business operations, was depending upon a $2 million investment from ECI

in order to commence operations. Given LMM’s true condition, even if ECI had invested $2 million,

it is highly doubtful that “tens of millions” of dollars in orders would have been received any time

soon. Moreover, in its answer to LMM’s complaint, ECI effectively admitted that the foregoing

press release was false and misleading because ECI had not reached an agreement, or even a

memorandum of understanding, with LMM sufficient to warrant the issuance of the above joint

release. ECI’s affirmative defenses stated as follows:

(Affirmative Defenses ¶ 2) The Term Sheet, signed and acknowledged by Last Mile, clearly

indicated that (i) it was not intended to be a binding agreement,

except with regard to the “no-shop provision,” (ii) a binding

agreement would be subject to corporate approvals and (iii) until a

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binding agreement had been reached, either party would have the

absolute right to terminate all negotiations for any reasons without

liability. The Term Sheet also provided that the closing of any

purchase of shares in Last Mile would be subject to a number of

conditions, including Last Mile entering into all agreements with

strategic partners described in Last Mile’s business plan.

(Affirmative Defenses ¶ 3) At the time the Term Sheet was executed, ECI was led to understand

by Last Mile that agreements with most important strategic partners

(namely RSG and MCS), would be executed shortly following the

execution of the Term Sheet. The “no-shop period” in the Term

Sheet contemplated a 30-day exclusivity period. It was understood

by the parties that by the end of this period the agreements with the

strategic partners would be executed, satisfying those conditions

precedent to the funding.

(Affirmative Defenses ¶ 4) In fact, the purported agreements with RSG and MCS were not

executed until late October 2000, well beyond the 30 days provided

in the Term Sheet. Following these conditions precedent to the

funding, ECI proceeded with its corporate approval process, which

was a condition precedent to ECI’s obligation to move forward with

a transaction. During this process, ECI’s executive officers told ECI

that the competitive local exchange carrier market in the United

States had deteriorated significantly since the execution of the Term

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Sheet. Last Mile sent a letter to ECI, dated December 4, 2000,

attempting to convince ECI that the deterioration of the market

condition did not effect Last Mile’s business. ECI, however, did not

agree with that assessment, and determined not to move forward with

the investment.

69. Thus, ECI’s August 17, 2000 press release misrepresented or failed to disclose the

following material information:

a. There was no definitive agreement between ECI and LMM, just a non-

binding term sheet. Indeed, the memorandum of understanding announced

in the press release was not yet drafted, let alone executed, at the time the

press release was issued. Specifically, in an e-mail sent on August 25, 2000,

an attorney for ECI lists various documents which must be revised and/or

drafted. One of the items on the list is an “MOU” between ECI and LMM,

which ECI’s attorney offers to draft. (LMM’s Amended Complaint, filed

October 29, 2001, is attached as Exh. D hereto, the e-mail is Exhibit. 3

thereto). Moreover, while the press release references a memorandum of

understanding once, the word “agreement” is used several times in the press

release, including once in a quote by an ECI vice president, Pinny Chaviv.

As a result of ECI’s use of the word “agreement,” in the August 18, 2000, on-

line edition of the industry magazine DSL Prime (www.dslprime.com/n/2000

August.html), the following news item appeared under the heading “Deals”:

“ECI got a DSLAM order from Last Mile Media, a building-oriented provider

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in Austin. [ECI has] been weak in the US but have major customers in

Europe and Asia.”;

b. According to the July 6, 2000 Term Sheet (Exh.D, at Exh. 1), the second

payment of ECI’s investment in LMM “shall not become due until execution

by [LMM] of at least one agreement with a property owner.” (Payment ¶(d),

at p. 2). In other words, LMM had no customers at the time of the press

release. The press release states otherwise. In the very first paragraph of the

press release, ECI states that LMM “is an emerging provider of high-speed

Internet connections to multi-tenant properties.” Written in the present tense,

this description suggests that LMM is already in business. Similarly, the

portion of the press release entitled “About Last Mile Media” is worded in

the present tense, not the future tense. Specifically, it states that LMM

“installs” ECI Telecom DSLAM equipment on the premises, with no cost to

the property owner, but that LMM “shares” the revenues, and that LMM

“handles” all customer service, billing, and provisioning issues via ECI

Telecom's OPS Management Software.

70. Despite the big splash ECI caused with the announcement of the LMM deal, ECI

failed to inform the investing public when the negotiations fell through.

71. Defendants knowingly or recklessly issued the LMM press release. At the time the

statement was made, defendants knew or had access to information inconsistent with the language

of the press release, to wit, that LMM was a start-up with no customers and no money, ECI was

going to invest $2 million in LMM to get its operations off the ground, and that there was no

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agreement or memorandum of understanding signed between ECI and LMM. Defendants also had

a motive to issue this press release, to stop the slide in ECI’s share price which had occurred since

the announcement of the break-up and ECI’s Q2 earnings several weeks before.

ECI Announces Strong Q3 Sales

72. On November 7, 2000, defendants announced Q3 2000 results for ECI, again

emphasizing demand for the Company’s products. The press release, which reported, inter alia, the

revenues ECI accrued during Q3 2000, stated in pertinent part:

ECI Telecom Announces Third Quarter 2000 Results

Revenues from Strategic Businesses Rise 31%, Record Book to Bill 1.4–Accelerating Restructuring Plan–

PETAH TIKVA, ISRAEL, November 7, 2000, ECI Telecom Ltd. (Nasdaq: ECIL)today announced consolidated results of operations for the third quarter endedSeptember 30, 2000.

Revenues for the third quarter of 2000 were $327.2 million, an increase of 15%compared to $285.7 million recorded in the third quarter of 1999. Gross profits were$144.2 million compared to $152.8 million in the third quarter of 1999. Operatingincome for the third quarter of 2000 was $12.0 million compared to $56.9 million forthe same period last year. Net income from continuing operations for the thirdquarter of 2000 was $14.6 million or $0.16 per diluted share compared to $57.5million or $0.61 per diluted share last year. Third quarter 2000 results includerestructuring expenses of $2.0 million. Excluding these restructuring expenses,earnings per share were $0.18.

Revenues for the nine months ended September 30, 2000 were $932.7 million, anincrease of 13% compared to $827.0 million for the comparable period in 1999.Gross profits were $424.4 million compared to $446.2 million for the first ninemonths [in] 1999. Operating income for the first nine months of 2000 was $41.9million compared to $62.7 million for the same period a year ago. Net income fromcontinuing operations, including one-time events, was $82.9 million, or $0.89 perdiluted share, compared to net income from continuing operations (and one timeevents) of $46.5 million or $0.51 per diluted share for the first nine months of 1999.Excluding one-time events (in-process R&D, capital gains and restructuring costs),net income from continuing operations for the first nine months of 2000 was $83

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million or $0.89 per diluted share compared to $169 million or $1.80 per dilutedshare for the same period last year.

Commenting on the results, Doron Inbar, President and CEO said, “Revenues fromour core strategic businesses continue to grow at a significantly faster rate than totalrevenues. Our Access business had revenues of $72 million, an increase of 40% overlast year. Optical Networks grew 33% over last year, reaching $82 million.Transport (Digital Cross Connects), recorded revenues of $42 million for the quarter,an increase of 23% compared to the same period last year. InnoWave experiencedvery strong demand for its products. Revenues, however, declined due tomanufacturing problems at our strategic manufacturer, which reported componentshortages and logistical issues. Next Generation Telephony Solutions (NGTS),which consists of IP Telephony products and ATM media gateways, grew from $1.4million in the third quarter of 1999 to $7.8 million in the third quarter of this year.Ectel, which ECI holds 75%, had an excellent quarter with sales up 50% to $15million. Our non-core businesses, which include legacy DCME (Digital CircuitMultiplication Equipment) products and Business systems, among others, decreased15% to $87.7 million. Legacy DCME declined 35% to $48 million.[”]

“Excluding non-core businesses, revenue growth for the quarter was 31%, year overyear. Demand for our products was very strong, with our record book-to-bill ratioreaching 1.4. The decrease in gross margins reflects the continuing decline in legacyDCME sales, the acceleration of lower margin ADSL (Asynchronous DigitalSubscriber Line) sales and the significant devaluation of the Euro versus the USdollar.[“]

“Our Broadband Access business continues to make significant progress as we rampup manufacturing to cope with the very large orders we received. We signedagreements with 2 global contract manufacturers in order to increase productioncapacity. During the quarter, we announced a major order from Deutsche Telecomfor over 1 million ADSL lines and expect to penetrate other strategic DSL accountsin the near term. We made good progress in reducing the manufacturing costs of ourADSL product, and began field trials of the 25Mb/s VDSL (video and TV)solution.[”] (Emphasis added.)

73. The foregoing statement was, however, false and misleading for the following

reasons:

a. As set forth in ECI’s restated figures for the quarter, revenues rose only 8%,

from approximately $285 million to approximately $310 million – not 15%,

to $327 million as originally reported. About half of ECI’s $17 million

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overstatement is attributable to the revenues of the optical division

(Lightscape) whose revenues did not increase 33%, from $61.7 million to $82

million, as originally reported. Whereas actual revenues were only $70.1

million, an increase of only $13.6%, ECI overstated the success of its optical

division by $12 million. A former senior sales and marketing executive in

Israel indicated that the SDH division (Lightscape) was the primary division

engaged in “short shipments,” i.e. sending an empty box or a partial order

with an invoice for a full shipment, for revenue recognition purposes,

followed by a $0 invoice when the order, or the remainder thereof, was

actually shipped, and in “order advancement,” i.e. advancing an order,

shipping the product to the warehouse, invoicing the customer for revenue

recognition purposes, and expecting payment only on delivery;

b. According to a former employee of LMM, at the end of Q3 2000, while

LMM was in negotiations with ECI, Dan Doczy (Vice President, Marketing

and Business Development of ECI’s access division) asked LMM to take a

delivery of a $100,000 (wholesale) demonstration unit because ECI needed

to book revenue and they expected LMM to place an order. At the time the

order was placed, LMM was not ready for the unit, did not have office space

and had no immediate means of paying for the unit;

c. The former LMM employee described above also indicated that ECI, again

through Dan Doczy, requested that LMM obtain letters of intent from

customers so that ECI could book revenue. LMM obtained several letters of

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intent on behalf of ECI even though LMM was months away from being

ready to fill the orders;

d. In September 2000, a former NGTS sales manager made a forecast that IDT

would order approximately $100,000 worth of DTX 60E hardware.

According to the sales manager, at the end of September (the close of Q3),

ECI shipped the equipment to an ECI warehouse for IDT, even though IDT

was not ready to receive the equipment and had not yet issued a purchase

order. (The sales manager only became aware of the shipment five months

later when he was asked to change the order by ECI United States CFO Tom

Sennott because the equipment, which had been sitting in an ECI warehouse

after the “sale” to IDT, had been shipped to another customer.);

e. An October 25, 2000, Customer Support Weekly Activity Report states with

respect to a service agreement with customer ITC Deltacom: “Deltacom are

understood to have signed the original contract for $436k. Waiting on PO -

can revenue half this quarter (backdated to July).” Whereas IDT’s purchase

order for this contract was not issued until the fourth quarter of 2000, it was

improper to backdate any of the revenue into July (third quarter). Moreover,

in accordance with GAAP and ECI’s own policies, revenues for a one-year

service contract are required to be recognized ratably over the term of the

contract. Daulton Huskey’s and Dennis McKeon sales reports, dated July 6,

2000, July 27, 2000, August 10, 2000, September 6, 2000, September 27,

2000, October 11, 2000, October 24, 2000 and October 25, 2000 (Exh. F

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hereto) indicate that the maintenance agreement was not executed until

August and that the purchase order approving the maintenance agreement was

not issued until Q4 2000, during the week of October 25, 2000;

f. ECI booked revenue on a $100,000 purchase order in July 2000 for T::DAX

expansions. However, a series of sales reports generated by Bill Gower and

M.C. Falletti dated June [sic] 20, 2000, September 27, 2000, October 11,

2000, October 25, 2000 and November 8, 2000 (Exh. G hereto) , indicate that

the $100,000 purchase order is actually contingent upon a ECI arranging for

a $500,000 financing package for that purchase as well as the purchase of

other equipment in Q4 2000.

g. Although ECI reported a year-on-year decline of DCME sales of 35%,

(restated) DCME sales actually rose from $38.8 million in the second quarter

of 2000 to $50.6 million in the third quarter of 2000. The reason for this

sharp increase was likely the “last time buy” program described in above.

According to a former marketing director employed by ECI at Herndon,

Virginia from April 2000 until January 2001, ECI began “shipping dollars

with products,” selling DCME equipment to customers at reduced rates.

h.. ECI claimed a book-to-bill ratio of 1.4, i.e. the Company realizes $1.40 in

current orders for every $1.00 billed suggests a 40% increase in anticipated

sales. However, as set forth above in ¶63(e), defendants were reckless in

disseminating this stated ratio because they lacked the ability to ascertain

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such a ratio due to the difficulties ECI had in ascertaining crucial financial

data.

74. For the reasons set forth above, at ¶¶ 57 and 61, and because defendants knew of or

had access to the sales reports and letters of intent referenced in ¶73, which set forth the true state

of affairs with respect to orders, shipment and installation, defendants were reckless when they

compiled and announced their financial results for the third quarter of 2000. Moreover, as set forth

infra, the overstatement of revenue in the third quarter had a dramatic effect in overstating the net

income for the quarter. Net income had been reported at $14.6 million, while the real net income

that should have been reported was only about 50% of that amount, which correspondingly has a

50% impact on the earnings per share reported of $0.16 per share, which should have been

approximately $0.08 per share.

ECI Thrice Announces ShortfallsFor Q4 And Calendar Year 2000

75. On December 14, 2000, defendants pre-warned of a revenue shortfall for the fourth

quarter of 2000, and the Company’s expectation of an operating loss for the quarter of $15-25

million before restructuring and other one-time charges. The Company blamed the loss primarily

on a revenue shortfall attributable to a sharper than expected decline in DCME sales and lower than

expected sales of optical division products. While it is true that DCME sales dropped precipitously

from the third quarter to the fourth quarter, the decline was not “greater than expected.” Rather, it

was part of defendants’ scheme to manipulate DCME financial results so as to scapegoat a purported

unexpected drop in DCME sales for ECI’s financial woes:

a. In an August 8, 2000, interview published in Globes, CEO Inbar indicated

that DCME sales appeared to be leveling off. Indeed, throughout the first

17 As indicated in note 2, supra, DCME sales for the first two quarters of 2000 wereoverstated by more than $22 million.

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three quarters of 2000, ECI reported level sales figures of $49 million (Q1),

$47.5 million (Q2) and $48 million (Q3);17

b. As explained above, defendants manipulated DCME sales – through deep

discounts and “last time buy” offers – which moved fourth quarter sales into

the third quarter;

c. In a December 18, 2000 Globes interview, CEO Inbar stated that DCME

sales had been $56 million in the third quarter, but that they would fall “over

$10 million.” In reality, sales dropped from $50.6 million to only $13.5

million;

d. Following restatement, DCME sales for 2000 were in fact fairly level, with

the exception of the sales pulled from the fourth quarter into the third quarter:

Q1: $35.1 million Q2: $38.8 mil. Q3: $50.6 mil. Q4: $13.5 mil.

76. On January 22, 2001, defendants issued a second warning for ECI’s impending fourth

quarter results, advising that the Company’s fourth quarter loss would be wider than initially warned,

blaming implementation of SAB 101, additional revenue shortfall and one-time charges associated

with the Company’s plan to break up into five separate companies. The announcement advised for

the first time that ECI would restate its financial statements for the first three quarters of fiscal and

calendar 2000, and sent the Company’s stock tumbling 14.5%, rendering the stock one of the top

percentage decliners for the day on NASDAQ.

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77. On February 14, 2001, the last day of the Class period, ECI announced that the

Company’s previously-announced financial performance restatement was expected to “move” $38

million in revenue from 1999's financial statement to 2000, and $61 million from 2000 to 2001.

Fourth quarter 2000 results also included, for the first time, a significant inventory write-off,

impairment of assets and restructuring and spin-off expenses totaling $56.4 million. ECI further

forecast an operating loss for the first fiscal quarter of 2001 and announced the second significant

cut in the Company’s workforce in three months. Defendant Inbar stated, “We were very

disappointed with our fourth quarter results which were weaker than our recent guidance.”

78. On May 23, 2001, ECI announced its financial results for the first quarter of 2001.

In addition to a drastic drop in revenues, according to a report issued that day by Jonathan Haft of

UBS Warburg, ECI wrote off $95 million of inventories, but this balance sheet item only declined

by $10 million, to $381 million – suggesting a continued increase in inventories and the need for

further write-offs in the future. ECI’s inventory figures before and after the class period demonstrate

the blatant falsity of ECI’s claims, at the end of the first three quarters of 2000, that its book-to-bill

ratio increased from 1.2 to 1.25 to 1.4 – a sign of increasing sales:

a. In its 1999 Annual Report, ECI reported that inventories rose from $162.7

million at the end of 1998 to $185.8 million at the end of 1999;

b. ECI’s inventory at the end of 2000 was $391 million;

c. Following Q1 2001, ECI had an astonishing 190 days of inventory, almost

double the 84-day average determined by UBS Warburg for 11

telecommunication companies.

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79. After the close of the Class period, on July 2, 2001, ECI filed with the SEC its Annual

Report on Form 20-F for the fiscal year ended December 31, 2000. In that document defendants

disclosed that:

Effective January 1, 2000, after giving consideration to guidance provided by SECStaff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in FinancialStatements”, the Company changed certain revenue recognition policies. Changesprimarily affected the reporting of sales and products under agreements thatcontained customer acceptance criteria or payment terms that were linked to thetiming of the installation of the product at the customer specified location. Thecumulative effect of this change for periods prior to January 2000 is $27.9 million(net of income taxes of $1 million), or $0.31 per share. This amount was reflectedas a charge to earnings in 2000. (Emphasis added).

The cumulative effect of this change for periods prior to January 1, 2000 is also very dramatic and

further strong indicia of scienter because of the magnitude of the impact on the financial results

reported to the investing public. While defendants try to minimize the impact by comparing the

revenue charge to total revenue, the correct analysis is to look at the impact on net income and the

earnings reported by ECI to investors. The financial statements included in the Form 20-F

demonstrate the dramatic effect of this revision – the loss from continuing operations of $63.5

million was increased by another $27.9 million or 44% for a total loss of $91.4 million. The loss

per share was increased from $0.69 to $1.00.

80. Defendants’ cannot rely upon the issuance of SAB 101 to hide their reckless inflation

of revenues and net profits during the first three quarters of fiscal 2000. SAB 101, an SEC bulletin

addressing how companies recognize revenue throughout their fiscal year, is only a refinement of

existing accounting principles, and implementation of SAB 101 should not result in a significant

restatement of past financial statements. Indeed, SAB 101 expressly states: “This staff accounting

bulletin summarizes certain of the staff's views in applying generally accepted accounting principles

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to revenue recognition in financial statements . . . This Staff Accounting Bulletin is not intended to

change current guidance in the accounting literature.” See 64 Fed. Reg. 68936 (Dec. 9, 1999), at

68936, 68945. SAB 101, moreover, does not provide public companies with a “safe harbor” from

which they may escape responsibility for insuring that management’s financial statements comply

with existing requirements of GAAP and other applicable accounting standards, as well as the

antifraud provisions of the federal securities laws. In fact, in SAB 101, the SEC explicitly confirmed

that:

...[I]f registrants have not previously complied with generally accepted accountingprinciples, for example, by recording revenue for products prior to delivery that didnot comply with the applicable bill-and-hold guidance, those registrants should applythe guidance in APB Opinion No. 20 for the correction of the error. In addition,registrants should be aware that the Commission may take enforcement action wherea registrant in prior financial statements has violated the antifraud or disclosureprovisions of the securities laws with respect to revenue recognition.

ECI’s False and Misleading Financial StatementsViolated Basic Principles of GAAP And,As A Result, The Federal Securities Laws

81. During the class period, ECI publicly disseminated and/or filed with the SEC

financial statements which contained materially false and misleading financial information in

violation of GAAP and SEC Rules and Regulations. As explained above, GAAP encompasses the

rules, conventions and practices recognized and employed in the preparation of financial statements

for the fair presentation of the financial condition, results of operations and cash flows of an

enterprise. Financial statements that are filed with the SEC must conform with GAAP and SEC

Regulation S-X.

82. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, “[f]inancial statements filed

with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be

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misleading or inaccurate.” 17 C.F. R. § 210.4-01(a)(1). Management is responsible for preparing

financial statements that conform with GAAP. As noted by the American Institute of Certified

Public Accountants’ (“AICPA”) professional standards:

Financial statements are management’s responsibility . . . .Management is responsible for adopting sound accounting policiesand for establishing and maintaining internal controls that will,among other things, record, process, summarize, and reporttransactions (as well as events and conditions) consistent withmanagement’s assertions embodied in the financial statements. Theentity’s transactions and the related assets, liabilities and equity arewithin the direct knowledge and control of management . . . . Thus,the fair presentation of financial statements in conformity withGenerally Accepted Accounting Principles is an implicit and integralpart of management’s responsibility.

AU § 110.03 (1998).

83. As set forth in Accounting Principles Board (“APB”) Opinion No. 28, “Interim

Financial Reporting,” (part of GAAP) “Each interim period shall be viewed primarily as an integral

part of an annual period. The results for each interim period shall be based on the accounting

principles and practices used by an enterprise in the preparation of its latest annual financial

statements unless a change in an accounting practice or policy has been adopted in the current year.”

Additionally, “[r]evenue from products sold or services rendered shall be recognized as earned

during an interim period on the same basis as followed for the full year.”

84. GAAP requires the restatement of previously issued financial statements for the

correction of a material error in the financial statements of a prior period. “Errors in financial

statements result from ... misuse of facts that existed at the time the financial statements were

prepared.” APB No. 20. (Emphasis added.) The same GAAP standard requires restatement of

previously reported financial statements if the misuse of facts that existed at the time the financial

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statements were prepared caused reported net income to be materially misstated. Accordingly, the

restatement of ECI’s previously reported 1999 and 2000 financial statements and earnings is itself

an admission that the originally issued financial information was materially false and misleading

when first reported.

85. In addition to ECI’s violation of its own revenue recognition policies and FASB 5,

defendants’ misrepresentations that ECI’s results conformed with GAAP were also false and

misleading because of the following GAAP violations:

a. As set forth in Statement of Financial Accounting Concepts (“Concepts

Statement”) No. 1. Objectives of Financial Reporting by Business Enterprises, one of the

fundamental objectives of financial reporting is to provide accurate and reliable information

concerning an entity’s financial performance during the period being presented. According to ¶ 42

of Concepts Statement No. 1:

Financial reporting should provide information about an enterprise’sfinancial performance during a period. Investors and creditors oftenuse information about the past to help in assessing the prospects of anenterprise. Thus, although investment and credit decisions reflectinvestors’ and creditors’ expectations about future enterpriseperformance, those expectations are commonly based at least partlyon evaluations of past enterprise performance.

b. This provision of GAAP was violated because, as detailed herein, the Company’s

reported revenues and earnings for the past two years were materially overstated due to improper

recognition of revenue.

c. Because of “the potential dilution of public confidence in financial statements

resulting from restating the financial statements of prior periods,” under GAAP, a retroactive

restatement of financial statements is reserved for material accounting errors that existed at the time

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the financial statements were prepared. See APB Opinion No. 20, Accounting Changes, §§ 18, 27,

34-38. Since GAAP only allows for correction of errors that are “material,” by restating its financial

statements, ECI admitted the materiality of the errors in its previously issued financial statements

for the fiscal years of 1999 and 2000.

d. The principle that financial reporting should provide information that is useful

to present and potential investors and creditors and other users in making rational investment, credit,

and similar decisions. (Concepts Statement No. 1, ¶ 34);

e. The principle that financial reporting should provide information about an

enterprise’s financial performance during a period. Investors and creditors often use information

about the past to help in assessing the prospects of an enterprise. Thus, although investment and

credit decisions reflect investors’ expectations about future enterprise performance, those

expectations are commonly based at least partly on evaluations of past enterprise performance.

(Concepts Statement No. 1, ¶ 42);

f. The principle that financial reporting should be reliable in that it represents what

it purports to represent. The notion that information should be reliable as well as relevant is central

to accounting. (Concepts Statement No. 2, ¶¶ 58-59); and

g. The principle that conservatism be used as a prudent reaction to uncertainty to try

to ensure that uncertainties and risks inherent in business situations are adequately considered. The

best way to avoid injury to investors is to try to ensure that what is reported represents what it

purports to represent. (Concepts Statement No. 2, ¶¶ 95, 97).

86. ECI’s January 22, 2001 and February 14, 2001 announcements that it intended to

restate its financial statements for the first three quarters of fiscal 2000 acknowledges that ECI’s

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financial statements as represented to the public were false and misleading for Q1 000 and Q2 000 and

Q3 000. While defendants blame implementation of SAB 101 for the restatement, the SEC has

publicly stated that a company whose prior accounting does not represent an error may not

voluntarily adopt a new method consistent with SAB 101 by restating prior periods, except in the

rarest of circumstances, such as when a company is filing publicly for the first time. During the class

period, defendants knew or recklessly disregarded the fact that they had engaged in pattern of

conduct to recognize revenue on sales of ECI’s products which violated existing standards of GAAP

and other accounting standards.

87. During the class period, each Individual Defendant occupied a position that made him

privy to non-public information concerning ECI. Because of this access, each of these defendants

knew that the adverse facts specified herein were concealed and that the public statements made by

the Company were false.

88. The market for ECI’s securities was open, well-developed and efficient at all relevant

times. As a result of the foregoing materially false and misleading statements and failures to disclose

the full truth about ECI and its business, earning momentum and future prospects, ECI’s common

stock traded at artificially inflated prices during the entire class period, reaching a class period high

of approximately $39 per share, until the time the adverse information described above was finally

provided to and digested by the securities market, plaintiffs and other members of the class

purchased or otherwise acquired ECI stock relying upon the integrity of the market price of ECI

stock and market information relating to ECI, or in the alternative, upon defendants’ false and

misleading statements, and in ignorance of the adverse, undisclosed information known to

defendants, and have been damaged thereby.

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GENERAL SCIENTER ALLEGATIONS

89. As alleged herein, defendants acted with scienter in that defendants knew or were

reckless with respect to the fact that the public documents and statement issues or disseminated in

the name of the Company were materially false and misleading; knew or were reckless with respect

to the fact that such statements or documents would be issued or disseminated to the investing

public; and knowingly and substantially, or recklessly, participated or acquiesced in the issuance or

dissemination of such statements or documents as primary violations of the federal securities laws.

As set forth elsewhere herein detail, defendants, by virtue of their receipt of information reflecting

the true facts regarding ECI, their control over and/or receipt and/or modification of ECI’s allegedly

materially misleading misstatements and/or their associations with the Company which made them

privy to confidential proprietary information concerning ECI, participated in the fraudulent scheme

alleged herein. As further alleged herein, defendants had a motive to perpetrate this securities fraud

and the opportunity to do so.

90. Under GAAP, the need to restate a previously reported financial statement arises only

when the facts that necessitate the restatement existed at the time the financials were originally

issued. See Accounting Principles Bulletin No. 20, ¶ 13. By acknowledging the need to restate prior

financials, defendants have effectively admitted that the Company’s improper recognition of revenue

was therefore known or recklessly disregarded at the time all of the foregoing fraudulent financial

statements were originally released, and that the originally issued financial statements were

materially misleading.

91. During the class period, defendants, including defendants Inbar and Ben-Assayag,

were specifically advised by ECI’s outside auditors, KPMG, of ECI’s improper revenue recognition

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practices but nevertheless continued to improperly recognize revenue and improperly reflect that

revenue on the financial statements of ECI.

92. Defendants were fully aware of their practices regarding revenue recognition yet

chose not to conform ECI’s financial statements to the applicable standards and ECI’s own stated

revenue recognition policy. In January 2001, defendant Inbar was quoted in the Israeli publication

Globe as stating:

It is true that there are companies that have been operating according to SAB 101, butwe did not have to until last quarter. If you look at the leading companies in ourfield, you will see that some of them refer to the SAB in the last quarter. I am puttingeverything on the table, and admit that we should have [acted] differently, but it isn’tthat simple. In any event, this is one reason ECI’s revenues shrank by $60-$65million for the year.

Defendants’ knowing and/or reckless conduct is further evidenced by the deliberate acts which were

known to them whereby they improperly recognized revenue during the class period such as shipping

products to warehouses, shipping products which were not requested by customers and recognizing

revenue prior to the completion of installation of products. In addition, as set forth above,

defendants were powerfully motivated to engage in these actions so as to permit the successful spin

off of various of ECI’s subsidiaries and to further the economic interests of Koor and Kolber, both

of whom stood to benefit from the spin offs.

PRESUMPTION OF RELIANCE

93. At all relevant times, the market for ECI’s securities was an efficient market for the

following reasons, among others:

(a) ECI’s stock met the requirements for listing, and was listed and actively

traded on the NASDAQ, a highly efficient and automated market;

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(b) As a regulated issuer, ECI filed periodic reports with the SEC;

(c) ECI regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of

press releases the national circuits of major newswire services and through

other wide-ranging public disclosures, such as communications with the

financial press and other similar reporting services; and

(d) ECI was followed by several securities analysts employed by major brokerage

firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was

publicly available and entered the public marketplace.

94. As a result of the foregoing, the market for ECI’s securities promptly digested current

information regarding ECI from all publicly available sources and reflected such information in

ECI’s stock price. Under these circumstances, all purchases of ECI’s securities were made at

artificially inflated prices and a presumption of reliance applies.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

95. The statutory safe harbor relating to forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint. By

its express terms, the Private Litigation Securities Reform Act of 1995 excludes financial statements

which purport to be prepared in compliance with GAAP from the coverage of the statutory safe

harbor. Many of the statements pleaded herein were not specifically identified as “forward-looking

statements” when made. To the extent there were any forward looking statements, there were no

meaningful cautionary statements identifying the important then-present factors that could and did

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cause actual results to differ materially from those in the purportedly forward-looking statements.

Alternatively, to the extent that the statutory safe harbor does not apply to any forward-looking

statements because at the time each of those forward-looking statements was false or misleading;

and/or the forward-looking statement was authorized and/or approved by an executive officer of ECI

who knew or recklessly disregarded the fact that those statements were false when made.

96. Any warning contained in the press releases and the financial statements quoted

herein were generic statements of the kind of risks that affect any company in ECI’s industry and

misleadingly contained no specific factual disclosure of any specific problems with ECI which

placed the Company’s profitability and growth at risk.

FIRST CLAIM

Violation of § 10(b) of the Exchange ActAnd Rule 10b-5 Promulgated ThereunderAgainst All Defendants

97. Plaintiffs repeat and allege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein.

98. At all relevant times, the defendants, individually and in concert, directly and

indirectly, by the use and means of instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct whereby they knowingly and/or

recklessly made and/or failed to correct public representations which were or had become materially

false and misleading regarding ECI’s financial results and operations. This continuous course of

conduct resulted in the defendants causing ECI to publish statements which they knew, or were

reckless in not knowing, were materially false and misleading, in order to artificially inflate the

market price of ECI stock and which operated as a fraud and deceit upon members of the Class.

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99. Defendants are liable as direct participants in and as controlling persons of the wrongs

complained of herein. By virtue of their positions of control and authority as officers and directors

of ECI, the Individual Defendants were able to and did, directly or indirectly, control the content of

the aforesaid statements relating to the Company, and/or the failure to correct those statements were

no longer true or accurate. The Individual Defendants caused or controlled the preparation and/or

issuance of public statements and the failure to correct such public statements containing

misstatements and omissions of material facts as alleged herein.

100. The Individual Defendants had actual knowledge of the facts making the material

statements false and misleading, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though the same were available to them.

101. In ignorance of the adverse facts concerning ECI’s business operations and earnings,

and in reliance on the integrity of the market, plaintiffs and the Class acquired ECI common stock

at artificially inflated prices and were damaged thereby.

102. Had plaintiffs and the class known of the materially adverse information not disclosed

by defendants, they would not have purchased ECI common stock, or at least not at the inflated

prices paid.

103. By virtue of the foregoing defendants violated § 10(b) of the 1934 Act and Rule 10b-5

promulgated thereunder.

SECOND CLAIM

Violation of § 20(a) of the Exchange ActAgainst the Individual Defendants

104. Plaintiffs repeat and allege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein.

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105. This claim is asserted against the Individual Defendants and is based upon § 20(a)

of the 1934 Act.

106. The Individual Defendants, by virtue of their offices, directorships, stock ownership

and specific acts were, at the time of the wrongs alleged herein and as set forth in the First Claim,

controlling persons of ECI within the meaning of § 20(a) of the 1934 Act. The Individual

Defendants had the power and influence and exercised the same to cause ECI to engage in the illegal

conduct and practices complained of herein by causing the Company to disseminate the false and

misleading information referred to above.

107. The Individual Defendants’ respective positions made them privy to and provided

them with actual knowledge of the material facts concealed from plaintiff and the class.

108. By virtue of the conduct alleged in the First Claim, the Individual Defendants are

liable for the aforesaid wrongful conduct and are liable to plaintiff and the class for damages

suffered.

WHEREFORE, plaintiffs pray for relief and judgment as follows:

A. Determining that the instant action is a proper class action maintainable under

Rule 23 of the Federal Rules of Civil Procedure:

B. Awarding compensatory damages and/or rescission as appropriate against

defendants, in favor of plaintiffs’ and all members of the class for damages

sustained as a result of defendants’ wrongdoing:

C. Awarding plaintiffs and the class the costs and disbursements of this suit,

including reasonable attorneys’, accountants’ and experts’ fees; and

D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: December 7, 2001 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C.

By_________________________________Steven J. Toll (VSB 15300)Daniel S. SommersJoshua S. Devore (VSB 45312)West Tower, Suite 5001100 New York Avenue, N.W.Washington, D.C. 20005-3934Liaison Counsel for Plaintiffs

LAW OFFICES OF LIONEL Z. GLANCYLionel Z. GlancyTracy L. Thrower1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067

- and -Robin B. Howald1501 Broadway, Suite 1416New York, NY 10036Lead Counsel for Plaintiffs

DEKEL-SABO LAW OFFICEJacob SaboTwin Towers 1, 33 Jabotinsky StreetRamat-Gan 52511Post Office Box 21119Tel-Aviv, Israel 61210

MILBERG WEISS BERSHAD HYNES & LERACHLLP

Kenneth J. VianaleR. Timothy Vannatta5355 Town Center Road, Suite 900Boca Raton, FL 33486

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BERNSTEIN LIEBHARD & LIFSHITZSandy A. Liebhard10 East 40th Street, 22nd FloorNew York, NY 10016

SCHIFFRIN & BARROWAY, LLPMarc A. TopazThree Bala Plaza East, Suite 500Bala Cynwyd, PA 19004

CAULEY & GELLER, BOWMAN & COATES, LLPPaul J. GellerOne Boca Place2255 Glades Road, Suite 421ABoca Raton, FL 33431

MILBERG WEISS BERSHAD HYNES & LERACHLLP

Steven G. SchulmanSamuel H. RudmanOne Pennsylvania PlazaNew York, NY 10119

LAW OFFICES OF MARK S. HENZELMarc S. Henzel210 West Washington Square - 3rd FloorPhiladelphia, PA 19106

WOLF HALDENSTEIN ADLER FREEMAN &

HERZ LLPGregory M. Nespole270 Madison AvenueNew York, NY 10016

COHEN GETTINGS, P.C.John E. GaglianoMichael Nachmanoff2200 Wilson Boulevard, Suite 800Arlington, VA 22224

ABBEY GARDY, LLPMark Gardy212 E. 39th StreetNew York, New York 10016

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FARUQI & FARUQI, LLPNadeem Faruqi320 East 39th StreetNew York, New York 10016

BEATIE AND OSBORN LLPEduard Korsinsky521 Fifth Avenue, 34th FloorNew York, New York 10175

Counsel for Plaintiffs