---

---

SECURITIES
  AND EXCHANGE COMMISSIONWASHINGTON,
  D.C. 20549

**FORM
  20-F**

|o                                                 | REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------
|                                                  |                                                                                                           
|OR                                               
|                                                  |                                                                                                           
|x                                                 | ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934          
|For
      the fiscal year ended December 31, 2003
|                                                  |                                                                                                           
|OR                                               
|                                                  |                                                                                                           
|o                                                 | TRANSITION
      REPORT PURSUANT TO SECTION 13(b) OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934   
|For
      the transition period from   to        

Commission File
  Number 0-28986

TTI
  TEAM TELECOM INTERNATIONAL LTD .(Exact name
  of Registrant as specified in its charter)

Israel(Jurisdiction of
  incorporation or organization)

7 Martin
  Gehl StreetKiryat Aryeh,
  Petach Tikva 49512 Israel972-3-926-9700(Address of principal
  executive offices)

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

Securities registered
  or to be registered pursuant to Section 12(g) of the Act:Ordinary Shares,
  par value NIS 0.5 per share(Title of Class)

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

Indicate the
  number of outstanding shares of each of the issuers classes of capital
  or common stock as of the close of the period covered by the annual report:11,872,052 Ordinary
  Shares, par value NIS 0.5 per share

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

Yes x              
  Noo

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

Item 17oItem 18 x



---

---

TABLE OF
  CONTENTS

|             |               |                                                             |                                                         | Page
|------------ | ------------- | ----------------------------------------------------------- | ------------------------------------------------------- | ----
|             |               |                                                             |                                                         |     
|PART
      I |               |                                                             |                                                         | 6   
|             | Item
      1. | IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 6                                                      
|             | Item
      2. | OFFER
      STATISTICS AND EXPECTED TIMETABLE               | 6                                                      
|             | Item
      3. | KEY
      INFORMATION                                       | 6                                                      
|             |               |                                                             | A.
      Selected Financial Data                        | 6   
|             |               |                                                             | B.
      Capitalization and Indebtedness                | 8   
|             |               |                                                             | C.
      Reasons for the Offer and Use of Proceeds      | 8   
|             |               |                                                             | D.
      Risk Factors                                   | 8   
|             | Item
      4. | INFORMATION
      ON THE COMPANY                            | 22                                                     
|             |               |                                                             | A.
      History and Development of the Company         | 22  
|             |               |                                                             | B.
      Business Overview                              | 22  
|             |               |                                                             | C.
      Organizational Structure                       | 36  
|             |               |                                                             | D.
      Property, Plants and Equipment                 | 37  
|             | Item
      5. | OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS          | 37                                                     
|             |               |                                                             | A.
      Operating Results                              | 37  
|             |               |                                                             | B.
      Liquidity and Capital Resources                | 49  
|             |               |                                                             | C.
      Research and Development, Patents and Licenses | 51  
|             |               |                                                             | D.
      Trend Information                              | 52  
|             |               |                                                             | E.
      Off-Balance Sheet Arrangements                 | 52  
|             |               |                                                             | F.
      Tabular Disclosure of Contractual Obligations  | 52  
|             | Item
      6. | DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES            | 53                                                     
|             |               |                                                             | A.
      Directors and Senior Management                | 53  
|             |               |                                                             | B.
      Compensation                                   | 56  
|             |               |                                                             | C.
      Board Practices                                | 58  
|             |               |                                                             | D.
      Employees                                      | 62  
|             |               |                                                             | E.
      Share Ownership                                | 62  
|             | Item
      7. | MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 64                                                     

3

---

---

|              |                |                                                                  | A.
      Major Shareholders                                      | 64
|------------- | -------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- | --
|              |                |                                                                  | B.
      Related Party Transactions                              | 65
|              |                |                                                                  | C.
      Interests of Experts and Counsel                        | 68
|              | Item
      8.  | FINANCIAL
      INFORMATION                                      | 68                                                              
|              |                |                                                                  | A.
      Consolidated Statements and Other Financial Information | 68
|              |                |                                                                  | B.
      Significant Changes                                     | 69
|              | Item
      9.  | THE
      OFFER AND LISTING                                      | 69                                                              
|              |                |                                                                  | A.
      Offer and Listing Details                               | 69
|              |                |                                                                  | B.
      Plan of Distribution                                    | 70
|              |                |                                                                  | C.
      Markets                                                 | 70
|              |                |                                                                  | D.
      Selling Shareholders                                    | 70
|              |                |                                                                  | E.
      Dilution                                                | 70
|              |                |                                                                  | F.
      Expenses of the Issue                                   | 70
|              | Item
      10. | ADDITIONAL
      INFORMATION                                     | 70                                                              
|              |                |                                                                  | A.
      Share Capital                                           | 70
|              |                |                                                                  | B.
      Memorandum and Articles of Association                  | 70
|              |                |                                                                  | C.
      Material Contracts                                      | 75
|              |                |                                                                  | D.
      Exchange Controls                                       | 75
|              |                |                                                                  | E.
      Taxation                                                | 75
|              |                |                                                                  | F.
      Dividends and Paying Agents                             | 75
|              |                |                                                                  | G.
      Statement by Experts                                    | 86
|              |                |                                                                  | H.
      Documents on Display                                    | 86
|              |                |                                                                  | I.
      Subsidiary Information                                  | 86
|              | Item
      11. | QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 87                                                              
|              | Item
      12. | DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES     | 87                                                              
|PART
      II |                |                                                                  |                                                                  | 87
|              | Item
      13. | DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES            | 87                                                              

4

---

---

| | Item
      14.  | MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 87
| | --------------- | ---------------------------------------------------------------------------------- | --
| | Item
      15.  | CONTROLS
      AND PROCEDURES                                                      | 88
| | Item
      16.  | Reserved                                                                           | 88
| | Item
      16A. | AUDIT
      COMMITTEE FINANCIAL EXPERT                                             | 88
| | Item
      16B. | CODE
      OF ETHICS                                                               | 88
| | Item
      16C. | PRINCIPAL
      ACOUNTANT FEES AND SERVICES                                        | 88
| | Item
      16D. | EXEMPTIONS
      FROM LISTING STANDARDS FOR AUDIT COMMITTEES                       | 89
| | Item
      17.  | FINANCIAL
      STATEMENTS                                                         | 89
| | Item
      18.  | FINANCIAL
      STATEMENTS                                                         | 89
| | Item
      19.  | EXHIBITS                                                                           | 89

Our
  consolidated financial statements are prepared in United States dollars and
  in accordance with generally accepted accounting principles in the United States.
  All references to dollars or $ in this annual report
  are to United States dollars, and all references to Shekels or NIS
  are to New Israeli Shekels. On March 15, 2004, the exchange rate between the
  NIS and the dollar, as quoted by the Bank of Israel, was NIS 4.501 to $1.00.

5

---

---

PART I

Unless
the context otherwise requires, all references in this annual report to TTI, us,
we, and our refer to TTI Team Telecom International Ltd.

Statements
in this annual report concerning our business outlook or future economic performance; anticipated
revenues, expenses or other financial items; introductions and advancements in development of products,
and plans and objectives related thereto; and statements concerning assumptions made or expectations
as to any future events, conditions, performance or other matters, are forward-looking statements
as that term is defined under the United States Federal Securities Laws. In some cases, you can identify
forward-looking statements by our use of words such as expect, anticipate,
believe, intend, plan, seek and estimate
and similar expressions. Forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from those in these statements. Factors
that could cause or contribute to these differences include, but are not limited to, those set forth
under Item 3D - Risk Factors in this annual report as well as those discussed elsewhere
in this annual report as well as our reports on Form 6-K submitted to the Securities and Exchange Commission.

|Item | 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|---- | --------------------------------------------------------
|     |                                                         
|     | Not applicable.                                         

| | Item | 2. OFFER STATISTICS AND EXPECTED TIMETABLE
| | ---- | ------------------------------------------
| |      |                                           
| |      | Not applicable.                           

| | Item | 3. KEY INFORMATION
| | ---- | ------------------

A.            Selected
  Financial Data The tables that follow present portions of our financial statements and are not complete. The following
selected financial data should be read together with our consolidated financial statements, notes
to our consolidated financial statements and Item 5 - Operating and Financial Review and Prospects
included in this annual report. Historical results are not necessarily indicative of any results
to be expected in any future period.

We derived the selected consolidated
  statements of operations data set forth below for the years ended December 31,
  2001, 2002 and 2003, and the selected consolidated balance sheet data as of
  December 31, 2002 and 2003, from our audited consolidated financial statements,
  which are included elsewhere in this annual report. These consolidated financial
  statements have been prepared in accordance with accounting principles generally
  accepted in the United States (GAAP). We derived the consolidated
  statements of operations data for the years ended December 31, 1999 and 2000
  and the selected consolidated balance sheet data as of December 31, 1999, 2000
  and 2001 from audited consolidated financial statements that are not included
  in this annual report.

6

---

---

December
  31(in thousands)

|                                                             | 1999 | 2000 | 2001 | 2002   | 2003
|------------------------------------------------------------ | ---- | ---- | ---- | ------ | ----
|**Statement
      of Income Data:**                          |      |      |      |        |     
|Revenues:                                                    |      |     
|Products                                                     |      |      | $    | 25,474 |     
|Services                                                     |      |      |      | 5,387  |     
|                                                             |      |      |      |        |     
|                                                             |      |      |      |        |     
|                                                             |      |      |      |        |     
|Total
      revenues                                         |      |      |      | 30,861 |     
|Cost of revenues:                                            |      |     
|Products                                                     |      |      |      | 10,783 |     
|Services                                                     |      |      |      | 2,894  |     
|Impairment
      of capitalized software                     |      |      |      | -      |     
|                                                             |      |      |      |        |     
|Total
      cost of revenues                                 |      |      |      | 13,677 |     
|                                                             |      |      |      |        |     
|Gross profit                                                 |      |      |      | 17,184 |     
|                                                             |      |      |      |        |     
|Operating
      expenses:                                    |      |      |      |        |     
|Research
      and development, net                          |      |      |      | 2,973  |     
|Selling
      and marketing, net                             |      |      |      | 5,971  |     
|General
      and administrative                             |      |      |      | 2,855  |     
|goodwill
      write-off                                     |      |      |      | -      |     
|                                                             |      |      |      |        |     
|Allowance
      for doubtful accounts and bad debt write-off |      |      |      | -      |     
|                                                             |      |      |      |        |     
|Total
      operating expenses                               |      |      |      | 11,799 |     
|                                                             |      |      |      |        |     
|Operating
      income (loss)                                |      |      |      | 5,385  |     
|Financial
      income, net                                  |      |      |      | 640    |     
|                                                             |      |      |      |        |     
|Income (loss)
      before income taxes                      |      |      |      | 6,025  |     
|Income taxes                                                 |      |      |      | (358   | )   
|                                                             |      |      |      |        |     
|Net income
      (loss)                                      |      |      | $    | 5,667  |     
|                                                             |      |      |      |        |     
|                                                             |      |      |      |        |     
|Basic net
      earnings (loss) per share                    |      |      | $    | 0.61   |     
|                                                             |      |      |      |        |     
|                                                             |      |      |      |        |     
|Diluted net
      earnings (loss) per share                  |      |      | $    | 0.57   |     
|                                                             |      |      |      |        |     
|Weighted
      average number of shares used in computing:   |      |     
|                                                             |      |      |      |        |     
|Basic
      net earnings (loss) per share                    |      |      |      | 9,351  |     
|                                                             |      |      |      |        |     
|Diluted
      net earnings (loss) per share                  |      |      |      | 10,014 |     
|                                                             |      |      |      |        |     

7

---

---

December
  31

|(in
      thousands)            | 1999 | 2000 | 2001 | 2002   | 2003
|------------------------------- | ---- | ---- | ---- | ------ | ----
|**Balance
      Sheet Data:**   |      |      |      |        |     
|Cash and
      cash equivalents |      |      | $    | 13,646 |     
|Short term
      bank deposits  |      |      |      | -      |     
|Marketable
      securities     |      |      |      | 387    |     
|Working capital                 |      |      |      | 27,614 |     
|Total assets                    |      |      |      | 42,612 |     
|Shareholders
      equity      |      |      |      | 33,014 |     

B.           
  Capitalization and Indebtedness

Not applicable.

C.           
  Reasons for Offer and Use of Proceeds

Not applicable.

D.            Risk Factors

We believe that the occurrence of any one or some combination of the following factors could have a
material adverse effect on our business, financial conditions and results of operations.

Risks Relating to Our
  Business and Our Industry

The general deterioration of the global economy and the slow-down of expenditures by communications
service providers could have a material adverse effect on our results of operations.

Our business is dependent on current and anticipated market demand for our products. The general deterioration
of the global economy and economic uncertainty in the telecommunications market resulted in a curtailment
of capital investment by communications service providers beginning towards the end of 2000. Many
new and small communications service providers have failed and existing service providers have been
reducing or delaying expenditures on new equipment and applications. Many companies, including our
current and potential customers, have postponed or decreased further capital investment or have indicated
to us that they intend to do so. Due to the past volatility of the market, it is difficult to predict
the conditions of our market going forward. A continued decline in capital expenditures would reduce
our sales and could result in pressure on the price of our products, each of which would have a material
adverse effect on our operating results.

Our customers are concentrated in the public carrier communications industry and accordingly, trends
in this industry could have a material adverse effect on our results of operations.

Our customers are concentrated in the public carrier communications market. Because of this concentration,
we are especially susceptible to the recent downturn and changes in the communications industry.
The communications service provider industry is currently undergoing a period of consolidation due
to the difficult market conditions. Consolidations of our prospective customers may delay or cause
cancellations of significant sales of our products, which could seriously harm our operating results.

8

---

---

The trends toward privatization and deregulation in the communications industry during the past decade
have contributed to the overall growth in spending for telecommunications equipment during that period.
Our business, financial condition and results of operations will be harmed if these trends reverse
or slow down materially.

We depend on a small number of customers for a large portion of our revenues and the loss of any one
major customer would significantly decrease our revenues.

A large portion of our revenues is derived from substantial orders placed by a relatively small number
of customers. Our revenues from our five largest customers represented 54% of our total revenues
in 2001, 48% of our total revenues in 2002 and 40% of our total revenues in 2003. One of these customers
recently terminated its agreement with us. Please see the information about this customer set forth
below under the heading Item 8A  Legal Proceedings.  Because of our dependence
on a small number of customers and large orders, if expected orders are not received, or orders are
postponed, reduced or cancelled, our revenues and profitability will be significantly reduced.

Our future operating results depend significantly on the continued market acceptance of our Netrac
suite of products, and if these products do not continue to achieve or maintain market acceptance,
we may have reduced revenues.

Revenues from licensing, servicing and supporting our Netrac suite of products account for a substantial
majority of our total revenues. Our future operating results will depend significantly on the continued
market acceptance of our Netrac suite of products, and improvements to these products. Our products
may not achieve or maintain market acceptance. If they lose acceptance, we may have reduced revenues.
This makes it difficult to rely on future revenues from these products.

Our products generally have long sales cycles and implementation periods over which we have no control.

Prospective users of our products generally must make a significant commitment of resources. Sales
cycles of our products are often lengthy, recently averaging approximately six to 24 months. Our
sales process is often subject to delays caused by lengthy approval processes that usually accompany
significant expenditures. In addition, the time required to implement our products can vary significantly
with the needs of our customers and generally lasts for six to 24 months. The implementation process
is also subject to delay. We cannot control these delays and cannot control the timing of our sales
revenue.

Our future success depends on our ability to keep pace with technological changes and emerging industry
standards.

The market for our products is characterized by:

| |  | rapidly changing
      technologies;                                      
| | - | --------------------------------------------------------------------------
| |   |                                                                           
| |  | evolving
      industry standards;                                        
| |   |                                                                           
| |  | changing
      regulatory environments;                                   
| |   |                                                                           
| |  | frequent
      new product introductions;                                 
| |   |                                                                           
| |  | rapid changes
      in communications service providers requirements; and
| |   |                                                                           
| |  | emergence
      of new types of networks.                                 

9

---

---

The introduction of new technologies and new industry standards and practices can render our existing
products obsolete and unmarketable. As a result, the life cycles of our products are difficult to
estimate and we could lose market acceptance and have reduced related revenues.

Our future success will depend on our ability to:

| |  | enhance our
      existing products;                                                                                                                                                                                                                     
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                          
| |  | develop and
      introduce, on a timely and cost-effective basis, new products and product
      features that keep pace with technological developments and emerging industry
      standards, including next-generation and third-generation networks;
| |   |                                                                                                                                                                                                                                                          
| |  | address the
      increasingly sophisticated needs of our customers;                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                          
| |  | incorporate
      new technologies and new infrastructures; and                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                          
| |  | develop new
      interfaces between our products and complimentary products.                                                                                                                                                                            

We may not be successful at these tasks. We may also experience difficulties that could delay or prevent
the successful development, introduction and marketing of new products and features. In addition,
our new products and features may not meet the requirements of the marketplace and may not achieve
market acceptance.

Our future operating results will depend significantly on the market acceptance of our NGOSS family
of products, and if these products do not achieve market acceptance, our business and financial condition
may be adversely affected.

We are in the process of developing and deploying our NGOSS family of products to support next-generation
architectures and managed IP services.  We have not yet fully completed any next-generation
products and we cannot assure you that our NGOSS family of products will receive market acceptance.
If our NGOSS family of products does not receive market acceptance, we may not be able to recover
significant resources we invested in the development of these products and we may lose future revenues.
As a result, our business, financial condition and results of operations may be adversely affected.

The development and roll-out of our NGOSS family of products may be difficult and costly, and we may
not have enough resources to execute our strategy.

We plan to continue devoting significant management and financial resources to developing our NGOSS
family of products and to expanding our customer base by targeting potential customers for our NGOSS
products in markets that we have not previously served. We will be dependent on our ability to secure enough funds, and if we will not be able to raise funds
we may not be able to execute our strategy, which may leave us with low liquidity resources.

If the Internet or broadband communication services growth slows, demand for our NGOSS family of products
may fall.

The success of our NGOSS family of products will depend heavily on the continued acceptance of the
Internet as a medium of commerce and communication, and the growth of broadband communication services.
If use of the Internet or broadband communication services does not continue to grow or grows slower
than expected, the market for software that manages communications over the Internet may not develop
and our sales of our NGOSS products would be adversely affected.

10

---

---

High project prices and the low number of projects sold by us may result in material fluctuations in
our operating results, and may also cause our stock price to vary significantly.

Our quarterly and annual operating results have varied significantly in the past as a result of many
factors, many of which are outside of our control. In particular, the high project prices and the
low number of such projects sold, as well as the timing of sales, can produce significant fluctuations
in our quarter-to-quarter and year-to-year financial performance. These fluctuations may increase
in the future if we succeed in obtaining larger contracts for projects. The fact that a significant
portion of our revenues has been, and will continue to be, derived from substantial orders placed
by a few customers exaggerates these fluctuations. The timing and amount of such orders and their
fulfillment have caused and will continue to cause material fluctuations in our operating results,
particularly on a quarterly basis. Our stock price may also vary significantly as a result of misinterpretation
by potential investors of period-to-period comparisons.

We depend on our strategic relationships and could experience reduced revenues if they are not successful.

We rely on our strategic relationships with IBM, Nortel, VocalTec, Siemens, CMGLogica,  Samsung
and others to sell our products and services and these relationships may account for a larger portion
of our revenues in the future. These parties are not obligated to sell any of our products. Any failure
of these relationships to generate significant revenues for us, or a termination of any of these
relationships, could harm our operations and profitability.

We rely on revenue from our international operations, and if we cannot overcome inherent risks, these
operations will not succeed.

Our current customers are located in more than 25 countries and we are seeking to expand into other
markets. We currently derive significant revenues from business in the United States, Europe and
Israel. We expect our revenues from international sales to continue to account for a large portion
of our total revenues in the future.

Our international operations and revenues are subject to a number of inherent risks, including:

| |  | difficulty
      in staffing and managing foreign operations generally, and time and costs
      spent on staffing and managing operations in markets from which we do not
      derive substantial revenue but still need to maintain a presence;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                   
| |  | the impact
      of possible recessionary environments in certain economies;                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                   
| |  | changes in
      regulatory requirements, including a slowdown in the rate of privatization
      of communications service providers;                                                                                                            
| |   |                                                                                                                                                                                                                                                   
| |  | difficulties
      in enforcing our rights in various jurisdictions;                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                   
| |  | reduced protection
      for intellectual property rights in some countries;                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                   
| |  | tariffs and
      other trade barriers;                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                   
| |  | adverse tax
      consequences;                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                   
| |  | restrictions
      on the conversion of currencies or the repatriation of earnings;                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                   
| |  | the burdens
      of complying with a wide variety of foreign laws and regulations; and                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                   
| |  | economic
      and political instability.                                                                                                                                                                                                         

11

---

---

We may not be able to manage these risks and these risks may lead to disputes with our customers. This
may have an adverse effect on our operational margins. We may not be able to sustain or increase
revenues derived from our international operations.

We may lose revenues if we are unable to adapt to the unique demands of communications markets in the
Far East.

We have recently entered communications markets in the Far East. We are in the process of learning
how to bridge commercial and cultural differences we have with our customers in these markets. We
may not be able to properly adapt to the unique requirements of customers in these markets. This
could result in customer dissatisfaction and the loss of revenues from these markets.

Our plans to expand our international operations will require significant expenditures and could reduce
our operating margins.

We intend to enter into additional international markets and to continue to expand our international
operations by:

| |  | expanding
      our direct sales force;                                   
| | - | --------------------------------------------------------------------------
| |   |                                                                           
| |  | opening additional
      in-region customer support and sales offices; and
| |   |                                                                           
| |  | adding distributors
      and pursuing additional strategic relationships.

These activities will require the expenditure of significant financial resources and could reduce our
operating margins. If we are unable to establish additional international operations in a timely
manner, this will limit our profitability and growth.

Government regulatory policies in the communications industry may harm our business.

Government regulatory policies have had a major impact on our ability to attract and retain customers.
For example, regulatory authorities have overseen the pricing of new and existing communications
services, which, in turn, has impacted our customers abilities to make significant capital
expenditures. The enactment of new laws or regulations or changes in the interpretation of existing
regulations could inhibit or prevent our customers from purchasing our products.

We generally perform most of our obligations to customers before we receive payment, and in some instances,
we commence our performance before we have concluded a written agreement with a customer, which forces
us to finance our performance and risk nonpayment.

We often perform most or all of our obligations to customers before receiving payment. In some instances
we commence our performance before we have concluded a written agreement with a customer. Because
of this, we must finance the costs of performing under our customer agreements, and risk nonpayment.
Although our customers are generally large companies, they may not pay our fees when due. Payment
of our fees is generally not secured or guaranteed. Delayed payment or failure to receive payment
may strain our finances.

12

---

---

Some of our customers may terminate their agreements with us after we have partially performed under
such agreements, and in such event, we may have difficulty recovering our costs and may lose future
revenues.

In order to continue to sell our products despite the slow-down of expenditures by communications service
providers, and resulting increased competition, we have been required to agree to provisions in our
contracts with customers that generally make it easier for customers to terminate their agreements
with us at various stages of performance, with minimal payments to us. Our performance often largely
comprises services and customized products which we cannot recover and resell. Because of the nature
of this performance, if any of our customers terminate their agreements with us, we may have difficulty
recovering our costs up to the date of any termination, despite a customers obligation to reimburse
us. In such event, we may have reduced future revenues. Please see the information about one of our
customers that terminated its agreement with us as set forth below under the heading Item 8A
 Legal Proceedings.

We may not be able to compete successfully in the highly competitive markets for our products.

The markets for our products are very competitive, and we expect competition to increase in the future.
Our current and prospective competitors offer a variety of solutions to address the network management
and operations support systems market. Our current and potential competitors include:

| |  | organizations
      internal design and development departments that produce network management
      and operations support applications for their particular needs;                                  
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                         
| |  | providers
      of network management and operations support systems applications, such
      as Agilent Technologies, Cramer, Granite, Hewlett-Packard, Inet, Metasolv,
      Micromuse and Telecordia;
| |   |                                                                                                                                                                                                         
| |  | communications
      equipment vendors, such as Ericsson and Lucent Technologies; and                                                                                                                   
| |   |                                                                                                                                                                                                         
| |  | systems integrators
      who provide programming services to develop customer-specific applications,
      such as CMGLogica, BusinessEdge, Accenture, Cap Gemini and IBM Global Services.             

Many of our current and potential competitors have significantly greater financial, technical, sales,
customer support, marketing and other resources and longer operating histories than we have. Many
also have greater name recognition and a larger installed base of their products and technologies.
Any of these competitors may be able to respond more quickly than us to new or emerging technologies
and changes in customer requirements. They may be able to devote greater resources to the development,
promotion and sale of their products and may develop products comparable or superior to ours.

In addition, as the network management and operations support systems markets develop, a number of
companies with significantly greater resources than us could attempt to increase their presence in
the market independently or by acquiring or forming strategic alliances with our competitors. This
could result in increased competition for us.

13

---

---

Increased competition could result in price reductions, reduced margins or loss of market share. If
we are unable to compete successfully against current and future competitors, our revenues and profitability
may be reduced.

We may compete with our customers internal efforts to design network management and operations
support systems.

Some of our customers continuously evaluate whether to design and develop their own network management
and operations support systems or purchase them from outside vendors. As a result, we may lose customers
and customer opportunities.

Currency fluctuations could reduce our revenues and profitability.

A large portion of our revenues and expenses are in currencies other than U.S. dollars. Accordingly,
fluctuations in exchange rates between these currencies and the U.S. dollar could reduce our revenues
and profitability.

We may be unable to attract or exploit indirect sales channels that will market our products effectively.

In the past, we have relied primarily on direct sales to customers. In the future, we expect to make
increasing use of original equipment manufacturers, commonly referred to as OEMs, strategic marketing
agreements and other indirect channels for sales and support of our products. However, we may not
be able to attract OEMs and strategic marketing partners that will be able to market our products
effectively. The inability to recruit, or the loss of, important OEMs or strategic marketing
partners could cause a reduction in our revenues and profitability.

Our future expansion may place a strain on our management personnel and resources.

Since our inception, our operations have significantly expanded. We intend to continue to expand into
new markets worldwide. Expansion places a strain on our management personnel and resources. In addition,
to support our expanded operations we will have to hire additional skilled personnel. We may not
be successful in expanding our operations or in hiring additional skilled personnel. Competition
for qualified personnel is generally intense. Our ability to compete effectively and to manage the
future expansion of our operations will require us to continue to improve our financial and management
controls, reporting systems and procedures. We may not be able to perform any of these activities
successfully and this could harm our business and reduce our profitability.

If we are unable to retain and attract management and technical personnel, we may not be able to achieve
our objectives.

The success of our business depends in large part on the continuing contributions of our management
and technical personnel. If we are unable to retain several key people, this could cause a reduction
in our efficiency and profitability, may harm perceptions of us in the investment community and may
cause our stock price to decline.

Our future success also depends on our continuing ability to attract new and present highly qualified
management and technical personnel. Highly qualified technical personnel are in demand in Israel,
and competition for such personnel is generally intense. If we are not able to attract and retain
such personnel when and as needed, our business could be harmed.

14

---

---

Our proprietary technology is difficult to protect and we may lose our rights to it.

Our success and ability to compete depend in part on our proprietary software technology. We rely on
a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect our proprietary rights. We currently have no registered
patents.

We are subject to a number of risks relating to intellectual property rights, including the following:

| |  | the measures
      we have taken to protect our proprietary rights may not be adequate to prevent
      others from misappropriating our technology or from independently developing
      or selling technology or products with features based on or similar to ours;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                        
| |  | our customers
      that are given access to our intellectual property rights under rare circumstances,
      may infringe these rights;                                                                                                                               
| |   |                                                                                                                                                                                                                                                                        
| |  | our intellectual
      property rights may be challenged, invalidated, violated or circumvented
      and may not provide us with any competitive advantage;                                                                                                           
| |   |                                                                                                                                                                                                                                                                        
| |  | any future
      litigation to protect our proprietary rights could result in substantial
      cost to us, even if we ultimately prevail; and                                                                                                                         
| |   |                                                                                                                                                                                                                                                                        
| |  | determination
      against us in any such litigation could subject us to significant liabilities
      to other parties and could prevent us from manufacturing, selling or using
      our products.                                                                 

If we lose any of our rights to our proprietary technology, we may not be able to continue our business.

We rely on software that we license from third parties and if we fail to maintain these licenses, we
may have delays or reductions in our product shipments and have difficulty continuing our business.

We rely on software that we license from third parties, including software that is integrated with
internally developed software and used in our products to perform key functions. Some of these third
party software licensors are small or early-stage companies that are not as stable as larger and
more established software licensors. Our third-party licensors that are larger and more established
software licensors sometimes impose on us stringent conditions to maintain our licenses and may unilaterally
change the price and other terms of our licenses. These third party software licenses may not continue
to be available to us on commercially reasonable terms or at all or, if available, may infringe upon
the proprietary rights of other parties. Our loss of or inability to maintain these software licenses
could result in delays or reductions in our product shipments. These delays or reductions in shipments
could cause a reduction in our revenues or profitability and could harm our business.

Our technology may infringe on the intellectual property rights of third parties and we may lose our
rights to it.

We rely on our proprietary software technology to compete in our markets. We are subject to a number
of risks relating to intellectual property rights, including the following:

15

---

---

| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we expect
      that software product developers will be increasingly subject to infringement
      claims as the number of products and competitors in our industry segment
      grows and the functionality of products in different industry segments overlaps;
| |   |                                                                                                                                                                                                                                                                    
| |  | we may inadvertently
      violate the intellectual property rights of other parties and other parties
      may assert infringement claims against us;                                                                                                            
| |   |                                                                                                                                                                                                                                                                    
| |  | if we violate
      the intellectual property rights of other parties we may be required to
      modify our products or intellectual property or obtain a license to permit
      their continued use;                                                            
| |   |                                                                                                                                                                                                                                                                    
| |  | any future
      litigation to defend us against allegations that we have infringed the rights
      of others could result in substantial cost to us, even if we ultimately
      prevail; and                                                                    
| |   |                                                                                                                                                                                                                                                                    
| |  | determination
      against us in any such litigation could subject us to significant liabilities
      to other parties and could prevent us from manufacturing, selling or using
      our products.                                                             

If we lose any of our rights to our proprietary technology, we may not be able to continue our business.

Product defects in our software products could reduce our revenues and harm our reputation.

The development, enhancement and implementation of our complex software products involve substantial
risks of product defects or failures. Despite testing by us and our customers, errors may be found
in products after they are licensed to customers. This could result in:

| |  | a delay in
      recognition or loss of revenues;
| | - | -------------------------------------------------
| |   |                                                  
| |  | loss of market
      share; and                  
| |   |                                                  
| |  | failure to
      achieve market acceptance.      

The complexities of the implementation of our products involve additional risks of performance failure
and substantial delays. Because our customer base consists of a relatively limited number of users,
the harm to our reputation that could result from product defects or implementation errors could
be especially damaging. This could seriously harm our business.

One entity owns a substantial amount of our shares and may control our affairs.

As of March 15, 2004, Team Software Industries Ltd., a wholly-owned subsidiary of Team Computers
and Systems Ltd., owned approximately 50.22% of our outstanding ordinary shares. These shares may
be deemed to be beneficially owned together by:

16

---

---

| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Arad Investments
      and Industrial Development Ltd., the holder of approximately 56.52%
      of the shares of Team Computers;                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                            
| |  | Shlomo Eisenberg,
      the chairman of our board of directors and the boards of directors of Arad,
      Team Computers and Team Software, and the holder of approximately 14.44%
      of the shares of Team Computers directly, and a member of the controlling
      group of shareholders of Arad; and
| |   |                                                                                                                                                                                                                                                                                                            
| |  | Meir Lipshes,
      our Chief Executive Officer and a director of us, Team Computers and Team
      Software, and the holder of approximately 8.26% of the shares of Team Computers
      directly.                                                                                                        

As a result, Team Software, Team Computers, Shlomo Eisenberg or Meir Lipshes may be able to elect all
of our directors and control issues that are decided by a vote of shareholders.

Conflicts of interest may arise with Team Computers.

Any decision we make concerning our relationship with Team Computers has to be made either by our board
of directors, which is indirectly controlled by Team Computers, or in certain instances by our shareholders,
including Team Software, a wholly-owned subsidiary of Team Computers. Although such decisions must
be approved by our audit committee, and are subject to compliance with provisions of Israeli law
concerning related-party transactions, Team Computers could exercise its influence in our affairs
in its own interest to the detriment of our other shareholders.

Our Chairmans conviction for violations under Israels Securities Law and Penal Law may
have adverse effects on our business.

Shlomo Eisenberg, the chairman of our board of directors and one of the members of the group of shareholders
who indirectly control the largest beneficial owner of our shares, Team Software, has been convicted
and sentenced on several counts under Israels Securities Law and Penal Law which are not related
to the Company. For more details regarding this matter, please see the discussion under Item
6A  Directors and Senior Management. Mr. Eisenberg informed the Company that he intends
to appeal the conviction and the sentence. If Mr. Eisenberg is not successful in his appeal, he may
be precluded from serving as a director of any public company, including ours. The conclusion of
Mr. Eisenbergs services may have adverse effects on our business. Mr. Eisenbergs continued
presence on our board of directors may have adverse effects on our business, and may harm perceptions
of us in the investment community.

We do not intend to pay dividends.

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

17

---

---

Risks Relating to Operations in Israel

Conditions in Israel could harm our results of operations.

We are incorporated under the laws of Israel, and our principal offices are located in Israel. Accordingly,
political economic and military conditions in Israel directly affect our operations. A state of hostility,
varying in degree and intensity, has led to security and economic problems for Israel. Since October
2000, there has been a high level of violence hostilities between Israel and the Palestinians, which
has led to a crisis in the entire peace process and has affected Israels relationship with
its Arab citizens and several Arab countries. Such ongoing hostilities may hinder Israels international
trade relations and may limit the geographic markets where we can sell our products. Furthermore,
several countries restrict business with Israel and Israeli companies, and additional companies may
restrict doing business with Israel and Israeli companies as the result of the recent increase in hostilities.

We do not believe that the political and security situation has had a material impact on our business
to date; however, we can give no assurance that it will have no such effect in the future. Any hostilities
involving Israel or threatening Israel, or the interruption or curtailment of trade between Israel
and its present trading partners or a significant downturn in the economic conditions in Israel could
adversely affect our operations.

The rate of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation
of the NIS against the U.S. dollar.

The majority of our revenues are denominated in U.S. dollars or are U.S. dollar-linked, but we incur
a significant portion of our expenses, principally the rent for our facilities in Israel and salaries
and related personnel expenses in Israel, in NIS. As a result, we are exposed to the risk that the
rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the U.S.
dollar or that the timing of this devaluation lags behind inflation in Israel. In that event, the
U.S. dollar cost of our operations in Israel will increase and our U.S. dollar-measured results of
operations will be adversely affected.

To date, we have not engaged in hedging transactions. In the future, we might enter into currency hedging
transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of
the U.S. dollar against the NIS. If we perform hedging transactions, they may not adequately protect
from the effects of inflation in Israel.

The tax benefits we currently receive require us to meet several conditions, which we may fail to satisfy.

Our investment programs were granted the status of an approved enterprise under Israels Law for
Encouragement of Capital Investments, 1959. An approved enterprise is eligible for tax benefits on
taxable income derived from its approved enterprise programs. The benefits available to an approve
enterprise are dependent upon the fulfillment of conditions stipulated in applicable law and the
certificate of approval. If we fail to comply with these conditions, in whole or in part, with respect
to any approved enterprise program we establish, we may be required to pay additional taxes for the
period in which we benefited from the tax exemption or reduced tax rates and we would likely be denied
these benefits in the future. This could harm our business and our profitability.

The tax benefits we currently receive may be reduced in the future.

The applicable law regarding approved enterprise programs will expire on June 30, 2004. Accordingly,
requests for new programs or expansions that are not approved on or before June 30, 2004 will not
confer any tax benefits, unless the term of the law will be extended. Our approved enterprise program
and the tax benefits thereunder may not continue in the future at their current levels or at any
level. The termination or reduction of these tax benefits would likely increase our taxes. The amount,
if any, by which our taxes would increase will depend upon the rate of the tax increase, the amount
of any tax benefit reduction, and the amount of any taxable income that we may earn in the future.

18

---

---

The government programs we currently participate in require us to meet several conditions, which we
may fail to satisfy.

We receive grants and participate in programs sponsored by the Office of the Chief Scientist of the
Israeli Ministry of Industry and Trade and the Israel-United States Binational Industrial Research
and Development Foundation, known as the BIRD Foundation and from the European Union. To maintain
our eligibility for these programs we must continue to meet several conditions under these grant
programs, including paying royalties with respect to the grants received. In addition, some of these
programs restrict our ability to manufacture particular products or transfer particular technology
outside of Israel, or require that we share with others intellectual property rights that are the
subject of such grants. If we fail to comply with these conditions in the future, the benefits received
could be cancelled. We could also be required to refund any payment previously received under these
programs. If we do not receive these grants in the future, we will have to allocate other funds to
product development at the expense of other operational costs.

The government programs in which we currently participate may be terminated or reduced in the future
which would increase our costs.

The Israeli government has reduced the benefits available under the Office of the Chief Scientist programs
in recent years, and has indicated that it may reduce or eliminate these benefits in the future.
These programs may not continue in the future at their current levels or at any level. From time
to time we submit requests for new grants from the Office of the Chief Scientist. These requests
might not be approved, particularly in light of the difficult economic conditions in Israel. The
termination or reduction of these grants would require us to divert other funds to product development
and increase our other operational costs.

Our results of operations could be negatively affected by the obligations of our personnel to perform
military service.

Most of our executive officers and employees in Israel are obligated to perform annual military reserve
duty. They may also be further subject to being called to active duty at any time under emergency
circumstances and could be required to serve in the military for extended periods of time. Our operations
could be disrupted by the absence for a significant period of one or more of our executive officers
or key employees or a significant number of other employees because of military service. The full
impact on our workforce or business if some of our executive officers and employees will be called
upon to perform military service, especially in times of national emergency, is difficult to predict.
Any disruption in our operations as the result of military service by key personnel could harm our business.

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

Service of process upon our directors and officers named herein may be difficult to effect within the
United States because some of these people reside outside the United States. Any judgment obtained
in the United States against us or these individuals or entities may not be enforceable within the
United States.

There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities
Exchange Act in original actions instituted in Israel. However, subject to specified time limitations,
Israeli courts may enforce a U.S. final executory judgment in a civil matter, provided that:

19

---

---

| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adequate
      service of process has been effected and the defendant has had a reasonable
      opportunity to be heard;                                                 
| |   |                                                                                                                                                                           
| |  | the judgment
      and its enforcement are not contrary to the law, public policy, security
      or sovereignty of the State of Israel;                                  
| |   |                                                                                                                                                                           
| |  | the judgment
      was obtained after due process before a court of competent jurisdiction
      according to the rules of private international law prevailing in Israel;
| |   |                                                                                                                                                                           
| |  | the judgment
      was not obtained by fraudulent means and does not conflict with any other
      valid judgment in the same matter between the same parties;            
| |   |                                                                                                                                                                           
| |  | an action
      between the same parties in the same matter is not pending in any Israeli
      court at the time the lawsuit is instituted in the U.S. court; and        
| |   |                                                                                                                                                                           
| |  | the U.S.
      court is not prohibited from enforcing the judgments of Israeli courts.                                                                                    

If a foreign judgment is enforced by an Israeli court, it generally will be payable in new Israeli
shekels, which can then be converted into non-Israeli currency and transferred out of Israel. The
usual practice in an action to recover an amount in non-Israeli currency is for the Israeli court
to render judgment for the equivalent amount in new Israeli shekels at the rate of exchange on the
date of payment, but the judgment debtor also may make payment in non-Israeli currency. Pending collection,
the amount of the judgment of an Israeli court stated in new Israeli shekels ordinarily will be linked
to the Israel Consumer Price Index plus interest at the annual rate (set by Israeli law) prevailing
at that time. Judgment creditors bear the risk of unfavorable exchange rates.

Provisions of Israeli law could delay, prevent or make difficult a merger or other business combination.

Provisions of Israeli corporate
  law may have the effect of delaying, preventing or making more difficult a merger
  with, or acquisition of, us. The Israeli Companies Law generally provides that
  a merger be approved by the board of directors and a majority of the shares
  present and voting on the proposed merger at a meeting called upon at least
  21 days notice. For purposes of the shareholder vote, unless a court rules
  otherwise, the merger will not be deemed approved if a majority of the shares
  not held by the other party to the merger (or by any person who holds 25% or
  more of the shares or the right to appoint 25% or more of the directors of the
  other party or its general manager) have voted against the merger. Upon the
  request of any creditor of a party to the proposed merger, a court may delay
  or prevent the merger if it concludes that there is a reasonable concern that,
  as a result of the merger, the surviving company will be unable to satisfy the
  obligations of the surviving company. Finally, a merger may not be completed
  unless at least 70 days have passed since the filing of a merger proposal signed
  by both parties with the Israeli Registrar of Companies.

The Companies Law also provides
  that an acquisition of shares in a public company must be made by means of a
  tender offer if as a result of the acquisition the purchaser would become a
  25% or greater shareholder of the company, unless there is already another 25%
  or greater shareholder of the company. Similarly, an acquisition of shares must
  be made by means of a tender offer if as a result of the acquisition the purchaser
  would become a 45% or greater shareholder of the company, unless there is already
  a majority shareholder of the company. In any event, if as a result of an acquisition
  of shares the acquirer will hold more than 90% of a companys shares, the
  acquisition must be made by means of a tender offer for all of the shares.

20

---

---

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

Risks Related to the Market for Our Ordinary Shares

Our stock price has fluctuated and could continue to fluctuate significantly.

The market price for our ordinary shares, as well as the prices of shares of other technology companies,
has been volatile. Numerous factors, many of which are beyond our control, may cause the market price
of our ordinary shares to fluctuate significantly, such as:

| |  | fluctuations
      in our quarterly revenues and earnings and those of our publicly held competitors;
| | - | -----------------------------------------------------------------------------------------------------
| |   |                                                                                                      
| |  | shortfalls
      in our operating results from levels forecast by securities analysts;               
| |   |                                                                                                      
| |  | announcements
      concerning us or our competitors;                                                
| |   |                                                                                                      
| |  | the introduction
      of new telecommunications services and new industry standards;                
| |   |                                                                                                      
| |  | changes in
      pricing policies by us or our competitors;                                          
| |   |                                                                                                      
| |  | general market
      conditions, and changes in market conditions in our industry;                   
| |   |                                                                                                      
| |  | the general
      state of the securities market (particularly the technology sector); and           
| |   |                                                                                                      
| |  | political,
      economic and other developments in the State of Israel and worldwide.               

In addition, trading in shares of companies listed on the Nasdaq National Market in general and trading
in shares of technology companies in particular have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to operating performance. The price levels of
technology stocks traded on the Nasdaq National Market decreased significantly during 2001, 2002
and 2003. These broad market and industry factors may depress our share price, regardless of our
operating results.

Substantial future sales of our ordinary shares may depress our share price.

If our shareholders sell substantial amounts of our ordinary shares, including shares issued upon the
exercise of outstanding employee options, or if the perception exists that our shareholders may sell
a substantial number of our ordinary shares, the market price of our ordinary shares may fall. Any
substantial sales of our shares in the public market also might make it more difficult for us to
sell equity or equity related securities in the future at a time and in a place we deem appropriate.

21

---

---

Item
  4. INFORMATION ON THE COMPANY

A.            History and Development of the
Company

Both our legal and commercial name is TTI Team Telecom International Ltd. We were incorporated under
the laws of the State of Israel in February 1990. We are domiciled in Israel. Our legal form is a
company limited by shares. We operate under the laws of the State of Israel. Our registered office
is located at 7 Martin Gehl Street, Kiryat Aryeh, Petach Tikva 49512 Israel, and our telephone number
is +972-3-926-9700.

We commenced independent operations in September 1992, as a subsidiary of Team Computers and Systems Ltd.,

after having operated as a division of Team Computers since 1988. Team Computers is a publicly
traded
company in Israel.

In December 1996, we conducted the initial public offering of our ordinary shares, par value NIS 0.5
per share, in which 2,000,000 ordinary shares were issued and sold by us at the price of $6.25 per
ordinary share. In connection with this offering, Team Computers, our largest beneficial shareholder,
sold 825,000 ordinary shares at the price of $6.25 per ordinary share.

In February of 1999, we conducted a follow-on public offering of our ordinary shares, par value NIS
0.5 per share, in which 1,150,000 ordinary shares were issued and sold by us at the price of $7.875
per ordinary share.

In March of 2000, we conducted a follow-on public offering of our ordinary shares, par value NIS 0.5
per share, in which 1,100,000 ordinary shares were issued and sold by us at the price of $34.875
per ordinary share. In connection with this offering, Team Computers sold 550,000 ordinary shares
at the price of $34.875 per ordinary share.

B.            Business Overview

We are a leading global provider of network management systems, or NMS, operations support system,
or OSS, and business support system, or BSS, solutions for the communications industry. Our software
solutions enable communications service providers to maximize and leverage their investments in network
infrastructure and to automate, simplify and manage the complex process of delivering multiple communications
services over diverse networks. Our Netrac suite of products supports multi-vendor voice and data
architectures over wireline, wireless and optical networks, allowing our customers to streamline
operations and efficiently and rapidly roll out new services. We are currently developing our next-generation
operations support system, or NGOSS, family of products under our proven Netrac platform to address
next-generation architectures and managed Internet Protocol, or IP, services. Certain modules from
our NGOSS family of products are currently being commercially deployed by one of our tier 1 communications
service provider customers.

We have a significant installed base of solutions with more than 60 customers, including some of the
worlds largest communication service providers, commonly referred to as tier 1 and tier 2 operators.
We have established working relationships with a number of leading network and communications equipment
providers which allow us to provide end-to-end integrated solutions as well as stand-alone modules
to meet our customers needs. Our Netrac suite of products is based on proven technology, which,
when combined with our professional service offerings, including customization, implementation and
integration expertise and post-sales customer support, make us an attractive turn-key solution provider.
Our software products are designed to work with a wide range of network equipment manufacturers and
varied technologies increasing the potential market for our systems.

22

---

---

Many communications service providers, including most tier 1 and tier 2 operators, are engaged in,
or are in the planning stages of, rolling out next-generation architectures and managed IP services
over wireline, wireless and optical networks. We intend to leverage our extensive installed base
of solutions, customer contacts and relationships with equipment manufacturers to become an integrated
provider of service assurance and service fulfillment solutions for legacy and next-generation networks.

Our Netrac service assurance solutions, consisting of fault, performance and service management products,
provide intelligence to help carriers proactively and strategically manage their businesses in a
complex environment. Our service assurance products monitor and assure the quality of network services
and ensure that appropriate service level agreements or SLAs, specifying the level and quality of
service to be provided to customers are enforced, enabling communications service providers to rapidly
and remotely identify and correct any network bottlenecks or failures.

Our Netrac service fulfillment solutions, consisting of order and inventory management, service provisioning
and service activation products, enable network service providers to efficiently enter, manage and
fulfill orders for service from their customers.

Our Netrac billing mediation solutions allow service providers to efficiently collect, process and
manage their raw network data to generate billable revenue of network services to their customers.

Industry Background

The deregulation process of the U.S. telecommunications market, including AT&Ts breakup in
1994 and the Telecommunications Act of 1996, revamped the competitive landscape. New market entrants
were given access to incumbent networks, including, most significantly, the last mile
connection to subscribers homes and offices. Access to incumbent networks and the funding of
vibrant capital markets spurred intense competition and the emergence of competitive local exchange
carriers, or CLECs. Competition and funding encouraged massive network build-outs as competitors
sought to offer more services at lower costs.

Facing competition, the new service providers, which depended on their ability to deploy their services
rapidly and cost effectively without sacrificing quality, and the incumbents, which sought to protect
their markets, placed a greater emphasis on customer satisfaction. It became imperative to deliver
timely services to customers over efficient networks. The new focus on customer service took place
against a backdrop of increasing network complexity as voice and data transmissions converged and
new services and technologies emerged. Concurrently, service providers sought to reduce their capital
and operational expenditures and streamline their business processes to operate more efficiently
and gain a competitive edge. OSS and BSS solutions maximize the return on invested capital by increasing
the service providers efficiency and staff productivity, reducing operational costs and facilitating
the rapid deployment of new services.

Network convergence and the Internet are delivering, and will continue to deliver, new services and
increased efficiency. However, this convergence will not be possible if the new networks are unmanageable.
Service providers offer integrated services, including long-distance, Internet, wireless and voice,
over multiple or converging networks and must operate and manage both legacy voice systems and newly-built
data networks, utilizing and combining traditional circuit-switched and new packet-based technologies.
In addition to networks being more complex to manage and operate, services offered have also grown
in complexity.

23

---

---

With complex networks to operate and manage and a growing demand for a variety of customized services
and billing schemes, communications service providers require sophisticated tools to execute their
strategies, reduce customer churn and to maximize the return on their significant investments in
infrastructure and customer acquisitions. NMS, OSS and BSS solutions help to automate the installation,
maintenance, monitoring and management of communications networks. Service providers use these systems
to streamline the processes of adding subscribers, managing network performance and introducing new
services.

Our Solution

Our Netrac suite of products, combined with our comprehensive professional service offerings, enable
communications service providers to improve the quality of existing services, streamline their operations
to compete cost-effectively, maximize return on their investment in network infrastructure, offer
new services over complex networks and efficiently add new subscribers without impacting network
performance. Our expertise is derived from over a decade of developing and implementing software
solutions for diverse communications service providers around the world. We are currently leveraging
this expertise and developing our NGOSS family of products to provide a comprehensive solution for
next-generation architectures and managed IP services. Our NGOSS family of products will provide
end-to-end integrated solutions as well as stand-alone modules for NMS, OSS and BSS applications
in legacy and next-generation architectures. Certain modules from our NGOSS family of products are
now being commercially deployed by one of our tier 1 operator customers.

Our Netrac solution provides the following advantages:

| |  | Comprehensive,
      End-to-End Integrated and Modular Product Offering . Our
      Netrac suite of products is composed of products that may be used in any
      combination to suit a communications service providers specific business
      needs and budget. Our Netrac modules seamlessly integrate with one another
      to provide either a comprehensive solution or address specific functions
      in areas such as fault management or service impact analysis.                                                                            
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Flexible
      Platform.  Our modular system provides our customers with an easy
      way to add new functionality and services and adapt to new technologies,
      as well as a scalable system that can easily accommodate the addition of
      network elements and growth in subscribers.                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Management
      of Existing and Next-Generation Networks. Our Netrac suite of products
      is designed to manage both legacy and next-generation wireline and wireless
      networks via a unified management platform. As a result, as we roll out
      the NGOSS family of products, communication service providers will be able
      to manage heterogeneous networks consisting of both legacy and next-generation
      technologies, protect investments in legacy systems and facilitate the migration
      to next-generation architectures.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Open Architecture.
       Netracs open mature application platform interfaces, or APIs,
      enables communications service providers to integrate their internal and
      third party systems and applications in their OSS environments, allowing
      the seamless exchange of information among these systems and applications.
      We continuously update our already extensive library of APIs, enabling interfaces
      with customers internal and third party software systems.                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Cost Effectiveness
      and Maximizing Return on Investment . Our Netrac suite
      of products streamlines operations, improves service restoration times and
      automates time-consuming service provisioning and assurance processes, leading
      to significant cost reductions. Netracs libraries and ability to communicate
      with various network elements and technologies result in rapid deployment
      of network devices and services, leading to faster time-to-revenue.                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Professional
      Services Enabling Turn-Key Solutions. We deliver end-to-end integrated
      turn-key solutions to communications service providers which are tailored
      by our professional services team to meet our customers specific requirements.
      Our professional services include customization, implementation and integration
      of our products within a communications service providers existing
      OSS environment.                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Rapidly
      Deployable Solutions . Our Netrac suite of products is network
      equipment vendor-independent and includes a pre-built set of modules and
      extensive libraries and applications, which enables communications service
      providers to rapidly and cost effectively deploy new network elements and
      services.                                                                                                                                                                                                                

24

---

---

Strategy

Our goal is to solidify and improve our position as a leading provider of NMS, OSS and BSS solutions
for legacy networks and to establish a position as a leading provider of these systems for next-generation
networks and managed IP services. Our strategy to achieve this goal contains the following key elements:

| |  | Expand and Enhance Product Offerings and Extend Technological Leadership.  We intend to continue to develop and introduce new products and product features that address
the increasingly sophisticated needs of communications service providers. We are committed to keeping
our products at the forefront of the industry by offering products that support new services and
technologies, including next-generation architectures and managed IP services.                                                                                                         
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Capitalize on our Worldwide Customer Base . We intend to capitalize on our long-term relationships with communications service providers, including
many tier 1 and tier 2 operators to cross-sell our Netrac suite of products to additional divisions
within our existing customers organizations. We expect to leverage our relationships and proven
track record to become their preferred choice for next-generation network solutions. In addition,
positive referrals from our existing customers have historically resulted in new sales opportunities
for us.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |  | Leverage our Existing Sales and Marketing Infrastructure to Broaden our Installed Base of Existing
Products and Launch Our NGOSS Family of Products.  We plan to utilize our strong sales and marketing presence, which has broad expertise and geographic
coverage, to further penetrate markets, broaden our installed base and customer list and cross sell
additional products to current customers. Further, as we introduce our NGOSS family of products,
our retrained sales staff will be in the forefront of our efforts to showcase our new and enhanced
product offerings.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |  | Focus
      Sales Penetration Efforts on Tier 1 and Tier 2 Communications Service Providers.
      We seek to continue to solidify and improve our existing relationships with
      tier 1 and tier 2 communications service providers worldwide. We will leverage
      our extensive installed base and new product offerings to build on these
      relationships and to penetrate other large communications service providers.
      By offering our products to a growing number of industry-leading communications
      service providers, we increase acceptance and demand for our products.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Expand
      and Develop Additional Strategic Partnerships. Our strategic partnerships
      with leading software and hardware vendors and systems integrators enable
      us to leverage the marketing strengths and customer base of our partners,
      thereby expanding our own installed base. Some of these partners assist
      us in generating sales leads. We intend to strengthen our existing strategic
      partnerships and to create new alliances as a means of identifying new business
      opportunities and entering new markets.                                             

25

---

---

Products and Services

Our Netrac suite of products is capable of service provisioning, activation and monitoring, and managing
complex wireline, wireless and optical networks encompassing various domains including Asynchronous
Transfer Mode, or ATM, Digital Subscriber Line, or DSL, Synchronous Digital Hirarchy/Synchronous
Optical Network, or SDH/SONET, Time Division Multiple Access, or TDMA, and Signaling System 7, or
SS7.

We are currently developing our NGOSS family of products under our proven Netrac platform to
address next-generation architectures and managed IP services. Next-generation architectures include
Dense Wavelength Division Multiplexing, or DWDM,  IP over SDH/SONET, General Packet Radio
Service, or GPRS, Multiprotocol Label Switching, or MPLS, Single Carrier Radio Transmission Technology,
or 1xRTT, Universal Mobile Telecommunications, or UMTS, Third Generation Mobile Telecommunication
Systems, or 3G, and Code Division Multiple Access 2000, or CDMA 2000. Managed IP services include
IP Virtual Private Networks, or IP VPNs, Voiceover IP, or VoIP, Layer 2 VPN, or L2VPN, Virtual Local
Area network, or VLAN, and IP Security Protocol, or IP Sec.

Since the first quarter of 2003, we have been reducing our activities in the SS7 field; however, we
continue to support existing customers.

Our Netrac suite of products consists of the Netrac platform, or base package modules, and service
assurance and service fulfillment modules. These modules are the basic building blocks which we use,
in various combinations, to construct NMS, OSS and BSS solutions for our customers. Integrated modules
can be combined or, if necessary, developed by us to meet customers communications network
requirements. Various combinations of these modules can be utilized to manage comprehensive networks
or to manage individual network elements.

The following table illustrates our principal existing products and their availability for next-generation
architectures:

Our quality management system for the development, design, testing, support and sales of our NMS, OSS
and BSS solutions has been certified as meeting ISO 9001 standards by the Standards Institution of
Israel.

Netrac Base Package

Our Netrac base package provides the basic infrastructure to manage communications operations and serves
as a common platform for our products, including our NGOSS family of products. It incorporates significant
functionality which allows rapid development of solutions for complex networks. Its advantages include
a state-of-the-art graphical user interface, a communications backbone which enables the seamless
integration of Netrac products and with external applications and a solution infrastructure which
is easily customizable.

26

---

---

Mediation Products

Our Netrac mediation products collect raw data from various network elements and process and transfer
the data to other Netrac products and external third party systems. Our mediation products also support
the sending of commands and controls from various applications to the network elements.

Our mediation products come with numerous libraries of rules already in place, enabling communications
service providers to quickly introduce and deploy new network elements and services, as well as rapidly
define new network elements within the existing management environment.

Our Netrac mediation products include the following:

| |  | Device Expert (DvXpert)  collects events, alarms, performance indicators, configuration information and xDR records from
an entire network and processes and transforms the raw information and distributes it to Netrac and
third party applications.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                       
| |  | Netrac Command Interface (NCI) serves as a platform for sending commands and controls to network elements, regardless of the elements
command language or syntax.                                                                                    

Security Management Products

Our security management products ensure secure, centralized access to network elements, protecting
the network from both internal and external security threats by rapidly detecting security risks
and alerting administrators to take corrective action.

Our Netrac security management products include the following:

| |  | SecureCentral automates the process of downloading user security profiles and updates to the profiles to network
elements, eliminating the need to manually update each network element with user information.                                                                              
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                             
| |  | SecureNE provides a centralized gateway through which authorized users can view, access and send commands to
different network elements, ensuring that only authorized users can gain access, thus preventing
network penetration and downtime caused by accidental use or malicious intent.
| |   |                                                                                                                                                                                                                                                                                             
| |  | SecureDetect identifies internal and external security threats and intrusion attempts in a network, and sends warning
notifications to security administrators.                                                                                                                             

Service Assurance Solutions

Our Netrac service assurance
  solutions, consisting of fault, performance and service management products,
  provides  intelligence to help carriers proactively and strategically
  manage their businesses in a complex environment. Our service assurance products
  monitor and assure the quality of network services and ensure that appropriate
  SLAs are enforced, enabling network service providers to rapidly and remotely
  identify and correct any network bottlenecks or failures.

Service Management Products

Our Netrac service management
  products enable communications service providers to monitor and manage services
  across multi-technology, multi-vendor networks and perform historical analysis
  of service behavior for improved service planning and design. Our service management
  products allow service providers to define, track and manage SLAs and ensure
  that customers are benefiting from high network performance and availability
  levels.

27

---

---

Our Netrac service management
  products include the following:

| |  | SLA Manager
       defines, tracks and reports on SLAs.  SLA Manager collects and
      calculates key quality indicators from an entire network in order to assess
      the service levels delivered to customers and determine whether SLAs are
      being met.                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                      
| |  | Service
      Monitor monitors service performance in near real-time, and pinpoints
      service performance degradations and outages.                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                      
| |  | Service
      Analyzer  collects, processes and analyzes historical service performance
      and quality of service and presents this information in reports, enabling
      network personnel to better understand service demand patterns and improve
      service planning and design decisions.
| |   |                                                                                                                                                                                                                                                                                                      
| |  | ServiceTest measures the performance and availability of services from an end-users
      point of view via testing probes.                                                                                                                                                                         

Fault Management Products

Our Netrac fault management products detect alarms across all domains and alert controllers of impending
faults in near real-time. The fault management products perform root-cause analysis, manage trouble
tickets from creation to resolution, determine the impact of network faults on services and customers,
and facilitate automatic response to network problems.

Our Netrac fault management products include the following:

| |  | Fault
      Management (FaM) is a real-time alarm surveillance and management system
      that offers network operations center, or NOC, personnel an all-inclusive,
      prioritized view of alarms from various network domains and equipment.                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                           
| |  | Correlator+
       is an alarm correlation system designed to detect and isolate root-cause
      faults from the incoming alarm volume, allowing customers to efficiently
      handle multiple alarms and quickly resolve problems by reducing large alarm
      volumes into a single root-cause alarm.
| |   |                                                                                                                                                                                                                                                                                                           
| |  | NetImpact
       identifies, in real-time, the services and customers that are impacted
      by faults, allowing NOC controllers to prioritize repair activities and
      proactively contact affected subscribers.                                                                                     
| |   |                                                                                                                                                                                                                                                                                                           
| |  | FaultPro proactively solves network faults by automatically sending predefined
      commands to network elements in response to alarms.                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                           
| |  | Netrac
      Trouble Ticket (NeTkT) manages trouble tickets from creation through
      resolution. NeTkT allows communications service providers to implement the
      desired workflow in the problem resolution cycle and ensure the assignment
      of problems to the appropriate personnel.       

Performance Management Products

Our Netrac performance management products perform real-time monitoring and long-term analysis of network
behavior based on performance measurements and xDR records. Our performance management products help
service providers identify and address traffic degradations before they impact customers, maximize
network performance and increase network utilization.

28

---

---

Our Netrac performance management products include the following:

| |  | Performance
      Management Module (PMM) collects and analyzes performance measurements
      and xDR records in order to provide an accurate picture of network health
      and utilization. The PMM also presents traffic information to help network
      staff understand network and service status and predict future network behavior.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | TrafficView provides operators with near real-time network monitoring and traffic
      surveillance capabilities based on performance measurements and xDR records.
      TrafficView detects traffic exceptions using sophisticated dynamic thresholds,
      alerting service providers to potential problems before they affect customers.  
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Traffic
      Control Handler (TCH) enables authorized personnel to respond to traffic
      exceptions in a network by sending traffic controls to the appropriate network
      elements.                                                                                                                                                     

xDR Analysis Products

Our Netrac xDR analysis products analyze quality of service in a network, identify fraudulent call
behavior patterns and ensure the accuracy of the billing process using xDR records.

Our Netrac xDR analysis products include:

| |  | CallExpert transforms raw xDR records into meaningful information that can be
      used for network and service monitoring, capacity planning and marketing-related
      applications, providing communications service providers with the tools
      to perform advanced quality of service, call failure and traffic trends
      analysis.                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                  
| |  | FraudDetect detects fraudulent activity in the network by comparing suspicious
      usage patterns with predefined profiles, and alerts users to suspicious
      behavior.                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                  
| |  | Billing
      Verification collects and compares xDR records obtained from different
      network sources such as switches, billing gateways, dialers and test devices.
      By comparing and correlating between the different types of xDR records,
      the Billing Verification module identifies and alerts network users to billing
      discrepancies.

Service Fulfillment Solutions

Our Netrac service fulfillment solutions, consisting of order and inventory management, service activation
and service provisioning products, enable network service providers to efficiently enter, manage
and fulfill orders for service from their customers.

Inventory Management Products

Our Netrac inventory management products provide a total end-to-end physical, logical and service view
of an entire network. Our inventory management products give service providers the ability to know
what network resources are available, allowing them to utilize resources more efficiently. These
products also synchronize the OSS database with the actual network, leading to reduced order fallout
and allowing service providers to detect and reclaim unused resources.

Our Netrac inventory management products include the following:

29

---

---

| |  | Physical
      Inventory offers a physical representation of a network, and enables
      service providers to model, track and manage all the physical entities in
      their network. Physical Inventory serves as the underlying infrastructure
      for both Netrac applications and other third party systems, and makes valuable
      inventory data accessible to other systems.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Logical Inventory represents the logical network, visualizes circuit layout
      and graphically presents the logical connections between network elements.
      Logical Inventory models existing and emerging technologies, including Frame
      Relay, IP, ATM, SDH/SONET, 2G, 2.5G and 3G.                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Service
      Inventory enables operators to efficiently create and model existing
      and new services. It also maps the relationships between offered services,
      network resources and customers.                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Sync
      synchronizes an inventory database with the actual network, and auto-discovers
      new network elements that are introduced. Sync produces discrepancy reports
      that detail any inconsistencies between the inventory database and the actual
      network and pinpoints under-utilized network resources.                                                             

Provisioning Products

Our provisioning products streamline the provisioning process end-to-end, from intake to fulfillment.
By automating time-consuming manual operations, our provisioning products allow operators to more
quickly roll out services and meet customers demands promptly and cost-effectively. Our provisioning
products manage information flow throughout the entire organization and provide users with complete
information on an orders status, helping to rapidly pinpoint and address any provisioning obstacles
in real-time.

Our Netrac provisioning products include the following:

| |  | Work Order models and automates complex provisioning processes in dynamic environments.
      Work Order replaces error-prone manual operations with computerized tasks,
      eliminating inefficiencies from the provisioning process. Work Order processes
      and coordinates large volumes of service orders, and tracks the progression
      of each activity in the provisioning process.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Activate automatically activates services end-to-end across multi-vendor, multi-technology
      networks. Activate replaces manual processes with automated activities,
      thus eliminating the problems that tend to plague manual activation and
      reducing service activation times, and performs rollback in
      case of an activation failure.                                    

Planning Products

Our planning products automate service design and assign processes, and enable network users to plan
and implement mass changes in a network.

Our Netrac planning products include the following:

| |  | Route
      Builder automatically designs service routes while taking into account
      user-defined parameters such as cost, distance and maximum number of hops,
      as well as technical and business constraints.                                                                                                                             
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                      
| |  | Change
      Planner enables users to plan changes in a network, such as circuit
      and facility changes, external and internal connection changes and mass
      modifications in the network. Change Planner keeps network personnel updated
      on the status of the change and sends error notifications to the appropriate
      personnel.

30

---

---

Professional Services

We provide a broad array of professional service offerings to assist our diverse customer base. We
focus on customer retention and our customers long-term satisfaction as key measures of the
quality of these services.

We deliver the expertise necessary to customize, integrate and implement our software solutions. As
of December 31, 2003, our professional services personnel consisted of 286 people operating in North
America, Europe, Latin America, the Asia/Pacific region and Australia. We provide a comprehensive
series of training courses to our customers, partners and employees to provide and enhance the knowledge
and skills necessary to deploy, use and maintain our software solutions. Our training courses address
the technical aspects of our products while providing examples of customer best practices and operational
efficiencies. We also offer Train-the-Trainer programs to enable our customers to conduct
their own internal end-user training.

Maintenance and Customer Support

We believe that a high level of maintenance and customer support is critical to our continued success
in developing long-term relationships with our customers. At the time of installation, customers
generally receive on-site training tailored to the user organization. We also offer supplementary
training to clients on an as needed basis.

An initial warranty period, typically one year, is included in the cost of the license for our products.
After that period, we offer support contracts, typically based on a percentage of the total license
fee, but in some cases based on hourly rates. Our standard support contract entitles the customer
to unlimited telephone support, product updates and product maintenance during the support period.
We offer toll-free technical customer support during business hours, which, for an additional fee,
can be extended to 24 hours a day, seven days a week. Support is provided via telephone, remote-access
and e-mail. We generally provide an initial response within approximately six hours and, if necessary,
on-site assistance within approximately 48 hours. Most of our customers are covered by support contracts
with, in some cases, services provided by local subcontractors.

Beyond support contracts,
  we also provide on-site network support for additional fees. Our site management
  services include:

| |  | system management;                                       
| | - | ---------------------------------------------------------
| |   |                                                          
| |  | configuration
      changes;                             
| |   |                                                          
| |  | failure recovery;                                        
| |   |                                                          
| |  | performance
      tuning;                                
| |   |                                                          
| |  | database
      administration support;                   
| |   |                                                          
| |  | communications
      administration support;             
| |   |                                                          
| |  | preventive
      maintenance activities; and             
| |   |                                                          
| |  | coordination
      between hardware and software vendors.

31

---

---

Customers

Our primary customers are established, large communications service providers and equipment vendors.
Our customers include:

| |  | incumbent
      local exchange carriers, or ILECs;                                                                                                    
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                       
| |  | CLECs;                                                                                                                                                
| |   |                                                                                                                                                       
| |  | long-distance
      carriers;                                                                                                                         
| |   |                                                                                                                                                       
| |  | wireless
      service providers and resellers; and                                                                                                   
| |   |                                                                                                                                                       
| |  | communications
      equipment vendors, such as vendors of switches, fixed wireless access equipment,
      transmission equipment and test equipment.

Potential intermediary customers include system integrators and private network owners, such as financial
institutions and governmental entities.

To date, we have approximately 60 customers of our software solutions in more than 25 countries. Our
significant customers with which we have ongoing relationships include the following:

|AT&T                                      | Nortel
      Networks 
|----------------------------------------- | ----------------------
|                                          |                       
|Belgacom                                  | Partner Communications
|                                          |                       
|Bezeq                                     | Pelephone             
|                                          |                       
|Bezeq International                       | Sprint                
|                                          |                       
|Cable & Wireless                          | Tele2                 
|                                          |                       
|Cellcom                                   | Telekom SA            
|                                          |                       
|Cyprus Telecommunications
      Authority | Telia                 
|                                          |                       
|Hutchison 3G                              | Telstra               
|                                          |                       
|ICE                                       | Teracom               
|                                          |                       
|KPN                                       | Tyco                  
|                                          |                       
|Luxemburg PTT                             | Wind                  
|                                          |                       
|Maltacom                                  |                       

32

---

---

Backlog

Our backlog represents signed purchase orders deliverable within 12 months. Backlog was approximately
$24 million on December 31, 2001, approximately $33 million on December 31, 2002 and approximately
$23 million on December 31, 2003.

Sales and Marketing

We market our products and services to communications service providers. As a key part of our marketing
strategy, we have established strategic partnerships with leading software and hardware vendors and
system integrators.

We have focused our direct sales activities on North America, Europe and the Asia Pacific region. Additionally,
we market our products to communications service providers in Western Europe and Asia/Pacific Rim
through relationships with strategic partners and agents.

The sales process for new customers generally requires a significant investment of time and money and
typically takes six to eighteen months. Our sales and marketing efforts are managed by a small group
of senior managers with substantial experience in the communications software market. The process
also involves system designers, sales representatives and support personnel and typically requires
presentations, demonstrations, field trials, visits to reference sites and lengthy negotiations.

| | To date,
      we have been successful in penetrating markets in North and South America,
      Europe, Israel, South Africa, the Asia/Pacific and Australia. We have established
      offices in The Netherlands, South Africa, Australia, Hong Kong, Costa Rica
      and several locations in the United States. In addition, we have sales representatives
      and sales consultants located in Africa (including South Africa, Botswana,
      Mozambique Mauritius, Namibia), Benelux countries, Italy, Poland, Brazil,
      Costa Rica, Cyprus, France, Germany, Greece, Mexico, Russia, Ukraine, Singapore,
      Taiwan, Thailand, Philippines, Turkey and UK.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2003, we employed 79 sales and marketing personnel. To date, we have established
relationships with many equipment and service providers, including IBM, Nortel, VocalTec, Samsung,
Siemens, Smarts Communications, Legend, T-Systems, Ness Technologies and LogicaCMG. Through these
partnerships, we deliver a joint, comprehensive solution that builds on each respective companys
strengths and jointly market our products. We intend to strengthen our existing strategic relationships,
establish additional relationships and recruit additional sales representatives as a means of identifying
business opportunities and entering new markets.

Research and Development

Our research and development efforts are currently focused on developing our NGOSS family of products
to support next-generation technologies and managed IP services. We believe that the timely development
of new products and enhancements is essential to maintaining our competitive position in the marketplace.

As of December 31, 2003, we employed 205 full-time employees in research and development. We have expertise
derived from more than a decade of developing software adapted to a variety of network hardware and
software configurations. Our core capabilities include our:

33

---

---

| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | familiarity
      with a wide variety of communications protocols and interfaces;                                                                                 
| |   |                                                                                                                                                                   
| |  | ability to
      assess customers networks and understand their NMS, BSS and OSS requirements;                                                                   
| |   |                                                                                                                                                                   
| |  | ability to
      incorporate rule-based inference engines, data warehousing technology and
      replication tools into our Netrac solutions;                     
| |   |                                                                                                                                                                   
| |  | ability to
      adapt our products to different kinds of existing and next-generation wireline,
      wireless and optical networks; and                         
| |   |                                                                                                                                                                   
| |  | expertise
      in utilizing leading programming languages, operating systems and databases
      to create user-friendly, distributed NMS, OSS and BSS solutions.

We reevaluate and enhance our product lines on
an ongoing basis and seek to introduce new releases of each product regularly.

Gross research and development expenses were approximately $7.8 million, or 13% of our revenues, for
the year ended December 31, 2001. Gross research and development expenses were approximately $9.3
million, or 16% of our revenues, for the year ended December 31, 2002. Gross research and development
expenses were approximately $10.5 million, or 22.9% of our revenues, for the year ended December
31, 2003. We also invested $6.6 million in 2001in the development of our new platform and $2 million
in 2002 in the development of our Service View management product, which amounts were capitalized
in our financial statements. We did not capitalize any amount invested for development in 2003. We
anticipate that we will commit increasing amounts to research and development in future periods.

The government of Israel encourages research and development projects oriented toward producing systems
and products for export. We received grants and participate in programs sponsored by the Office of
the Chief Scientist of the Israel Ministry of Industry and Trade, the BIRD Foundation and the European
Union. We have relied on these grants for the financing of a portion of our product development expenditures.
In the past, we recognized grants totaling $4.9 million from the Chief Scientist and the BIRD Foundation
for the development of various aspects of our products.

In 2003 we received a grant of approximately $185,000 from the Chief Scientist, out of which $133,000
was provided to us as part of our participation in a consortium of companies engaged in the development
of a management system for large networks (MAGNET program). We are not required to repay this grant,
nor are we required to pay any royalties in respect thereof.

During 2003 we received a grant of approximately $52,000 from the European Union as part of our participation
in a consortium of companies engaged in the development of a platform for the management and control
of IP over optical networks (DWDM). We are not required to repay this grant, nor are we required
to pay any royalties in respect thereof.

As of December 31, 2003, our total contingent liability in respect of grants received from the Chief
Scientist and the BIRD Foundation, net of royalties paid or accrued, was approximately $3 million.
Although we have received grants in the past, and may do so in the future, we intend to fund future
research and development efforts primarily from our own funds and through fees charged for customization
and enhancement of products for our customers.

Competition

Competition in todays economically challenging telecommunications marketplace is intense and
is characterized by rapidly changing technologies, evolving industry standards, frequent new product
introductions and rapid changes in customer requirements. Competition in todays market is exacerbated
by the fact that service providers are extremely price conscious, and place greater demands than
ever before on their vendors.

34

---

---

The principal competitive factors affecting the market for our products are price, product reputation,
quality, performance, customer support and product features such as adaptability, scalability, ability
to integrate with other products, functionality and ease of use.

Our current and prospective competitors offer a variety of solutions to address the communications
service provider market and generally fall within four categories:

| |  | organizations
      internal design and development departments that NMS, OSS and BSS applications
      for their particular needs;                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                            
| |  | providers
      of NMS, OSS and BSS applications, such as Agilent Technologies, Cramer Systems,
      Granite Systems, Hewlett-Packard, Metasolv, Micromuse, Telecordia Technology
      and Watchmark;    
| |   |                                                                                                                                                                                                            
| |  | communications
      equipment vendors, such as Ericsson and Lucent Technologies; and                                                                                                                      
| |   |                                                                                                                                                                                                            
| |  | systems integrators
      who provide programming services to develop customer-specific applications,
      such as LogicaCMG, BusinessEdge Solutions, Accenture, Cap Gemini and IBM
      Global Services.

Intellectual Property

We rely on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect our proprietary rights. We currently have no registered
patents and two patent applications pending. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only limited protection. As
part of our confidentiality procedures, we generally enter into invention assignment and proprietary
information agreements with our employees and consultants and nondisclosure agreements with our customers
and distributors. We also generally limit access to the source code of our products, documentation
and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use information that we regard
as proprietary.

In addition, in particular instances we are required by our customers to place the source codes for
certain of our products into escrow arrangements to ensure that customers will not be adversely affected
by an interruption in our business or if we materially breach our agreement with such customer. In
limited circumstances, we are required to grant to our customers access to such source code for internal
development purposes according to agreed terms. Such arrangements relating to our source code may
increase the likelihood of misappropriation or other misuse of our intellectual property. Moreover,
effective copyright and trade secret protection may be unavailable or limited in certain foreign
countries, making the possibility of misappropriation of our proprietary technology more likely.

The steps we take to protect our proprietary technology may not prevent misappropriation of such technology,
and such protections may not prevent competitors from developing products with functionality or features
similar to our products. We believe that, because of the rapid pace of technological change in the
market for our products, legal protections of our proprietary technology are less significant factors
in our success than the knowledge, technical expertise, ability and experience of our employees,
the frequency of product enhancements, timely introduction of new products and the quality of professional
services and customer support we provide.

35

---

---

We develop customized solutions for certain customers to accommodate their specific requirements. Some
of these customers retain certain intellectual property rights in such customized applications.

We believe that our products
  and trademarks do not infringe upon the proprietary rights of third parties
  and there are currently no pending claims to such effect. We may, however, receive
  future communications from third parties asserting that our products infringe,
  or may infringe, their proprietary rights. We expect that software product developers
  will be increasingly subject to infringement claims as the number of products
  and competitors in our industry segment grows and the functionality of products
  in different industry segments overlaps. Any such claims, with or without merit,
  could:

| |  | be time-consuming;                                                                    
| | - | --------------------------------------------------------------------------------------
| |   |                                                                                       
| |  | result in
      costly litigation and diversion of technical and management personnel;
| |   |                                                                                       
| |  | cause product
      shipment delays;                                                  
| |   |                                                                                       
| |  | require us
      to develop non-infringing technology; or                             
| |   |                                                                                       
| |  | require us
      to enter into royalty or licensing agreements.                       

Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or
at all. In the event of a successful claim of product infringement against us and our failure or
inability to develop non-infringing technology or license the infringed or similar technology, our
business, financial condition and results of operations could be seriously harmed.

We rely on certain software that we license from third parties, including software that is integrated
with third party and internally developed software and used in our products to perform key functions.
For instance, we have licensed databases from Oracle and Sybase and development tools from Sybase
and ILOG. There can be no assurance that these third party software licenses will continue to be
available to us on commercially reasonable terms or at all. In addition, to a certain extent we are
dependent upon such third parties ability to enhance their current products and develop new
products on a timely and cost-effective basis that will meet changing customer needs and respond
to emerging industry standards and other technological changes.

C.            Organizational Structure

Both our legal and commercial name is TTI Team Telecom International Ltd. We were incorporated under
the laws of the State of Israel and we are domiciled in Israel. We operate under the laws of the
State of Israel. We commenced independent operations in September 1992, as a subsidiary of Team
Computers and Systems Ltd. As of March 15, 2004, Team Software Industries Ltd., a wholly-owned subsidiary
of Team Computers, held 50.22% of our shares.

36

---

---

Currently our subsidiaries are:

| |  | TTI-Telecom
      International Inc., a wholly-owned subsidiary, incorporated under the laws
      of the State of Delaware, and domiciled in New Jersey, U.S.A.   
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                    
| |  | TTI-Telecom
      International B.V., a wholly-owned subsidiary, incorporated under the laws
      of The Netherlands, and domiciled in Amsterdam, The Netherlands.
| |   |                                                                                                                                                                    
| |  | TTI Telecom
      Australia PTY. Ltd., a wholly-owned subsidiary, incorporated under the laws
      of Australia, and domiciled in Sydney, Australia.              
| |   |                                                                                                                                                                    
| |  | TTI France
      S.A.R.L., a wholly-owned subsidiary, incorporated under the laws of France,
      and domiciled in Paris, France.                                 
| |   |                                                                                                                                                                    
| |  | Axarte Ltd.,
      a wholly-owned subsidiary, incorporated under the laws of the United Kingdom,
      and domiciled in Newberry, UK.                              
| |   |                                                                                                                                                                    
| |  | Axarte GmbH,
      a wholly-owned subsidiary of Axarte Ltd., incorporated under the laws of
      Germany, and domiciled in Dorfen, Germany.                       
| |   |                                                                                                                                                                    
| |  | TTI BVI Ltd.,
      a wholly-owned subsidiary, incorporated under the laws of the British Virgin
      Islands, and domiciled in the British Virgin Islands.       
| |   |                                                                                                                                                                    
| |  | TTI Telecom
      (HK) Limited, a wholly-owned subsidiary, incorporated under the laws of
      Hong Kong, and domiciled in Hong Kong.                             
| |   |                                                                                                                                                                    
| |  | TTI Telecom
      Software Private Limited, a wholly-owned subsidiary, incorporated under
      the laws of India, and domiciled in Mumbai, India.                 
| |   |                                                                                                                                                                    
| |  | TTI Telecom
      de Costa Rica S.A., a wholly-owned subsidiary, incorporated under the laws
      of Costa Rica, and domiciled in San Jose, Costa Rica.           
| |   |                                                                                                                                                                    
| |  | TTI Team
      Software (Malta) Ltd., a wholly-owned subsidiary, incorporated under the
      laws of Malta, and domiciled in Valleta, Malta.                      
| |   |                                                                                                                                                                    
| |  | CDR Technologies
      a wholly-owned subsidiary, incorporated under the laws of Israel, and domiciled
      in Petach Tikva, Israel.                              

D.            Property, Plants and Equipment

We do not own any real property.  Our principal facilities, in which our corporate headquarters
are located, comprise approximately 58,000 square feet of office space, and are located in Petach
Tikva, Israel. These facilities are leased from Team Computers, our largest beneficial shareholder.

We also lease the following facilities, used primarily as marketing and sales offices: approximately
4,135 square feet in Hoboken, New Jersey, USA; approximately 1,186 square feet in Plantation, Florida,
USA; approximately 23,305 square feet in Atlanta, Georgia, USA; approximately 3,270 square feet in
Lenexa, Kansas, USA; approximately 1,937 in Redmond, Washington, USA; approximately 400 square feet
in Amsterdam, The Netherlands; approximately 1,300 square feet in Sydney, Australia; approximately
1300 square feet in San Jose, Costa Rica; and approximately 2,433 square feet in Hong Kong. Our leasing
expenses for our facilities were approximately $1.7 million in 2003. We expect to pay total leasing
expenses for our facilities of approximately $1.6 million in 2004.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.            Operating Results.

The following discussion of our consolidated financial condition and consolidated results of operations
should be read in conjunction with the Item 3A - Selected Financial Data and our consolidated
financial statements and notes to those statements included elsewhere in this document. This discussion
contains certain forward-looking statements that involve risks, uncertainties and assumptions. As
a result of many factors, including those set forth under Item 3D - Risk factors and
elsewhere in this document, our actual results may differ materially from those anticipated in these
forward-looking statements.

37

---

---

Overview

We commenced independent operations in September 1992, as a subsidiary of Team Computers and Systems Ltd.,

after having operated as a division of Team Computers since 1988. Team Computers is a publicly
traded
company in Israel.

Product revenues consist primarily of product license fees and fees for professional services required
to customize our products for our customers. Service revenues consist of fees for maintenance, customer
support and development services. In some cases, we receive commissions from hardware vendors which
are accounted for as either product or service revenues, depending upon the project. Our usual sale
to a customer ranges from $1 million to $10 million, depending upon the scope of the network
and functionality required for a specific customer application. We believe that revenues from the
license, service and support of our Netrac family of products will continue to account for most of
our total revenues for the foreseeable future.

Revenues from software licenses usually require significant customization, integration and installation.
The revenues are recognized using contract accounting on a percentage of completion method based
on the relationship of labor days incurred to total estimated labor days to be incurred over the
duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined in the amount of the estimated loss on the entire contract.
Revenues from maintenance and support contracts are recognized over the life of these contracts,
which is typically one year, or at the time when our services are rendered.

Generally, the time elapsed from when we receive an order for our products to the completion of installation
averages from six to eighteen months. Under the terms of some of our contracts, we invoice our customers
as we complete certain milestones, which on average occur every few months, or, in certain cases,
after installation has been completed. We generally receive payment 30 to 120 days after we
invoice customers. As a result, an average of five to six months passes between our performance of
work and our receipt of payment.

Sales effected through our strategic relationships with IBM, Nortel, VocalTec, Siemens and CMGLogica
accounted for approximately 10% of our revenues in 2001, approximately 14% of our revenues in 2002
and approximately 18% of our revenues in 2003.

A majority of our revenues
  is paid to us in U.S. dollars or is U.S. dollar-linked. In addition, a substantial
  portion of our costs is incurred in U.S. dollars. Since the U.S. dollar is the
  primary currency in the economic environment in which we operate, the dollar
  is our functional and reporting currency. Accordingly, we remeasure monetary
  accounts maintained in currencies other than the U.S. dollar using the foreign
  exchange rate at the balance sheet date. We measure and record operational accounts
  and nonmonetary balance sheet accounts at the rate in effect at the date of
  the transaction. 
  We report the effects of foreign currency remeasurement in current operations.

Because a majority of our revenues is paid to us in U.S. dollars or is U.S. dollar-linked, and a substantial
portion of our expenses is incurred in NIS, we are exposed to risk to the extent that the rate of
inflation, or specifically the rate at which our costs increase, in Israel, exceeds the rate of devaluation
of the NIS in relation to the U.S. dollar or if the timing of such devaluation lags behind in Israel.

38

---

---

Our Functional Currency

Our consolidated financial statements are prepared in dollars in accordance with U.S. generally accepted
accounting principles. The currency of the primary economic environment in which we operate is the
U.S. dollar. Transactions and balances denominated in dollars are presented at their original amounts.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into
U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation (SFAS No. 52). All exchange gains and losses from translation
of monetary balance sheet items denominated in non-dollar currencies are reflected in the income
statement when they arise. These exchange gains and losses are included in the same income statement
items in which the related transactions are included.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These estimates are evaluated by us on an on-going basis. We base our estimates
on our historical experience and on various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying amount
values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

We believe that application of the following critical accounting policies entails the more significant
judgments and estimates used in the preparation of our consolidated financial statements.

Revenue  recognition.   We derive our revenues from the sale of software licenses and from services. Our products
are sold worldwide through a combination of our direct sales force and indirect sales channels. Our
services revenues consist primarily of fees derived from annual maintenance and customer support.

Significant management judgments and estimates must be made and used in connection with the recognition
of revenue in any accounting period. Material differences in the amount of revenue in any given period
may result if these judgments or estimates prove to be incorrect or if managements estimates
change on the basis of development of the business or market condition.

We recognizes revenue from software licenses that require significant customization, integration, installation
and development services in accordance with Statement of Position (SOP) 81-1, Accounting
for Performance of Construction - Type and Certain Production - Type Contracts, using contract
accounting on a percentage of completion method based on the relation of actual labor days incurred
to total labor days estimated to be incurred over the duration of the contract. According to SOP
81-1, costs that are incurred for a specific anticipated contract prior to the existence of a persuasive
evidence of an agreement are deferred, subject to evaluation of their probable recoverability, and
only if the costs can be directly associated with a specific anticipated contract. Such deferred
costs are recorded as unbilled contract costs, in other accounts receivable and prepaid expenses.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses
are determined in the amount of the estimated loss on the entire contract.

Revenues from maintenance and support contracts are recognized ratably over the life of the agreement,
which is typically one year, or at the time when such services are rendered.

39

---

---

We believe that the use of the percentage of completion method is appropriate as we have the ability
to make reasonably dependable estimates of the extent of progress towards completion, contract revenues
and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable
rights regarding products and services to be provided and received by the parties to the contracts,
the consideration to be exchanged and the manner and terms of settlement. In all cases we expect
to perform our contractual obligations under the contract.

If we do not accurately estimate the resources required or the scope of the work to be performed, or
do not manage our projects properly within the planned periods of time or satisfy our obligations
under the contracts, then future results may be significantly and negatively affected or losses on
existing contracts may need to be recognized.

Goodwill.  Under Statement of Financial Accounting Standard No.142, Goodwill and Other Intangible
Assets (SFAS No. 142) goodwill acquired in a business combination which closes
on or after July 1, 2001 is deemed to have indefinite life and will not be amortized. SFAS No.142
requires goodwill to be tested for impairment on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down when impaired, rather than being amortized
as previous accounting standards required. Goodwill is tested for impairment by comparing the fair
value of the reporting unit with its carrying value. Fair value is determined using market multiples
and comparative analysis. Significant estimates used in the methodologies include estimates of market
multiples for the reportable unit. We have performed impairment tests and determined that our goodwill
in the amount of $1.1 million is not subject to an impairment charge as of December 31, 2002. On
September 30, 2003, we internally performed impairment tests on our goodwill, which resulted in impairment
of $1.1 million. Following such impairment, the value of our goodwill is zero.

Marketable securities.   We account for investments in debt securities in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.  We determine the proper classification
of investments in marketable securities at the time of purchase and reevaluate such designations
as of each balance sheet date. At December 31, 2003, all securities were designated as available-for-sale.
Accordingly, the available-for-sale securities are stated at fair value, with unrealized gains and
losses reported in a separate component of shareholders equity, accumulated other comprehensive
income. Amortization of premium and accretion of discounts are included in financial income and other,
net. Realized gains and losses on sales of investments, as determined on a specific identification
basis, are included in the consolidated statements of operations.

Capitalized software development costs. Based on our product development process, technological feasibility is established upon completion
of a working model. Costs incurred by us between completion of the working model and the point at
which the product is ready for general release, are capitalized in accordance with Statement of Financial
Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed. (FSAS No. 86) and amortized these costs over the product
estimated economic life which historically has been between three to six years. No software development
costs were capitalized in 2003.

The Company and
  its subsidiaries assess the recoverability of capitalized software development
  costs in accordance with SFAS No. 86 at each balance sheet date by determining
  whether the amount by which the unamortized capitalized cost of a computer software
  product exceeds the net realizable value. The net realizable value is the estimated
  future gross revenues from that product reduced by the estimated future costs
  of completing and disposing of that product, including the cost of performing
  maintenance and customer support required to satisfy the Companys responsibility
  set forth at the time of sale. Based on its most recent analyses, management
  believes that no further impairment of capitalized software development costs
  exists as of December 31, 2003. 
  On September 30, 2003, the net realizable value of the capitalized software
  development costs were periodically reviewed by management, based on the estimated
  future gross revenues from such technologies reduced by the estimated future
  costs for completing and disposing of each of them. This review indicated that
  the net realizable value of the capitalized software development costs exceed
  the unamortized capitalized costs. An amount of $5.9 million has been reduced
  and recorded as an impairment of capitalized software costs included in the
  cost of revenues.

40

---

---

Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.

Results of Operations

The following table sets forth certain items from our results of operations as a percentage of total
revenues for the periods indicated:

|                                                           | Years
      Ended December 31,
|---------------------------------------------------------- | ------------------------------
|
|Revenues:                                                  |                               
|Product                                                    |                               
|Service                                                    |                               
|                                                           |                               
|Total
      revenues                                       |                               
|Cost of revenues:                                         
|Product                                                    |                               
|Service                                                    |                               
|Impairment
      of capitalized software development costs |                               
|                                                           |                               
|Total
      cost of revenues                               |                               
|                                                           |                               
|Gross profit                                               |                               
|Operating
      expenses:                                 
|Research
      and development, net                        |                               
|Selling
      and marketing,                               |                               
|General
      and administrative                           |                               
|goodwill
      write-off                                   |                               
|Allowance
      for doubtful accounts and bad debt         |                               
|write-off                                                  |                               
|                                                          
|Total
      operating expenses                             |                               
|                                                           |                               
|Operating
      income (loss)                              |                               
|Financial
      income, net                                |                               
|                                                           |                               
|Income (loss)
      before income taxes                    |                               
|Income taxes                                               |                               
|                                                           |                               
|Net income
      (loss)                                    |                               
|                                                           |                               

41

---

---

|                                     | Years
      Ended December 31,
|------------------------------------ | ------------------------------
|
|**Sales
      by Geographic Areas:** |                               
|Israel                               |                               
|United States                        |                               
|Europe                               |                               
|Australia                            |                               
|South America                        |                               
|Far East                             |                               
|South Africa                         |                               
|                                     |                               
|                                     |                               

Comparison of 2001, 2002 and 2003

Revenues

|Years
      Ended December 31, | %
      Change
      2001 vs. 2002 | %
      Change 
      2002 vs. 2003
|------------------------------ | ---------------------------------- | -----------------------------------
|                              
|Product sales                  | $53.5                              | $47.0                              
|Services                       | 7.3                                | 11.3                               
|Total
      revenues           | 60.8                               | 58.3                               

Revenues consist primarily of product revenues, which include license fees and fees for professional
services required to customize, implement and integrate our products and commissions from hardware
vendors. Service revenues include fees for maintenance and customer support, as well as development
services.

The decrease in our product revenues in 2003 and 2002 was primarily attributable to delays in some
of our customers network roll-outs, extension of customers sale cycles and difficulties in
obtaining new contracts, all of which we believe was a result of the overall decline in capital expenditure
by customers in the telecommunication industry. Our product revenues also decreased due to the termination
of a contract with a major customer as more fully set forth below under the heading Item 8A
 Legal Proceedings.

The decrease in product revenues was partially offset by a 6% increase in our service revenues in 2003,
and a 55% increase in our service revenues in 2002, which were primarily attributable to our entering
into new maintenance contracts, and renewals of maintenance contracts with existing customers.

42

---

---

Cost of Revenues

|Years
      Ended December 31,                                    | %
      Change
      2001 vs. 2002 | %
      Change 
      2002 vs. 2003
|----------------------------------------------------------------- | ---------------------------------- | -----------------------------------
|                                                                 
|Cost of product
      sales                                       | $20.8                              | $27.4                              
|Cost of services                                                  | 3.6                                | 5.7                                
|Impairment
      of capitalized software
       development costs | 0                                  | 0                                  
|Total
      cost of revenues                                      | 24.3                               | 33.1                               

Cost of product revenues consists primarily of labor costs relating to customization, integration and
installation of our products, license fees paid to third party vendors, depreciation of equipment,
other allocated expenses, amortization of capitalized software and royalties paid to the Office of
the Chief Scientist in each year.

Cost of service revenues consists primarily of personnel costs for providing maintenance services,
fees paid to third-party providers of maintenance services and third-party software vendors, personnel
costs for telephone support and maintenance and other allocated expenses.

Gross Profit

|Years
      Ended December 31,                                    | %
      Change
      2001 vs. 2002 | %
      Change 
      2002 vs. 2003
|----------------------------------------------------------------- | ---------------------------------- | -----------------------------------
|                                                                 
|Product sales                                                     | 32.8                               | 19.6                               
|Services                                                          | 3.7                                | 5.6                                
|Impairment
      of capitalized software
       development costs | -                                  | -                                  
|Total
      gross profit                                          | $36.5                              | $25.3                              

Gross profit as a percentage of revenues

|Years ended       December 31,
|------------------------------
|                              
|Product
      sales           
|Services                      
|Total gross
      profit      

43

---

---

Total gross profit decreased to $4 million in 2003 from $25.3 million in 2002, partially due to a one-time
impairment charge related to capitalized software in the amount of $5.9 million.

The decrease in the gross profit and gross profit as a percentage on product revenues is due to intense
price pressure resulting from competition and the increasing demands of customers to receive more
functionality for reduced prices, the substantial amounts invested in customer funded R&D and
the fixed expenses that remain unchanged on a lower revenue figure. The margin on gross profit for
services decreased in 2003 compared to 2002 due to the execution of previous maintenance contracts
during 2003. The gross profit of services as a percentage of service revenues decreased slightly
due to price pressure resulting from competition.

Operating Expenses

|Years ended       December 31,        | %
      Change 2001
      vs. 2002 | %
      Change 2002
      vs. 2003
|------------------------------------- | ---------------------------------- | ----------------------------------
|                                     
|Research
      and development, net   | $  6.3                             | $  8.0                            
|Selling and
      marketing           | 12.2                               | 17.7                              
|Allowance
      for doubtful accounts | 0                                  | 7.4                               
|Impairment
      of good-will         | -                                  | -                                 
|General and
      administrative      | 5.2                                | 7.0                               
|Total
      operating expenses        | 23.7                               | 40.1                              

Research and Development Expenses, Net. Gross research and development expenses consist primarily of compensation and related costs of employees
engaged in ongoing research and development activities, subcontractors and other related costs.

|Years ended       December 31,                                    
|------------------------------------------------------------------
|                                                                  
|Total
      cost                                                  
|Less
      grant participations                                   
|Less - capitalization
      of software
         development costs
|Research
      and development, net                               

44

---

---

Gross research and development expenditures decreased 8% to $10.5 million in 2003, from $11.4 million
in 2002, and were offset by $0.2 million in grants recognized in 2003 compared to an offset of $1.4
million for grants recognized in 2002. As a result, research and development expenses, net (and after
capitalization of our investments in the development of our Service View management product in the
amount of $2 million in 2002), increased 29% to $10.3 million in 2003 from $8.0 million in 2002.

Gross research and development expenditures decreased 21% to $11.4 million in 2002, from $14.5 million
in 2001 and were offset by $1.4 million in grants recognized in 2002 compared to an offset of $1.6
million for grants recognized in 2001. As a result, research and development expenses, net (and after
capitalization of our investment of $6.6 million in the development of our new platform in 2001,
and $2.0 million in the development of our Service View management product in 2002), increased 26%
to $8.0 million, or 13.6% of total revenues, in 2002 from $6.3 million, or 10.3 % of total revenues,
in 2001.

The increases in research and development net, in 2002 and 2003 were primarily due to costs associated
with increased personnel, equipment and facilities with no additional grants to offset such expenses.

Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for sales and marketing personnel,
as well as promotion of contract administration, traveling and entertainment expenses. Selling and
marketing expenses were 42% of total revenues in 2003, 30.4% of total revenues in 2002 and 20% of
total revenues in 2001. These increases were primarily due to the expansion of our sales and marketing
organization in the United States, Asia Pacific and in Europe, as well as increased expenses for
trade shows and other marketing programs, to increase sales of our existing products and launch our
sales efforts relating to our next-generation products. In addition, the sales process has become longer and sales efforts have become more complicated and
intensive due to the demands to perform proof of concepts and to invest significant resources in
presale activities.

General and Administrative Expenses. General and administrative expenses consist primarily of compensation for finance, human resources,
general management, networks and information systems, personnel, as well as insurance, consultancy
services expenses, and other expenses. General and administrative expenses decreased 10% to $6.3
million, or 14% of total revenues in 2003, from $7.0 million, or 12% of total revenues in 2002. This
decrease was primarily due to our efforts to reduce discretionary expenses.

General and administrative expenses increased 35% to $7.0 million, or 12% of total revenues in 2002
from $5.2 million, or 8.6 % of total revenues, in 2001. This increase was primarily due to increased
hiring, facilities costs and associated expenses necessary to manage and support our growth.

Goodwill write off. During 2003 we incurred a charge for impairment of goodwill in the amount of $1.1 million relating
to our investment in Axarte Limited. There was no comparable charge in 2002.

45

---

---

Financial Income, Net. Financial income consists primarily of interest derived from cash and cash equivalents, short-term
investments and foreign currency translation adjustments, off-set by impairment of marketable securities,
if any. Our financial income decreased to $2.8 million in 2003 from $3.4 million in 2002, due to
the decrease in our liquid assets during the year 2003.

We recognized financial income of $3.4 million in 2002 compared to financial income of $2.4 million
in 2001. The increase in the financial income in 2002 was primarily attributed to the devaluation
of the US dollar against the Euro, which was partially offset by an increase of impairment of marketable
securities.

Allowance for doubtful accounts and bad debt write off.  The allowance for doubtful accounts consists of the balance of the unpaid sums under our agreements
with two major customers. One of these agreements was terminated by the customer, and the second
was terminated by mutual agreement, and the dispute thereunder was settled. Please see the information
about these customers set forth below under the heading Item 8A  Legal Proceedings.
Allowance for doubtful accounts was in the aggregate amount of $7.5 million in 2002 and $177,000
in to 2003.

Research and Development

We conduct our research and development operations in Israel. Our research and development efforts
have been financed through internal resources and grants from the Office of the Chief Scientist,
the BIRD Foundation and the European Union. The Chief Scientist and the European Union provided grants
of approximately $1.6 million for the year ended December 31, 2001, approximately $1.4 million for
the year ended December 31, 2002 and approximately $237,000 for the year ended December 31, 2003.Of
our total research and development expenses, these grants accounted for 11% in 2001, 12.4% in 2002
and 2.3% in 2003.

With respect to grants we
  received from the Office of the Chief Scientist of the Israeli Ministry of Industry
  and Trade, we paid or accrued to the Israeli government approximately $347,000
  for the year ended December 31, 2001, $258,000 for the year ended December 31,
  2002 and $110,000 for the year ended December 31, 2003. See Item 5B  Grants
  from the Office of the Chief Scientist.

We have also received royalty-bearing grants from the BIRD Foundation to be repaid at the rate of 3.5%
to 5% of sales of products developed as a result of the research projects funded by the BIRD Foundation
until a maximum of 150% of the U.S. dollar amount we received, linked to the United States consumer
price index, is repaid. These royalty-bearing grants received for research and development are offset
against our gross research and development expenditures. We paid or accrued to the BIRD Foundation
approximately $10,000 for the year ended December 31, 2001, $36,000 for the year ended December 31,
2002 and $9,000 for the year ended December 31, 2003. We have not received grants from the BIRD Foundation
since 1996.

We received grants of approximately $687,000 in 2002 and $185,000 in 2003 from the Chief Scientist,
out of which $133,000 was provided to us as part of our participation in a consortium of companies
(MAGNET program) engaged in the development of a management system for large networks. We are not
required to repay these grants, nor are we required to pay any royalties in respect thereof.

We received grants of approximately $62,000 in 2002 and $52,000 in 2003 from the European Union as
part of our participation in a consortium of companies engaged in the development of a platform for
the management and control of IP over optical networks (DWDM). We have not received any grants during
the year 2003 from the European Union as part of our participation in a consortium of companies engaged
in the development of a platform for the management and control of IP over optical networks (DWDM).
We are not required to repay these grants, nor are we required to pay any royalties in respect thereof.

46

---

---

Corporate Tax Rate

Israeli companies are generally subject to tax at the rate of 36% of taxable income (and to capital
gains tax at a rate of 25% for capital gains derived after January 1, 2003). However, our facilities
in Petach Tikva have been granted approved enterprise status under the Law for Encouragement of Capital
Investments, 1959. Consequently, these facilities are eligible for tax benefits. We have derived,
and expect to continue to derive, a substantial portion of our income from our approved enterprise
facilities.

Subject to compliance with applicable requirements, the income derived from our approved enterprise
facilities will be subject through 2011 to a reduced tax rate of a maximum of 25%. The actual tax
rate will depend upon the percentage of non-Israeli holders of our share capital.

The above benefits are conditions upon our fulfillment of conditions stipulated by the Law for the
Encouragement of Capital Investments, the regulations promulgated thereunder an dthe instruments
of approval for the specific investments in approved enterprises. If we fail to comply with these
conditions, our benefits may be canceled and we may be required to refund the amount of benefits
received, in whole or in part.

Our effective tax rate was 5.1% in 2002, and 6.6% in 2001. Due to the expiration of certain of  the  tax  benefits
and exceptions discussed above and a decrease in the impact of the remaining benefits, our effective
tax  rate was supposed  to increase to 17% in 2003, but since we incurred losses
in this year, we were not required to pay taxes. During the year 2003 we recorded deferred taxes
in the amount of $456,000. We believe that this deferred tax together with additional deferred tax
in the amount of $585,000 which was recorded in 2002, will be set-off against our income tax liability
within 3 years. See Note 10 to our consolidated financial statements incorporated by reference in
this annual report for more information on our income taxes.

Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities
and Assets

The dollar cost of our operations is influenced by the extent to which any increase in the rate of
inflation in Israel is offset by the devaluation of the NIS in relation to the U.S. dollar. Inflation
in Israel will cause contracts under which we are to receive payment in dollars or dollar-linked
NIS, while incurring expenses in NIS linked to the Israeli consumer price index, to be less profitable,
unless such inflation is offset by a devaluation of the NIS.

Most of our sales are denominated in dollars or are dollar linked. However, a significant portion of
our expenses, primarily expenses associated with employee compensation, is denominated in NIS unlinked
to the dollar. A devaluation of the NIS in relation to the dollar has the effect of decreasing the
dollar value of any asset of ours which consists of NIS or receivables payable in NIS, unless such
receivables are linked to the dollar. Such a devaluation also has the effect of reducing the dollar
amount of any of our expenses or liabilities which are payable in NIS, unless such expenses or payables
are linked to the dollar. Conversely, any increase in the value of the NIS in relation to the dollar
has the effect of increasing the dollar value of any of our unlinked NIS assets and the dollar amounts
of any of our unlinked NIS liabilities and expenses.

The rate of inflation (deflation) in Israel was 1.4% in 2001, 6.5% in 2002 and (1.9)% in 2003, while
the rate of devaluation (revaluation) was 9.3% in 2001, 7.3% in 2002 and (7.6) % in 2003.

47

---

---

Because exchange rates between the NIS and the dollar fluctuate continuously, albeit with a historically
declining trend in the value of the NIS, exchange rate fluctuations and especially larger periodic
devaluations will have an impact on our profitability and period-to-period comparisons of our results.

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

Quarterly Results of Operations

The
following tables set forth certain unaudited quarterly financial data for each of our last eight
quarters and this data is expressed as a percentage of total revenues for each quarter. The data
have been prepared on a consistent basis with our audited consolidated financial statements included
elsewhere in this prospectus and include all necessary adjustments, consisting only of normal recurring
accruals that we consider necessary for a fair presentation. The operating results for any quarter
are not necessarily indicative of results for any future period.

|                                            | Quarters
      Ended
|------------------------------------------- | --------------------
|
|Revenues:                                   |                     
|Products                                    | $                   
|Services                                    |                     
|                                            |                     
|Total revenues                              |                     
|Cost of revenues:                          
|Products                                    |                     
|Services                                    |                     
|Impairment
      of capitalized software    |                     
|development
      costs                     |                     
|                                            |                     
|Total cost of revenues                      |                     
|                                            |                     
|Gross profit                                |                     
|                                           
|Operating
      expenses:                  
|                                            |                     
|Research and development, net               |                     
|Selling and marketing                       |                     
|General and administrative                  |                     
|goodwill
      write-off provision for     
|doubtful
      accounts                     |                     
|Allowance
      for doubtful accounts and  
|bad debt write-off                          |                     
|                                            |                     
|Total operating expenses                    |                     
|Operating
      Income (loss)               |                     
|Financial
      income, net                 |                     
|                                            |                     
|Income (loss)
      before income taxes     |                     
|Income taxes                                |                     
|                                            |                     
|Net income
      (loss)                     | $                   
|                                            |                     
|Basic (loss)
      net earnings per share   | $                   
|                                            |                     
|Diluted net
      earnings (loss) per share | $                   
|                                            |                     

48

---

---

|                                         | Quarters
      Ended | 
|---------------------------------------- | -------------------- | 
|
|Revenues:                                |                      | 
|Products                                 |                      | 
|Services                                 |                      | 
|                                         |                      | 
|Total
      revenues                     |                      | 
|Cost of revenues:                        |                      | 
|Products                                 |                      | 
|Services                                 |                      | 
|Impairment
      of capitalized software |                      | 
|development
      costs                  |                      | 
|                                         |                      | 
|Total
      cost of revenues             |                      | 
|                                         |                      | 
|Gross profit                             |                      | 
|                                         |                      | 
|Operating
      expenses:                |                      | 
|                                         |                      | 
|Research
      and development, net      |                      | 
|Selling and
      marketing              |                      | 
|General and
      administrative         |                      | 
|goodwill
      write-off                 |                      | 
|                                         |                      | 
|allowance
      for doubtful accounts    |                      | 
|and bad debts
      write-off            |                      | 
|                                         |                      | 
|Total operating
      expenses           |                      | 
|                                         |                      | 
|Operating
      Income (loss)            |                      | 
|Financial
      income, net              |                      | 
|                                         |                      | 
|Income(loss)
      before Income taxes   |                      | 
|Income
      Taxes                       |                      | 
|                                         |                      | 
|Net income
      (loss)                  |                      | 
|                                         |                      | 

B.            Liquidity and Capital Resources

We had cash and cash equivalents, marketable securities and bank deposits of $54.5 million for the
year ended December 31, 2001, $48.1 million for the year ended December 31, 2002 and $35 million
for the year ended December 31, 2003.

Our operating activities provided (used) cash of $16.3 million for the year ended December 31, 2001,
$1.9 million for the year ended December 31, 2002, and $(11.1) million for the year ended December
31, 2003. We had no cash provided from financing activities in 2002 and in 2003.

Our capital expenditures were $2.1 million in 2003, $3.9 million in 2002 and $5 million in 2001. Our
capital investments for improvements of leased premises were $1.3 million in 2001, $0.3 million in
2002 and $0.2 million in 2003. We also invested $6.6 million in 2001 in the development of our new
platform, and $2 million in 2002 in the development of our Service View management program, which
investments were capitalized in our financial statements. We did not capitalize any amount invested
for development in 2003.

49

---

---

In 2001 we invested $4.1 million in Axarte, Ltd. in the form of a six-year convertible debenture with
a call option, granted by the shareholders of Axarte, entitling us to acquire all of the equity interests
in Axarte for nominal value at any time prior to December 31, 2006. Following our original investment
in Axarte, we provided additional loans to Axarte in exchange for convertible debentures in the aggregate
amount of approximately $1.5 million. On December 31, 2001, we exercised our call option to purchase
100% of the issued and outstanding share capital of Axarte and we decided to consolidate Axartes
operations with our other operations effective as of January 31, 2001.

We do not have any off-balance-sheet concentration of credit risk, such as foreign exchange contracts,
option contracts or other foreign hedging arrangements. We may be subject to concentrations of credit
risk from financial instruments, consisting principally of cash and cash equivalents, short-term
bank deposits, trade and unbilled receivables and investments in marketable securities. We invest
our cash and cash equivalents and marketable securities in US$ deposits with major Israeli and U.S.
banks. We believe that the financial institutions that hold our investments are financially sound,
and, accordingly, minimal credit risk exists with respect to these investments.

Management believes our cash and cash equivalents reserve, as well as cash flow from our operations
in 2004, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures
for the next twelve months. However, if we carry out acquisitions of other companies or new technologies
by paying cash, there may be a need to raise additional capital by issuing debt or equity during
the year.

Market Risk

For information on our market risk, see Item 11  Quantitative and Qualitative Disclosures
About Market Risk.

Grants from the Office of the Chief Scientist

From time to time we receive grants under programs of the Office of the Chief Scientist of the Ministry
of Industry and Trade of the Government of Israel.This governmental support is conditioned upon our
ability to comply with certain applicable requirements and conditions specified in the Chief Scientists
program and with the provisions of the Law for the Encouragement of Research and Development in the
Industry, 1984, and the regulations promulgated thereunder, or the Research and Development Law.
Under the Research and Development Law, research and development programs that meet specified criteria
and are approved by the research committee of the Office of the Chief Scientist of the Ministry of
Industry and Trade of the Government of Israel are eligible for grants of up to 50% of certain approved
expenditures of such programs, as determined by said committee.

In exchange, the recipient of such grants is required to pay the Office of the Chief Scientist royalties
from the revenues derived from products incorporating know-how developed within the framework of
each such program or derived therefrom (including ancillary services in connection therewith), up
to an aggregate of 100% of the dollar-linked value of the total grants received in respect of such
program, plus interest, or up to 150% thereof in the case of some of our earliest programs. The royalty
rates applicable to our programs range from 3.5% to 5%.

The Research and Development Law generally requires that the product developed under a program be manufactured
in Israel. However, upon the approval of the Chief Scientist, some of the manufacturing volume may
be performed outside of Israel, provided that the grant recipient pays royalties at an increased
rate, which may be substantial, and the aggregate repayment amount is increased to 120%, 150% or
300% of the grant, depending on the portion of the total manufacturing volume that is performed outside
of Israel. Effective April 1, 2003, the Research and Development Law also allows for the approval
of grants in cases in which the applicant declares that part of the manufacturing will be performed
outside of Israel or by non-Israeli residents and the research committee is convinced that doing
so is essential for the execution of the program. This declaration will be a significant factor in
the determination of the Office of Chief Scientist whether to approve a program and the amount and
other terms of benefits to be granted. For example, the increased royalty rate and repayment amount
will be required in such cases.

50

---

---

The Research and Development Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without the approval of the
research committee. Such approval is not required for the export of any products resulting from such
research or development. The Research and Development Law further provides that the know-how developed
under an approved research and development program may not be transferred to any third parties outside
Israel.

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

The funds available for Office of the Chief Scientist grants out of the annual budget of the State
of Israel were reduced in 1998, and the Israeli authorities have indicated in the past that the government
may further reduce or abolish Office of the Chief Scientist grants in the future. Even if these grants
are maintained, we cannot presently predict what would be the amounts of future grants, if any, that
we might receive.

C.            Research and Development, Patents
and Licenses

Our research and development efforts are focused on developing new products to meet the evolving needs
of communications service providers and equipment vendors and on improving existing products by incorporating
new features, interfaces and technologies. We believe that the timely development of new products
and enhancements is essential to maintaining our competitive position in the marketplace.

We currently employ 205 full-time employees in research and development. Gross research and development
expenses were approximately $14.4 million, or 23.7% of our revenues, for the year ended December
31, 2001. Gross research and development expenses were approximately $11.3 million, or 19.4% of our
revenues, for the year ended December 31, 2002. Gross research and development expenses were approximately
$10.5 million, or 22.9% of our revenues, for the year ended December 31, 2003. For information on
our research and development expenditures and grants we received, see Item 5A  Results
of Operations  Research and Development.  We anticipate that we will commit
increasing amounts to research and development in future periods.

51

---

---

As a recipient of grants from the Office of the Chief Scientist, we are obligated to perform all manufacturing
activities for projects subject to the grants in Israel unless we receive an exemption. Know-how
from the research and development which is used to produce these products may not be transferred
to third parties without the approval of the Office of the Chief Scientist. Approval is not required
for the export of any products resulting from the research and development based on these grants.
For further information regarding the Office of the Chief Scientist of the Israeli Ministry of Industry
and Trade, see Item 5B  Liquidity and Capital Resources Grants from the Office
of the Chief Scientist.

D.            Trend Information

The deterioration of the global economy in general and economic uncertainty in the communications industry
in particular has resulted in a decline of capital investment by communications service providers,
and in the communications industry in particular, has significantly reduced spending by communications
service providers since late 2000. Many new and small communications service providers have failed
and existing communications service providers have been reducing or delaying expenditures on new
equipment and applications. The attacks of September 11, 2001, caused a further decline in the global
economy. As a result, many companies, including current and potential customers of ours, have indicated
that they plan to postpone or decrease further capital investment. We believe that this slow-down
in communications-related spending will continue.

E.             Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

F.             Tabular Disclosure of Contractual
Obligations

The following table sets forth, as of December 31, 2003, the Companys known contractual obligations
by type of obligation and for the periods indicated:

|Contractual
      Obligations                               | Payment
      due by period (in thousands US$)
|----------------------------------------------------------- | ----------------------------------------------
|                                                           
|Operating
      Lease Obligations (facilities and vehicles) | 4,863                                         

Additional contractual obligations relating to royalty commitments to the Chief Scientist and the BIRD
Foundation are as set forth above in Item 5A - Operating Results  Research and Development.

52

---

---

Item 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.            Directors and Senior Management

Our
directors and officers as of March 15, 2004, are as follows:

|Name             | Age | Position
|---------------- | --- | --------
|Shlomo Eisenberg |     | 55      
|Meir Lipshes     |     | 58      
|Meir Dvir        |     | 74      
|Nechama Zivin    |     | 50      
|Rami Zivony      |     | 52      
|Ron Al-Dor       |     | 44      
|Israel Ofer      |     | 50      
|Norman Tutnauer  |     | 45      
|Avichai Levy     |     | 40      
|Rami Doron       |     | 47      
|Gadi Komet       |     | 44      

Shlomo Eisenberg has served as Chairman of our board of directors since our inception in September 1992. Since 1990,
Mr. Eisenberg has served as Chairman of the board of directors of Team Computers, the parent company
of our major shareholder, Team Software, and Team Computers various other subsidiaries. Since
1994, Mr. Eisenberg has served as Chairman of the board of directors of Team Software. Since 1988,
Mr. Eisenberg has served as Chairman of the board of directors of Arad, a Tel Aviv Stock Exchange-listed
company which, directly and indirectly, owns 54.8% of Team Computers. Mr. Eisenberg is a shareholder
of Team Computers and a member of the controlling group of shareholders of Arad. Since May 1989,
Mr. Eisenberg has been the Chairman and Chief Executive Officer of Isras Investment Company, Ltd.
Mr. Eisenberg received a Masters of Science degree in mathematics from the Hebrew University, Jerusalem.
In November 1997, a motion for certification of a class action was filed against Mr. Eisenberg, Arad
and the other directors of Arad in the Tel Aviv District Court. The class action alleged that the
defendants, including Mr. Eisenberg, had, among other things, wrongfully obtained the approval by
Arads shareholders of a transaction in which Arad acquired shares of Isras from Mr. Eisenberg
and two other controlling shareholders of Arad which was financed through a rights offering. On February
24, 1999, all of the defendants, except Mr. Eisenberg, signed a settlement agreement with respect
to this action without admitting any of the charges. With respect to Mr. Eisenberg, he was given
a specific period of time following the resolution of the criminal proceedings described below to
join the settlement agreement. Following an investigation by the Israel Securities Authority of certain
aspects of the above-mentioned matter, an indictment was filed against Mr. Eisenberg and others in
the Tel Aviv District Court alleging, among other things, that Mr. Eisenberg and others failed to
disclose to the Arad public shareholders and in the rights offering prospectus, the circumstances
surrounding the sale of certain Arad shares by Mr. Eisenberg to third parties, including certain
understandings that the parties to that transaction have allegedly reached. The indictment alleged
that the purpose of that transaction was to fraudulently obtain the shareholders consent required
under Israeli law for the acquisition by Arad of the Isras shares from Arads related parties.
The charges included violations of Israels Securities Law (including making a misleading statement
in a prospectus) and Penal Law. Mr. Eisenberg pled not guilty to the charges. On September 16, 2003,
Mr. Eisenberg and others were convicted on several counts under Israels Securities Law and
Penal Law, including obtaining consents through fraudulent means and misrepresentations or omissions
in communications to shareholders and in a prospectus. On February 10, 2004, Mr. Eisenberg was sentenced
to 18 months in prison, received an 18-month suspended sentence and was fined NIS 1 million (approximately
$225,000). Mr. Eisenberg has informed the Company that he intends to appeal the conviction and the
sentence. As a result of the foregoing, Mr. Eisenberg might be precluded from serving as a director
of any public company, including ours. The civil and criminal actions described above concern matters that are not related to the Company.

53

---

---

Meir Lipshes, one of our directors and our Chief Executive Officer, has served on our board of directors since
it commenced independent operations in September 1992 and was appointed Chief Executive Officer in
January 1996. Mr. Lipshes was one of the founders and is a current shareholder of Team, our principal
shareholder, served as Teams President from 1972 to May 1995 and as its Chief Executive Officer
from May 1995 until September 1996. Mr. Lipshes also served as acting President of Omnitek-Eichut
Ltd. from November 1994 until September 1996. Mr. Lipshes has been a director of Team since 1972
and a director of Omnitek since 1979. From 1970 to 1972, he was employed in the electronics and engineering
division at Motorola Israel, where he was one of the founders of the computing department. He also
served as a development engineer for encoding equipment in the Signal Corps of the Israel Defense
Forces. Mr. Lipshes has a degree in electronics from the Technical School of the Israeli Air Force.

Meir Dvir  became a director in 1997.  Since 1999, Mr. Dvir has served as a director of Bank Leumi
B.M. and Israel Military Industries. Since 1998, Mr. Dvir has served as a director of Intergamma
Ltd. Since 1996, Mr. Dvir has served as a director of TAT Technologies. Since 1994, Mr. Dvir has
served as President of Dea Shnia Ltd., a consulting company. Mr. Dvir additionally has held the following
positions, among others: Executive Vice President of R&D and Business Development at Israel Aircraft
Industries from 1985 to 1994, Director of the Aircraft Division of Israel Aircraft Industries from
1987 to 1989, Chief Operating officer of Elscint Ltd., a publicly-held Israeli high technology and
defense company from 1984 to 1985, and President of Elta, a subsidiary of Israeli Aircraft Industries,
from 1998, to 1983. Mr. Dvir holds a Masters Degree and a Ph.D. in physics from the Hebrew University, Israel.

Rami
  Zivony became a director in 2003.  He also served as a director of
  the Company from the commencement of its independent operations in 1992 through
  1998. From 2003 until February 2004, Mr. Zivony was the Chief Executive Officer
  of CelleBrite Ltd., a company engaged in manufacturing and marketing universal
  memory exchangers for cellular telephones. From 2000 through 2002, Mr. Zivony
  served as Chief Executive Officer of Callscape Inc., a start-up company he founded,
  which engaged in the development of a system to enhance the availability of
  telephone users, especially cellular users. During 1999, Mr. Zivony acted as
  Chief Executive Officer of Madah-Com Ltd., a start-up company engaged in wireless
  public announcement systems. From 1983 through 1998, Mr. Zivony was employed
  with Team Computers, in various capacities, including as Joint Chief Executive
  Officer. Mr. Zivony received a Masters Degree in Business (with honors) from
  The Technion  Israel Institute of Technology.

Nechama Tzivin became a director in 2003.  Ms. Tzivin has been in private practice as a lawyer since 1997. From
1992 through 1995 she worked as an independent computer consultant for IBM Corporation and El-Al
Israel Airlines, and she acted as President of World Team Consulting, a U.S. company which provided
computer software consulting services. She has served as a director of Team Software since 2002,
as a director of Omnitech-Eichut Ltd. since 1998 and as a director of Meshulam Levinstein Contracting
& Engineering Ltd. since 2003. Ms. Tzivin served as a director of the Israeli Government Tourist
Corporation between May 1997 and June 2000, a director of Israeli Chemicals Ltd. between 1998 and
1999, a director of Dead Sea Periclase Ltd. between 1998 and 1999, and a director of Team Computers
between 1998 and 1999.

54

---

---

Ron Al-Dor  was appointed our President in August 1996 after serving as Vice President from September 1992
to November 1995, and Co-President from November 1995 until August 1996. From February 1988 until
September 1992, Mr. Al-Dor was Manager of Software Development of Telecommunications Projects at
Team. During his service in the Israeli Air Force, Mr. Al-Dor worked on projects relating to computerization
in aircrafts. Mr. Al-Dor is a graduate of the military computer college of the Israeli Air Force,
studied computer science and management at Bar Ilan University and attended the Israel Management
Center for Business Administration.

Israel Ofer, Chief Financial Officer, joined us in September 1996. From 1984 to September 1996, Mr. Ofer was the
Chief Financial Officer and Comptroller of TAT Technologies, a group of high-technology companies
based in Israel and traded on Nasdaq and the Tel Aviv Stock Exchange. From 1982 to 1984, Mr. Ofer
worked as Accounting Supervisor and Administrative Manager at Amcor Ltd., an Israeli appliance manufacturer.
He was previously an accountant at Maadanot and an inspector at the Israeli Income Tax Authority.
Mr. Ofer earned a Bachelor of Arts degree in Finance and Accountancy from Tel Aviv University. He
is a certified public accountant in Israel.

Norman (Nahum) Tutnauer, appointed Vice President of Sales in May 1996, served as Director of Sales and Marketing from June
1994 until April 1996 and as an Account Manager from September 1992 until May 1994. From October
1988 until September 1992, Mr. Tutnauer was a project manager for network management solutions at
Team. Before joining Team, he served as a project manager for advanced electronic intelligence systems
for the Israeli Air Force, where he also served as a transport pilot. Mr. Tutnauer is a graduate
of the military computer college of the Israel Defense Forces.

Avichai Levy, Vice President of Marketing, joined us in 1992. In 1990 and 1991, he worked as a systems engineer
and project manager at Eldor Computers, a large Israeli computer company. He also served as a consultant
to the Israeli Ministry of Defense for the specification of software and communication systems, and
as a project manager for a real-time management and control system for the Israeli Air Force. Mr.
Levy received a Bachelor of Science degree in mathematics and computer science and a Master of Science
in management of information systems from Tel Aviv University, Israel.

Rami Doron, Vice President of Development and Operations, joined us in 1995. Prior to joining us, he was manager
of the software division at Team for three years, specializing in relational databases and operating
systems. From 1995 to 1992, Mr. Doron was a software and service engineer at Team. He was previously
employed at Israel Aircraft Industries Ltd. from 1984 to 1985 as a software engineer. Mr. Doron studied
software engineering at Hadassah College, Jerusalem. He continued his education in management at
Bar Ilan University, Israel.

Gadi Komet, Vice President of Products Group since March 2003. Prior to March 2003, he served as Assistant Vice
President of NetCAP Products from October 2001 through February 2003. Mr. Komet served as department
manager of products development from December 2000 to September 2001, and as a department manager
of projects from November 1999 to November 2000. He was previously employed at Elbit Systems from
February 1989 to October 1999, in the following capacities: one year as a programmer, two years as
a team leader, three years as a software development group manager and four years as a program manager
for advanced command and control systems for various customers. Mr. Komet is a graduate of the computer
engineering faculty of the Technion in Haifa, Israel. Mr. Komet is a Lieutenant Colonel (Res.) in
the Israel Defense Forces.

We
have called an extraordinary general meeting of our shareholders, to be held on April 1, 2004, to
consider the election of Mr. Doron Zinger to serve as an external director of the Company.

The
  following information is supplied regarding Doron Zinger and is based upon information
  furnished by Mr. Zinger:

55

---

---

Doron Zinger currently operates Zinger Communications, an independent communications consulting company, and is
a Venture Partner (Telecommunications) with Giza Venture Capital Fund, a member of the Advisory Board
of Iamba Technologies Limited and Main.net communications Ltd, and a member of the Boards of Directors
of Cellot Ltd., and V-Secure Technologies (US) Inc. From February through July 2000, Mr. Zinger served
as Chief Executive Officer of Lambda Crossing Ltd., a start-up company engaged in the development
of electro optic components for optical communications networks. From 1997 through 2000, Mr. Zinger
served as President and Chief Executive Officer of VocalTec Communications Ltd., a leading company
in the emerging IP telephony industry. From 1980 through 1997, Mr. Zinger held various technical,
marketing and management positions at ECI Telecom Ltd., a leading provider of telecommunications
equipment worldwide (NASDAQ: ECIL), including: Senior Vice President and Chief Operating
Officer from 1995 through 1997, Corporate Vice President and General Manager DCME SBU from 1993 through
1995, and Director of Marketing and Sales  Telecommunications Products from 1991 through 1993.
Mr. Zinger received a B.Sc. Degree from The Technion  Israel Institute of Technology in 1975,
and an MBA from Tel Aviv University in 1991. Mr. Zinger is a Major (Res.) in the Israeli Navy.

B.            Compensation

Our directors, other than Shlomo Eisenberg and Meir Lipshes, receive annual compensation of approximately
$10,500 each and in addition approximately $380 per board meeting or per board committee meeting
in which they participate, and approximately $190 per such meeting by telephone in which they participate.
We paid our directors, other than Shlomo Eisenberg and Meir Lipshes, the aggregate amount of approximately
$60,545 in respect of their services in 2003.

We undertook to pay monthly management fees of NIS 30,000 to Shlomo Eisenberg, and NIS 60,000 to Meir
Lipshes. These amounts are linked to the Israeli Consumer Price Index and are updated every month
according to this Index. As of December 31, 2003, we paid monthly management fees of NIS 31,938 ($7,293
according to the exchange rate prevailing on December 31, 2003) to Shlomo Eisenberg, and NIS 63,876
($14,587 according to the exchange rate prevailing on December 31, 2003) to Meir Lipshes.

Total compensation paid to Shlomo Eisenberg and Meir Lipshes during 2003 was $227,336, out of which
$73,750 was in respect of amounts accrued during 2002. In 2004 we will pay approximately $86,300
in respect of amounts accrued during 2003. The total amount of the compensation paid during 2003
of $227,336 includes pension, bonuses, retirement and similar benefits. This amount also includes
a bonus paid in 2003 to Meir Lipshes of NIS 300,000 ($62,500 according to the exchange rate prevailing
on January 31, 2003) in respect of his performance during 2001.

Our employment agreements with our executive officers located in Israel, including those that are also
members of our board of directors, provide for standard Israeli benefits, which are managers
insurance and educational fund payments. We make payments in this context as follows: pension - 5.0%
of gross salary; severance pay - 8.33% of gross salary; loss of earning capacity - up to 2.5% of
gross salary; and educational fund - 7.5% of gross salary. With respect to some of our employees,
such payments are made based on 75-85% of their gross salary.

Total compensation during 2003 to the members of senior management included in the table at the beginning
of this Item 6A  Directors, Senior Management and Employees, but who are not directors,
amounted to approximately $1.1 million. This amount includes special bonuses, pension, retirement
and similar benefits amounting to approximately $195,105.

In November 2001, these members of senior management, other than Shlomo Eisenberg and Meir Lipshes,
were granted options to purchase a total of up to 46,666 ordinary shares for an exercise price of
either $19 or $30 each. These options are currently fully exercisable. The expiration date of these
options is November 9, 2005.

56

---

---

In October 1999, our board of directors authorized the grant to Shlomo Eisenberg of options to purchase

18,000 Ordinary Shares at an exercise price of $10.50 per share, and 18,000 Ordinary Shares at
an
exercise price of $12.875 per share, and the grant to Meir Lipshes of options to purchase 24,000

Ordinary Shares at an exercise price of $10.50 per share and 24,000 Ordinary Shares at an exercise

price of $12.875 per share. These options are currently fully exercisable.

In January 2000, our board of directors authorized the grant to Shlomo Eisenberg of options to purchase
up to an additional 9,000 Ordinary Shares and to Meir Lipshes options to purchase up to an additional
12,000 Ordinary Shares. The exercise price of these options is $20.25 per share. These options are
currently fully exercisable. Of the above options, 30,000 have been exercised by Shlomo Eisenberg,
and 40,000 have been exercised by Meir Lipshes. Out of Shlomo Eisenbergs remaining options,
12,000 expire on October 28, 2004 and 3,000 expire on January 31, 2005. Out of Meir Lipshes
remaining options, 16,000 expire on October 28, 2004, and 4,000 expire on January 31, 2005. These
option grants were approved by our shareholders in October 2000.

In November 2001, our board of directors authorized the grant of options to purchase up to an additional

15,000 Ordinary Shares to Shlomo Eisenberg, and options to purchase up to an additional 20,000
Ordinary
Shares to Meir Lipshes. Out of the 15,000 options granted to Shlomo Eisenberg, 12,000
options have
an exercise price of $19.00 per share, and 3,000 options have an exercise price of
$30.00 per share.
Out of the 20,000 options granted to Meir Lipshes, 16,000 options have an exercise
price of $19.00
per share, and 4,000 options have an exercise price of $30.00 per share. These
options are currently
fully exercisable. These options expire on November 9, 2005. These option
grants were approved by
our shareholders in October 2002.

57

---

---

C.            Board Practices.

Israeli Companies Law

We are subject to the provisions of the Israeli Companies Law, 5759-1999, and the regulations adopted
thereunder.

Board of Directors

The management of our business is vested in our board of directors, which may exercise all such powers
and do all such acts as we are authorized to exercise and do, and are not, by the provisions of our
articles of association or by law, required to be exercised or done by our shareholders. Our board
of directors may, in its discretion, cause our company to borrow or secure the payment of any sum
or sums of money for the purposes of our company, at such times and upon such terms and conditions
in all respects as it thinks fit, and, in particular, by the issuance of bonds, perpetual or redeemable
debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or
the whole or any part of the our property, both present and future, including its uncalled or called
but unpaid capital for the time being.

Our articles of association provide for a board of directors of not less than three and not more than
seven members. Each director is elected at the annual general meeting of shareholders and holds office
until the election of his successor at the next annual general meeting, except for external directors,
who hold office for three-year terms and may be re-elected by the shareholders for an additional
three-year term. Our officers serve at the discretion of the board of directors. There are no family
relationships among our directors and executive officers.

Alternate Directors

Our articles of association provide that any director may appoint, by written notice to the Company,
any individual, whether or not such person is then a member of the board of directors, to serve as
an alternate director. Any alternate director shall have all of the rights and obligations of the
director appointing him or her, except the power to appoint an alternate. The alternate director
may not act at any meeting at which the director appointing him or her is present. Such alternate
may act as the alternate for several directors and have the corresponding number of votes. Unless
the time period or scope of any such appointment is limited by the appointing director, such appointment
is effective for all purposes and for an indefinite time, but expires upon the expiration of the
appointing directors term. To our knowledge, no director currently intends to appoint any person
as an alternate director, except If the director is unable to attend a meeting of the board of directors.

External Directors

Qualifications of External Directors

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

58

---

---

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

The Companies Law defined the term office holder of a company to include a director, the
chief executive officer, the chief business manager, a vice president and any officer that reports
directly to the chief executive officer. No person can serve as an external director if the persons
position or other business creates, or may create, conflict of interests with the persons responsibilities
as an external director. Until the lapse of two years from termination of office, a company may not
engage an external director to serve as an office holder and cannot employ or receive services from
that person, either directly or indirectly, including through a corporation controlled by that person.

Election of External Directors

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

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

The initial term of an external director is three years and may be extended for an additional three
years. External directors may be removed from office only by the same percentage of shareholders
as is required for their election, or by a court, and then only if the external directors cease to
meet the statutory qualifications for their appointment or if they violate their duty of loyalty
to the company. Each committee of a companys board of directors is required to include at least
one external director. Rami Zivony commenced his term as an external director on August 11, 2003.
We have called an extraordinary general meeting of our shareholders, to be held on April 1, 2004,
to consider the election of Doron Zinger as our second external director.

An external director is entitled to compensation as shall be provided in regulations under the Companies
Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with service provided as an external director. We do not have, nor do our subsidiaries
have, any directors service contracts granting to the directors any benefits upon termination
of their employment.

Audit Committee

Under the Companies Law, our board of directors is required to appoint an audit committee, comprised
of at least three directors including all of the external directors, but excluding:

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

59

---

---

The role of the audit committee is to examine flaws in the business management of the company, in consultation
with the internal auditor and the companys independent accountants and suggest appropriate
course of action and to approve certain related-party transactions.

An audit committee may not approve a related-party transaction under the Companies Law, unless at the
time of approval the two external directors are serving as members of the audit committee and at
least one of whom was present at the meeting in which an approval was granted. Our audit committee
currently consists of two members, Rami Zivony, our external director, and Meir Dvir. If Mr. Zinger
is elected as our second external director at the upcoming extraordinary general meeting of our shareholders
scheduled for April 1, 2004, he will also serve as a member of our audit committee. Until our audit
committee will consist of two external directors, we are prohibited from taking actions that require
audit committee approval under the Companies Law. As a foreign private issuer, we received an exemption
from the listing requirements of Nasdaq relating to audit committees that were adopted in 2000, such
as the requirement to adopt an audit committee charter and that all three members of our audit committee
be independent directors under the Nasdaq definition.

Under the Companies Law, the board of directors must also appoint an internal auditor proposed by the
audit committee. The role of the internal auditor is to examine whether the companys actions
comply with the law, integrity and orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of the company, but may not be an interested party, an office holder or
a relative of any of the foregoing, nor may the internal auditor be the companys independent
accountant or its representative. Our internal auditor in accordance with the requirements of the
new Companies Law is Yardeni Gelfand & Co. C.P.A (ISR).

We have agreed to indemnify our office holders to the fullest extent permitted under Israeli law, but
up to a maximum aggregate amount for all indemnified office holders equal to 25% of our total shareholders
equity at the time of actual indemnification. We do not currently maintain directors and officers
liability insurance for the benefit of our office holders. In August 2003, our shareholders approved
the creation of an escrow account in the amount of up to $1 million for purposes of providing coverage
for a portion of our obligations to indemnify our office holders for legal expenses incurred by them,
the creation of a fixed charge on the escrow account in favor of our eligible officeholders, and,
in our discretion, the procurement by us of a directors and officers liability insurance policy with
an annual premium not to exceed $250,000. We have not set up the escrow account described above,
and we have not procured directors and officers liability insurance. Our management is currently
in the process of considering offers from providers of directors and officers liability insurance.

Fiduciary Duties of Office Holders

The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.

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

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

| |  | information
      on the advisability of a given action brought for his approval or performed
      by him by virtue of his position; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                          
| |  | all other
      important information pertaining to these  actions.                                                                      

60

---

---

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

| |  | refrain from
      any conflict of interest between the performance of his duties in the company
      and the performance of  his other duties or his personal affairs;            
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                     
| |  | refrain from
      any activity that is competitive with the company;                                                                                                               
| |   |                                                                                                                                                                                     
| |  | refrain from
      exploiting any business opportunity of the company to receive a personal
      gain for himself or others; and                                                   
| |   |                                                                                                                                                                                     
| |  | disclose
      to the company any information or documents relating to a companys
      affairs which the office holder has received due to his position as an office
      holder.

Under the Companies Law, the approval of the board of directors is required for all compensation arrangements
of office holders who are not directors. Under the Companies Law, directors compensation arrangements
require the approval of the audit committee, the board of directors and the shareholders, in that
order.

Related-Party Transactions

The Companies Law requires that an office holder of a company disclose to the company, promptly and
in any event no later than the board of directors meeting in which the transaction is first discussed,
any personal interest that he may have and all related material information known to him, in connection
with any existing or proposed transaction by the company. In the case of an extraordinary transaction,
the office holders duty to disclose applies also to a personal interest held by:

| |  | the office
      holders spouse, siblings, parents, grandparents, descendants, spouses
      descendants and the spouses of any of the these people; or                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                              
| |  | any corporation
      in which the office holder is a 5% or greater shareholder, director or general
      manager or in which the office holder has the right to appoint at least
      one director or the general manager.

Under Israeli law, an extraordinary transaction is a transaction:

| |  | other than
      in the ordinary course of business;                                                       
| | - | -----------------------------------------------------------------------------------------------------------
| |   |                                                                                                            
| |  | otherwise
      than on market terms; or                                                                   
| |   |                                                                                                            
| |  | that is likely
      to have a material impact on the companys profitability, assets or
      liabilities.

Under the Companies Law, once an office holder complies with the above disclosure requirement, the
board of directors may approve a transaction between the company and an office holder, or a third
party in which an office holder has a personal interest. A transaction that is adverse to the companys
interest may not be approved.

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

61

---

---

D.            Employees

We currently employ 649 full-time employees, including 491 in research and development and project
integration, 79 in sales and marketing and 79 in finance and administration. Competition for technical
personnel in the communications and computer industry is intense. Although we believe we have been
able to attract talented development and other support personnel, there is a large demand for highly
qualified technical personnel in Israel and competition is intense.

None of our employees are represented by a labor union and we have not experienced a work stoppage.
We believe our relationship with our employees is good and that our future success will depend on
a continuing ability to hire, assimilate and retain qualified employees.

Certain provisions of the collective bargaining agreements between the Histadrut, General Federation
of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists
Associations, are applicable to our employees by order of the Israeli Ministry of Labor and Welfare.
These provisions principally concern cost of living increases, recreation pay and other conditions
of employment. We generally provide our employees with benefits and working conditions above the
required minimums.

Israeli labor laws and regulations are applicable to all of our employees in Israel. The laws principally
concern matters such as paid annual vacation, paid sick days, the length of the workday, pay for
overtime, insurance for work-related accidents, severance pay and other conditions of employment.
Israeli law generally requires severance pay, which may be funded by managers insurance described
below, upon the retirement or death of an employee or termination of employment without cause as
defined in the law. These payments amount to approximately 8.3% of wages. Furthermore, Israeli employees
and employers are required to pay predetermined sums to the National Insurance Institute, which is
similar to the United States Social Security Administration. Since January 1, 1995, such amounts
also include payments for national health insurance. The payments to the National Insurance Institute
are approximately 14.5% of wages up to a specified amount, of which the employee contributes approximately
66% and the employer contributes approximately 34%.

Although not legally required, we regularly contribute to a managers insurance fund on behalf
of our employees. This fund provides employees with a lump sum payment upon retirement or severance
pay, if legally entitled, upon termination of employment. Each employee who agrees to participate
in the managers insurance plan contributes an amount equal to 5.0% of such employees
salary and the employer contributes an average of approximately 6.1% of such salary.

E.             Share Ownership

None of our directors or members of senior management hold, individually, 1% or more of our ordinary
shares or options to purchase our ordinary shares.

As of March 15, 2004, Team Software Industries Ltd., a wholly-owned subsidiary of Team Computers and
Systems Ltd. owned 5,962,550 of our ordinary shares. As of March 15, 2004, Shlomo Eisenberg, Chairman
of our board of directors, owned approximately 14.4% of Team Computers directly; Arad Investments
and Industrial Development Ltd., of which Mr. Eisenberg is a member of the controlling group of shareholders
and Chairman of Arads board of directors, owned approximately 56.5% of Team Computers
shares. As of March 15, 2004, Meir Lipshes, a member of our board of directors and our Chief Executive
Officer, owned approximately 8.3% of Team Computers shares. Shlomo Eisenberg and Meir Lipshes
are members of our board of directors and of the board of directors of Team Software and Team Computers,
and therefore, may be deemed to beneficially own the ordinary shares owned by Team Software in us.
Messrs. Eisenberg and Lipshes disclaim any beneficial interest in the ordinary shares owned by Team
Software in us.

62

---

---

Options to Purchase Our Ordinary Shares

In 1995, 1996, 1999, 2000 and 2001our board of directors adopted employee share option plans. We have
reserved 2,325,515 ordinary shares for issuance upon the exercise of options granted and to be granted
to certain of our directors and key employees under our employee share option plans. Our board of
directors is empowered, among other things, to designate the optionees, dates of grant and the exercise
price of options. Unless otherwise decided by our board of directors or a committee of our board
of directors, the options will vest over a four-year period, and will be non-assignable except by
the laws of descent. Under the share option plans, the grantee is responsible for all personal tax
consequences of the grant and the exercise thereof.

Under our employee share option plans, as of March 15, 2004, we had granted options to purchase an
aggregate of 2,211,533 ordinary shares to certain of our employees and directors, at exercise prices
ranging from $0.66 to $30 per ordinary share. As of March 15, 2004, 1,572,608 of such options had
been exercised, 258,093 of these options were forfeited or expired and 380,832 of these options remain
outstanding. As of March 15, 2004, options to purchase 374,832 of such shares were exercisable, and
372,075 shares remained available for issuance upon the exercise of options to be granted under our
share option plans. The following table sets forth the dates of expiration for the options granted
under the share option plans and not yet exercised, excluding options granted to Shlomo Eisenberg
and Meir Lipshes:

As of March 15, 2004:

|           | Number of Options |  | Expiration
      Date 
|---------- | ----------------- |  | ----------------------
|           | 91,666            |  | October
      28, 2004
|           | 61,333            |  | October 31,
      2004
|           | 55,833            |  | January 31,
      2005
|           | 12,000            |  | April 5,
      2005   
|           | 30,667            |  | October 31,
      2005
|           | 53,333            |  | November
      9, 2005
|           | 6,000             |  | April 5,
      2006   
|           |                   |  |                       
|**Total:** | 310,832           |  |                       
|           |                   |  |                       

In October 1999, our board of directors authorized the grant to Shlomo Eisenberg of options to purchase

18,000 Ordinary Shares at an exercise price of $10.50 per share, and 18,000 Ordinary Shares at
an
exercise price of $12.875 per share, and the grant to Meir Lipshes of options to purchase 24,000

Ordinary Shares at an exercise price of $10.50 per share and 24,000 Ordinary Shares at an exercise

price of $12.875 per share. These options are currently fully exercisable.

In January 2000, our board of directors authorized the grant to Shlomo Eisenberg of options to purchase
up to an additional 9,000 Ordinary Shares and to Meir Lipshes options to purchase up to an additional
12,000 Ordinary Shares. The exercise price of these options is $20.25 per share. These options are
currently fully exercisable. Of the above options, 30,000 have been exercised by Shlomo Eisenberg,
and 40,000 have been exercised by Meir Lipshes. Out of Shlomo Eisenbergs remaining options,
12,000 expire on October 28, 2004 and 3,000 expire on January 31, 2005. Out of Meir Lipshes
remaining options, 16,000 expire on October 28, 2004, and 4,000 expire on January 31, 2005. These
option grants were approved by our shareholders in October 2000.

63

---

---

In November 2001, our board of directors authorized the grant of options to purchase up to an additional

15,000 Ordinary Shares to Shlomo Eisenberg, and options to purchase up to an additional 20,000
Ordinary
Shares to Meir Lipshes. Out of the 15,000 options granted to Shlomo Eisenberg, 12,000
options have
an exercise price of $19.00 per share, and 3,000 options have an exercise price of
$30.00 per share.
Out of the 20,000 options granted to Meir Lipshes, 16,000 options have an exercise
price of $19.00
per share, and 4,000 options have an exercise price of $30.00 per share. These
options are currently
fully exercisable. These options expire on November 9, 2005. These option
grants were approved by
our shareholders in October 2002.

In 2000 we adopted an employee stock purchase plan. During 2001, we issued 11,779 ordinary shares to
employees under this plan. This plan is no longer in effect.

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.            Major Shareholders

Set forth below is information
  concerning our shareholders that are the beneficial owners of 5% or more of
  our outstanding ordinary shares as of March 15, 2004.

|Number
      of ordinary
      shares held                  | Percentage
      of our
      outstanding
      ordinary shares(1)
|----------------------------------------------------------- | ------------------------------------------------------------------
|Team Software
      Industries Ltd.(2)                      | 5,962,550                                                         
|Fidelity
      Management & Research Company (3)            | 1,175,000                                                         
|All directors
      and executive officers as a group(4)(5) | 6,177,652                                                         

| | (1) | Based on 11,872,052 ordinary shares outstanding as of March 15, 2004. Ordinary shares deemed beneficially
owned by virtue of the right of any person or group to acquire such ordinary shares within 60 days
are treated as outstanding only for purposes of determining the percent owned by such person or group.                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (2) | Team Software is a wholly-owned subsidiary of Team Computers and Systems Ltd. Team Computers, an Israeli
company whose shares are publicly traded on the Tel Aviv Stock Exchange, is a large computer vendor
in Israel. The principal shareholder of Team Computers is Arad Investments and Industrial Development
Ltd., an Israeli company, whose shares are publicly traded on the Tel Aviv Stock Exchange, which,
as of March 15, 2004, owned approximately 56.5% of Team Computers  shares. Team Softwares
and Team Computers address is 7 Martin Gehl Street, Kiryat Aryeh, Petach Tikva, Israel, 49512.                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (3) | Based on information provided by FMR Corp. in its report on Schedule 13G filed with the SEC on February
14, 2004. Fidelity Management & Research Company, or Fidelity, is a wholly-owned subsidiary of  FMR
Corp., and acts as an investment adviser to various investment companies. The ownership of one investment
company, Fidelity Low Priced Stock Fund, amounted to 1,165,000 of such shares or 9.913% of our outstanding
shares as of the date of the filing. Edward C. Johnson 3d and FMR Corp., through their control of
Fidelity, each have sole power to dispose of the 1,175,000 shares owned by Fidelity. Members of the
Edward C. Johnson 3d family hold 49% of the voting power of FMR Corp.

64

---

---

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | Includes
      5,962,550 ordinary shares owned by Team Software. As of March 15, 2004,
      Shlomo Eisenberg, Chairman of our board of directors, owned approximately
      14.4% of Team Computers shares directly; Arad, of which Mr. Eisenberg
      is a member of the controlling group of shareholders and Chairman of the
      board of directors, owned approximately 56.5% of Team Computers shares;
      and Meir Lipshes, a member of our board of directors and our Chief Executive
      Officer, owned approximately 8.3% of Team Computers shares. Shlomo
      Eisenberg and Meir Lipshes are directors of each of Team Software, Team
      Computers and us, and therefore may be deemed to beneficially own the ordinary
      shares owned by Team Software. Messrs. Eisenberg and Lipshes disclaim any
      beneficial interest in our ordinary shares owned by Team Software.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (5) | Includes
      182,001ordinary shares issuable upon the exercise of currently-exercisable
      options granted to directors and executive officers under our employee share
      option plans (of which options to purchase an aggregate of 70,000 ordinary
      shares are held by Shlomo Eisenberg and Meir Lipshes), and 28,101 ordinary
      shares held by Shlomo Eisenberg, as a result of exercise of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Our major shareholders do not have different voting rights.

On February 7, 2003, Team Software commenced a tender offer to purchase 650,000 of our Ordinary Shares
at the price of $6.00 per share. On March 17, 2003, Team Software accepted 650,000 ordinary shares
under the tender offer. Prior to the tender offer, Team Software held 5,312,550 of our ordinary shares,
representing 44.75% of our issued and outstanding ordinary shares. Following completion of the tender
offer, Team Software holds 5,962,550 of our ordinary shares, representing 50.22% of our issued and
outstanding ordinary shares.

As of March 15, 2004, there were approximately 22 record holders of our ordinary shares, of which 16
were record holders with mailing addresses in the United States owning an aggregate of approximately
55.6% of our outstanding shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial
holders are resident since many of these ordinary shares were held of record by brokers or other
nominees.

B.            Related Party Transactions

Sale of Products; Services

Since the commencement of our operations in 1992, Team Computers has from time to time paid us commissions
in respect of the sale by us of certain products represented and sold by Team Computers. This relationship
is reflected in an agreement between us and Team Computers dated October 1996. Team Computers generally
pays us a commission at the rate of 15% of the sales price of these products, up to a maximum of
50% of the amount received by Team Computers from these sales less the cost to Team Computers. We
recorded commissions of approximately $520,000 in 2002 and $157,000 in 2003.

In addition, Team Computers provides us certain administrative services, including computer servicing,
salary administration, automotive fleet maintenance, legal counsel and basic insurance coverage,
and we reimburse Team Computers for the actual cost of such services. We recorded expenses for such
services of $636,000 in 2001 $583,000 in 2002 and $503,000 in 2003. We and Team Computers have agreed
to indemnify each other for liabilities resulting from the acts or omissions of their respective
employees constituting intellectual property violations. The agreement is automatically renewed for
successive terms of one year on each December 31, and can be terminated by either party at the end
of any such term upon at least 60 days prior written notice.

65

---

---

Since 1992, we have also purchased fixed assets, such as computer hardware, from Team Computers and
Omnitek-Eichut Ltd. (Omnitek-Eichut), a subsidiary of Team Computers. We pay Team Computers
and Omnitek-Eichut prices for these assets that are no less favorable to us than those we could obtain
from unrelated third parties. The payments made by us to Team Computers and Omnitek-Eichut in respect
of such asset purchases were, in the aggregate, approximately $2.0 million in 2001, $884,000 in 2002
and $711,000 in 2003.

In addition, Team Computers supplies us with hardware, software related to such hardware and support
services for such hardware for our customer projects in accordance with the agreement referred to
above. Under the agreement between us and Team Computers, we are required to pay for such hardware,
related software and support services when we receive payment from our customers. A disagreement
arose between us and Team Computers regarding whether we are required to pay Team Computers for hardware
and related software that it supplied to three of our major customers as part of projects for which
we receive payments based on milestones which do not allocate specific amounts for hardware and related
software. Following negotiations to achieve a compromise with Team Computers on this issue, we agreed
to pay Team Computers the amount of $1,047,000 in respect of hardware and related software supplied
by Team Computers as part of our projects for these customers. We also agreed that, when and if we
will receive additional payments for these projects, we are required to pay Team Computers an additional
payment based on Team Computers pro rata share of the project, up to a maximum additional amount
of $563,000.In 2003, we paid the additional amount of $272,000 to Team Computers in respect of these
projects. Please see the information about this customer set forth below under the heading Item
8A  Legal Proceedings.  On March 23, 2003, we executed a written agreement
reflecting our understanding with Team Computers. This agreement was approved by our audit committee
on June 23, 2003, by our board of directors on June 29, 2003, and by our shareholders on August 11, 2003.

Registration Rights

Team Software has registration rights with respect to an aggregate of 4,625,000 of our ordinary shares.
We have agreed that, at the request of Team Software, but on no more than two occasions, we will
file a registration statement under the Securities Act of 1933, as amended, for an offering of those
shares as to which registration is requested. In addition, if we otherwise propose to register any
of our ordinary shares under the Securities Act, we shall include in such registration Team Softwares
shares, subject to certain limitations. All fees and expenses incurred in connection with any registration
will be borne by us, except that Team Software will pay all fees and expenses of its own counsel
and all underwriting discounts and commissions relating to Team Softwares shares.

Leased Facilities

Since February 1998, we have leased our principal facilities in Petach Tikva, Israel from Team Computers
pursuant to a lease agreement dated February 1, 1998. Aggregate payments under this lease, which
amount includes rent, maintenance and additional related expenses, were approximately $1.3 million
during 2002 and $1.4 million during 2003. We exercised our option to extend the lease until August
31, 2007.

Since we became a tenant of Team Computers, Team Computers has performed various internal construction
projects on our behalf, adapting our premises to our requirements. These construction projects were
performed on a cost only basis. On September 2, 2002, we and Team Computers amended the lease, such
that, among other things, the space leased by us was expanded by an additional 2,800 square meters,
for a total of approximately 5,830 square meters. The amendment was approved by our shareholders
on October 24, 2002.

66

---

---

Compensation to Directors

Options

In October 1999, our board of directors authorized the grant to Shlomo Eisenberg of options to purchase
18,000 ordinary shares at an exercise price of $10.50 per share, and 18,000 ordinary shares at an
exercise price of $12.875 per share, and the grant to Meir Lipshes of options to purchase 24,000
ordinary shares at an exercise price of $10.50 per share and 24,000 ordinary shares at an exercise
price of $12.875 per share. These options are currently fully exercisable.

In January 2000, our board of directors authorized the grant to Shlomo Eisenberg of options to purchase
up to an additional 9,000 ordinary shares and to Meir Lipshes options to purchase up to an additional
12,000 ordinary shares. The exercise price of these options is $20.25 per share. These options are
currently fully exercisable. Of the above options, 30,000 have been exercised by Shlomo Eisenberg,
and 40,000 have been exercised by Meir Lipshes. Out of Shlomo Eisenbergs remaining options,
12,000 expire on October 28, 2004 and 3,000 expire on January 31, 2005. Out of Meir Lipshes
remaining options, 16,000 expire on October 28, 2004, and 4,000 expire on January 31, 2005. These
option grants were approved by our shareholders in October 2000.

In November 2001, our board of directors authorized the grant of options to purchase up to an additional
15,000 ordinary shares to Shlomo Eisenberg, and options to purchase up to an additional 20,000 ordinary
shares to Meir Lipshes. Out of the 15,000 options granted to Shlomo Eisenberg, 12,000 options have
an exercise price of $19.00 per share, and 3,000 options have an exercise price of $30.00 per share.
Out of the 20,000 options granted to Meir Lipshes, 16,000 options have an exercise price of $19.00
per share, and 4,000 options have an exercise price of $30.00 per share. These options are currently
fully exercisable. These options expire on November 9, 2005. These option grants were approved by
our shareholders in October 2002.

Management Fees and Bonuses

We undertook to pay monthly management fees of NIS 30,000 to Shlomo Eisenberg, and NIS 60,000 to Meir
Lipshes. These amounts are linked to the Israeli Consumer Price Index and are updated every month
according to this Index. As of December 31, 2003, we paid monthly management fees of NIS 31,938 ($7,293
according to the exchange rate prevailing on December 31, 2003) to Shlomo Eisenberg, and NIS 63,876
($14,587 according to the exchange rate prevailing on December 31, 2002) to Meir Lipshes.

During 2001, we paid a bonus to Meir Lipshes of NIS 400,000 ($84,442 according to the exchange rate
prevailing on December 31, 2002) in respect of his performance during 2000. The payment of this bonus
was approved by our shareholders in October 2000.

During January 2003, we paid a bonus to Meir Lipshes of NIS 300,000 ($62,500 according to the exchange
rate prevailing on January 31, 2003) in respect of his performance during 2001, and during November
2002, the Company paid a bonus to Shlomo Eisenberg of NIS 150,000 ($34,254 according to the exchange
rate prevailing on December 31, 2003) in respect of his performance during 2001. These bonuses were
approved by our shareholders in October 2002.

67

---

---

C.            Interests of Experts and Counsel

Not applicable.

Item 8. FINANCIAL INFORMATION

A.            Consolidated Statements and Other
Financial Information

Financial Statements

See Item 18.

Legal Proceedings

On November 13, 2002, we received a letter from a major customer notifying us of the termination of
its agreement with us dated January 30, 2002, for the supply by us of a Manager of Managers system
(MoM), and its intention to call the performance bond issued by a bank on our behalf
under the agreement. We believe that this customer terminated the agreement unlawfully, and in violation
of the termination provisions set out in the agreement.

We filed a court application on November 18, 2002, requesting an injunction to prevent the customer
from calling the bond. During the hearings on this matter, the customer asserted that it was entitled
to terminate the agreement as a result of our failure to deliver specific functionalities of the
MoM by the milestone dates set out in the agreement. In response, we asserted that the milestone
dates were varied by the agreement of the parties, that we substantially met the revised milestone
dates, and to the extent that there was any failure to do so, any delay was caused by the customer.

On January 23, 2003 an order was issued denying our request for an injunction, on a number of grounds,
including that our submissions were fact based and related to the merits of the termination and not
the procedural validity of the termination or the conformity of the written notice with the requirements
of the agreement. For that (and other) reasons, the Judge held that our submissions were not capable
of supporting an application to restrain a call on the bond. Thereafter an amount representing the
amount of the bond, approximately £1 million, was paid to the customer out of monies previously
paid into court as security by us. Under the circumstances, the bond did not need to be (and was
not) called by the customer.

Because we believe that the termination of the agreement was unlawful, court proceedings were commenced
(as part of the injunction proceedings) claiming damages for the customers wrongful repudiation
of the agreement. During the course of the hearings regarding our application for an injunction,
the customer indicated that it intends to bring a substantial counterclaim (which, in
the context of the agreement, could run to several millions of British pounds) against us for our
alleged failure to complete the supply of the MoM. The customer has of yet provided no details of
its grounds for this counterclaim.

Our management believes, in light of the facts surrounding our relationship with this customer, and
following consultations with legal counsel, that we have reasonably good prospects of establishing
that the customer was not entitled to terminate the agreement and by its conduct repudiated the agreement.
We cannot currently quantify the amount of damages that it would receive if it were to succeed in
a lawsuit against the customer, and we cannot estimate the amount of damages that could be sought
by the customer in a potential counterclaim. We are currently considering our options with respect
to the best manner in which to pursue damages from this customer.

In 2002, we also signed an agreement for a similar project with an affiliate of the customer referred
to above. Following a dispute that arose between us and such affiliate, a settlement agreement was
signed in the beginning of 2004. Pursuant to the settlement agreement, the parties agreed to terminate
the agreement with such customer, we refunded the amount of £100,000 to this customer, and the
parties waived all claims against each other in connection with the agreement.

68

---

---

In 2002, we recorded trade and unbilled receivables in the amount of $10.3 million as due
from these customers. Due to the letter of termination received from the first customer and our managements
concerns about termination by the second customer, as described above, in 2002 we classified the
amount of $2.9 million as long-term trade and unbilled receivables, which represents
the amount whose collection is probable, in our managements opinion. As of December 31, 2003,
this amount is $3.1 million due to the devaluation of the United States dollar against the British
Pound.

The balance, in the amount of $7.4 million was recorded in 2002 as allowance for doubtful accounts.

B.            Significant Changes

No significant change has occurred since December 31, 2003, except as otherwise disclosed in this annual
report.

Item 9. THE OFFER AND LISTING

A.            Offer and Listing Details

Our ordinary shares have
  been traded on the Nasdaq National Market under the symbol TTIL
  since our initial public offering on December 4, 1996. The following tables
  set forth, for the periods indicated, the high and low closing prices of our
  ordinary shares, as reported by the Nasdaq National Market.

|                                          | High | Low  
|----------------------------------------- | ---- | -----
|**1998:**                                 |      |      
|Full
      Year                           | $    | 9.188
|                                         
|**1999:**                                
|Full
      Year                           | $    | 23.00
|                                         
|**2000:**                                
|Full
      Year                           | $    | 50.75
|                                         
|**2001:**                                
|Full
      Year                           | $    | 26.84
|**2002:**                                
|Full
      Year                           | $    | 34.50
|First
      Quarter                       |      | 34.50
|Second
      Quarter                      |      | 29.03
|Third
      Quarter                       |      | 15.46
|Fourth
      Quarter                      |      | 7.73 
|                                         
|**2003:**                                
|Full Year                                 | $    | 6.65 
|First Quarter                             |      | 5.97 
|Second Quarter                            |      | 5.80 
|Third Quarter                             |      | 6.25 
|Fourth Quarter                            |      | 6.65 
|                                         
|**Most
      Recent Six Months:**        
|March
      2004 (through March 15, 2004) | $    | 6.00 
|February
      2004                       |      | 6.36 
|January
      2004                        |      | 6.35 
|December
      2003                       |      | 5.42 
|November
      2003                       |      | 6.65 
|October
      2003                        |      | 5.84 

69

---

---

On
March 15, 2003, the last reported sale price of our ordinary shares on the Nasdaq National Market
was $5.73 per share.

B.            Plan of Distribution

Not applicable.

C.            Markets

Our ordinary shares are quoted on the Nasdaq National Market under the symbol TTIL.

D.            Selling Shareholders

Not applicable.

E.             Dilution

Not applicable.

F.             Expenses of the Issue

Not applicable.

Item 10. ADDITIONAL INFORMATION

A.            Share Capital

Not applicable.

B.            Memorandum and Articles of Association

Our memorandum of association and articles of association were amended in October 2000. The following
is a summary description of certain provisions of our amended memorandum of association and articles
of association, and certain relevant provisions of the Israel Companies Law which apply to us:

70

---

---

Objects and Purposes

We were first registered by the Israeli Registrar of Companies on February 5, 1990, as a private company.
On November 17, 1996, we became a public company.

Section 2 of our memorandum of association attached as an exhibit to this annual report includes a
comprehensive list of our objects and purposes of the Company. Among these objects and purposes are
the following: to engage in the field of computer software as a software house in the design, development,
conversion, manufacturing, marketing, enhancement, sale and manufacture of software; to organize,
promote, and establish investment and financial services; to form all kinds of companies; to acquire
shares in companies who have a business similar to ours; to purchase or otherwise own assets; and
to fulfill any other objects any place in the world.

Directors

According to the our articles of association, our board of directors is to consist of not less than
three and not more than seven directors, such number to be determined by a resolution of our shareholders.

Election of Directors

Directors, other than external directors, are elected by our shareholders at our annual general meeting
of shareholders, or by our board of directors. In the event that any directors are appointed by our
board of directors, their appointment is required to be ratified by the shareholders at the next
shareholders meeting following the appointment. Our shareholders may remove a director from
office under certain circumstances. There is no requirement that a director own any of our shares.
Directors may appoint alternate directors in their stead.

Remuneration of Directors

Directors remuneration is subject to shareholders approval, except for reimbursement of reasonable
expenses incurred in connection with carrying out the directors duties.

Powers of the Board of Directors

Our board of directors may resolve to take action by a resolution approved by a vote of at least a
majority of the directors present at a meeting in which a quorum is constituted. A quorum at a meeting
of our board of directors requires the presence of at least a majority of the directors then in office
who are lawfully entitled to participate in the meeting, but in any event, shall not be less than
two directors. Our board of directors may elect one director to serve as the Chairman of the board
of directors to preside at the meetings of the board of directors, and may also remove such director.

Dividends

Our board of directors may from time to time declare and cause the payment of dividends as it views
justified. Dividends may be paid in assets or shares, debentures, or debentures stock of our company
or of other companies. Our board of directors may decide to distribute our profits among our shareholders.
Dividends that remain unclaimed after seven years will be forfeited and returned to our company.
Unless there are shareholders with special dividend rights, any dividend declared will be distributed
among our shareholders in proportion to their respective holdings of our shares for which the dividend
is being declared.

71

---

---

Redeemable Shares

Our articles of association allow us to create redeemable shares, but at the present time, we do not
have any redeemable shares.

Changing the Rights Attached to Shares

We may only change the rights of shares with the approval of a majority of the holders of that class
of shares present and voting at the separate general meeting called for that class of shares. An
enlargement of a class of shares is not considered changing the rights of such class of shares.

Shareholders Meetings

We have two types of shareholders meetings: the annual general meetings and extraordinary general meetings.
An annual general meeting must be held once in every calendar year, but not more than 15 months after
the last annual general meeting. Our board of directors may convene an extraordinary general meeting
whenever it sees fit, at any place within or outside of the State of Israel.

A quorum in a general meeting consists of two or more holders of ordinary shares, present in person
or by proxy, who hold together at least a majority of the voting power of our company. If there is
no quorum within an hour of the time set, the meeting is postponed until the following week, or any
other time that the chairman of the board of directors and the shareholders present agree to. At
the postponed meeting, any two shareholders will constitute a quorum. Every ordinary share entitles
the holder thereof to one vote. A shareholder may only vote the shares for which all calls have been
paid up on, except in separate general meetings of a particular class. A shareholder may vote in
person or by proxy, or if the shareholder is a corporate body, by its representative.

Duties of Shareholders

Under the Companies Law, the disclosure requirements which apply to an office holder also apply to
a controlling shareholder of a public company. A controlling shareholder is a shareholder who has
the ability to direct the activities of a company, including a shareholder that holds 25% or more
of the voting rights if no other shareholder owns more than 50% of the voting rights in the company,
but excluding a shareholder whose power derives solely from his or her position as a director of
the company or any other position with the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and the engagement of
a controlling shareholder as an office holder or employee, require the approval of the audit committee,
the board of directors and the shareholders of the company, in that order. The shareholder approval
must be by a majority vote, provided that either:

| |  | at least
      one-third of the shares of shareholders who have no personal interest in
      the transaction and are present and voting, in person, by proxy or by written
      ballot, at the meeting, vote in favor; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                            
| |  | the shareholders
      who have no personal interest in the transaction who vote against the transaction
      do not represent more than one percent of the voting rights in the company.                                 

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

72

---

---

Exculpation, Insurance and Indemnification of Office Holders

Exculpation of Office Holders

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

Insurance of Office Holders

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

| |  | a breach
      of his duty of care to us or to another person;                                                                                                                                    
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                   
| |  | a breach
      of his duty of loyalty to us, provided that the office holder acted in good
      faith and had reasonable cause to assume that his act would not prejudice
      our interests; or
| |   |                                                                                                                                                                                                   
| |  | a financial
      liability imposed upon him in favor of another person.                                                                                                                          

Indemnification of Office Holders

Our articles of association provide that we may indemnify an office holder with respect to an act performed
in his capacity of an office holder against:

| |  | a financial
      liability imposed on him in favor of another person by any judgment, including
      a settlement or an arbitration  award approved by a court; and                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | reasonable
      litigation expenses, including attorneys fees, expended by the office
      holder or charged to him by a court, in proceedings we institute against
      him or instituted on our behalf or by another person, a criminal charge
      from which he was acquitted, or a criminal charge in which he was convicted
      for a criminal offense that does not require proof of criminal intent.

Our articles of association also include provisions:

| |  | authorizing
      us to grant in advance an undertaking to indemnify an office holder, provided
      that the undertaking is limited to types of events which our board of directors
      deems to be anticipated at the time of the undertaking and limited to an
      amount determined by our board of directors to be reasonable under the circumstances;
      and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                           
| |  | authorizing
      us to retroactively indemnify an office holder.                                                                                                                                                                                                                                                                                                         

73

---

---

Limitations on Exculpation, Insurance and Indemnification

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

| |  | a breach
      by the office holder of his duty of loyalty, unless, with respect to insurance
      coverage, the office holder acted in good faith and had a reasonable basis
      to believe that the act would not prejudice the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                              
| |  | a breach
      by the office holder of his duty of care if the breach was done intentionally
      or recklessly;                                                                                                                            
| |   |                                                                                                                                                                                                                                              
| |  | any act or
      omission done with the intent to derive an illegal personal benefit; or                                                                                                                                                     
| |   |                                                                                                                                                                                                                                              
| |  | any fine
      levied against the office holder.                                                                                                                                                                                             

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

Mergers and Acquisitions under Israeli Law

The Companies Law includes provisions that allow a merger transaction and requires that each company
that is a party to a merger have the transaction approved by its board of directors and a vote of
the majority of its shares, at a shareholders meeting called on at least 21 days prior
notice. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not
be deemed approved if a majority of the shares held by parties other than the other party to the
merger, or by any person who holds 25% or more of the shares or the right to appoint 25% or more
of the directors of the other party, vote against the merger. Upon the request of a creditor of either
party to the proposed merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that as a result of the merger, the surviving company will be unable
to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be
completed unless at least 70 days have passed from the time that a proposal of the merger has been
filed with the Israeli Registrar of Companies by each merging company.

The Companies Law also provides that an acquisition of shares of a public company must be made by means
of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder
of the company and there is no existing 25% or greater shareholder in the company. An acquisition
of shares in a public company must be made by means of a tender offer if as a result of the acquisition
the purchaser would become a 45% or greater shareholder of the company and there is no existing majority
shareholder of the company. If following any acquisition of shares, the acquirer will hold more than
90% of a companys shares, the acquisition may not be made other than through a tender offer
for all of the shares of such class. If more than 95% of the outstanding shares are tendered in the
tender offer, all the shares that the acquirer offered to purchase will be transferred to it. However,
the remaining minority shareholders may seek to alter the consideration by court order.

Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign
company less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances,
subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation
prior to the sale of the shares received in such stock-for-stock swap.

74

---

---

C.            Material Contracts

For a description of the agreements we have entered into with Team Computers, please refer to Item
7B  Related Party Transactions.

D.            Exchange Controls

There are currently no Israeli currency control restrictions on payments of dividends or other distributions
with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation
of Israeli residents to file reports with the Bank of Israel regarding some transactions. However,
legislation remains in effect under which currency controls can be imposed by administrative action
at any time.

The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens
of countries which are in a state of war with Israel, is not restricted in any way by our memorandum
of association or articles of association or by the laws of the State of Israel.

E.             Taxation

The following is a general summary only and should not be considered as income tax advice or relied
upon for tax planning purposes. Holders of our ordinary shares should consult their own tax advisors
as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition
of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.

U.S. TAX CONSIDERATIONS REGARDING SHARES ACQUIRED BY U.S. TAXPAYERS

Subject to the limitations described in the next paragraph, the following discussion describes the
material United States federal income tax consequences to a U.S. holder arising from the purchase,
ownership and disposition of our ordinary shares. A U.S. holder is a holder of ordinary shares that
is:  (1) an individual citizen or resident of the United States, (2) a corporation created
or organized under the laws of the United States or any political subdivision thereof, or (3) an
estate, the income of which is includable in gross income for United States federal income tax purposes
regardless of its source, (4) a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust, and one or more U.S. persons have the authority
to control all substantial decisions of the trust, or (5) a trust that has a valid election
in effect to be treated as a U.S. person. This summary is for general information purposes only and
does not purport to be a comprehensive description of all of the federal income tax considerations
that may be relevant to a decision to purchase ordinary shares. This summary generally considers
only U.S. holders that will own ordinary shares as capital assets. Except to the limited extent discussed
herein, this summary does not consider the United States tax consequences to a person that is not
a U.S. holder, nor does it describe the rules applicable to determine a taxpayers status as a U.S. holder.

This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, current
and proposed Treasury regulations promulgated thereunder, and administrative and judicial interpretations
thereof, all as in effect on the date hereof and all of which are subject to change, possibly on
a retroactive basis. This discussion does not address all aspects of United States federal income
taxation that may be relevant to any particular shareholder based on such shareholders particular
circumstances. In particular, this discussion does not address the tax treatment of U.S. holders
who are broker-dealers or who own, directly, indirectly or constructively, 10% or more of our outstanding
voting stock, U.S. holders holding the ordinary shares as a hedge or as part of a hedging, straddle
or conversion transaction, and certain U.S. holders, including, without limitation, insurance companies,
tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax
who may be subject to special rules not discussed below. Additionally, the tax treatment of persons
who hold ordinary shares through a partnership or other pass-through entity is not considered, nor
is the application of United States federal gift or estate taxes or any aspect of state, local or
non-United States tax laws considered. Each prospective investor is advised to consult such persons
own tax advisor with respect to the specific United States federal income tax consequences to such
person of purchasing, holding or disposing of the ordinary shares.

75

---

---

Distributions on Ordinary Shares

We have never paid cash dividends on our ordinary shares, and we do not intend to pay cash dividends
in the foreseeable future. In the event that we do pay dividends, and subject to the discussion under
the headings Passive Foreign Investment Companies and Foreign Personal
Holding Company below, a U.S. holder will be required to include in gross income as ordinary
income the amount of any distribution paid on ordinary shares on the date the distribution to the
extent that such distribution does not exceed our current and accumulated earnings and profits, as
determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings
and profits will be treated first as a non-taxable return of capital, reducing the U.S. holders
tax basis for the ordinary shares to the extent thereof, and then as capital gain. Preferential tax
rates for long-term capital gains are applicable for U.S. holders that are individuals, estates or
trusts. Corporate holders generally will not be allowed a deduction for dividends received.

The amount of a distribution with respect to our ordinary shares will be measured by the amount of
fair market value of any property distributed, and for U.S. federal income tax purposes, the amount
of any Israeli taxes withheld therefrom. Cash distributions paid by us in NIS will be included in
the income of U.S. holders at a U.S. dollar amount based upon the spot rate of exchange in effect
on the date the dividend is includible in the income of the U.S. holder, and U.S. holders will have
a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If
the U.S. holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS
arising from exchange rate fluctuations will be U.S. source ordinary exchange income or loss.

Distributions paid by us will generally be foreign source passive income for U.S. foreign tax credit
purposes. Subject to limiting rules set forth in the Internal Revenue Code, U.S. holders may elect
to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld
from distributions received in respect of ordinary shares. One such rule generally limits the amount
of allowable foreign tax credits in any year to the amount of regular U.S. tax liability for the
year attributable to foreign taxable income. This limitation on foreign taxes eligible for the foreign
tax credit is calculated separately with respect to specific classes of income. Also, this limitation
on the use of foreign tax credits generally will not apply to an electing individual U.S. holder
whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such
individuals gross income for the tax year from non-U.S. sources consists solely of certain
passive income. A U.S. holder will be denied a foreign tax credit with respect to Israeli income
tax withheld from dividends received with respect to the ordinary shares if such U.S. holder has
not held the ordinary shares for at least 16 days out of the 30-day period beginning on the date
that is 15 days before the ex-dividend date or to the extent that such U.S. holder is under an obligation
to make certain related payments with respect to substantially similar or related property. Any day
during which a U.S. holder has substantially diminished its risk of loss with respect to the ordinary
shares will not count toward meeting the 16-day holding period referred to above. A U.S. holder may
also be denied a foreign tax credit if the U.S. holder holds ordinary shares in an arrangement in
which the U.S. holders reasonably expected economic profit is insubstantial compared to the
foreign taxes expected to be paid or accrued. The rules relating to the determination of the foreign
tax credit are complex, and U.S. holders should consult their own tax advisors to determine whether
and to what extent they would be entitled to such credit. U.S. holders that do not elect to claim
a foreign tax credit may instead claim a deduction for Israeli income tax withheld, provided such holders itemize their deductions.

76

---

---

Disposition of Shares

Except as provided under the passive foreign investment company or foreign personal holding company
rules, upon the sale, exchange or other disposition of ordinary shares, a U.S. holder generally will
recognize capital gain or loss in an amount equal to the difference between such U.S. holders
tax basis for the ordinary shares and the amount realized on the disposition (or its U.S. dollar
equivalent, determined by reference to the spot rate of exchange on the date of disposition, if the
amount realized is denominated in a foreign currency). The gain or loss realized on the sale, exchange
or other disposition of ordinary shares will be long-term capital gain or loss if the U.S. holder
has a holding period of more than one year at the time of disposition.

Gain realized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally
will be treated as United States source income for United States foreign tax credit purposes. A loss
realized by a U.S. holder on the sale, exchange or other disposition of ordinary shares is generally
allocated to U.S. source income. However, these rules require the loss to be allocated to foreign
source income to the extent certain dividends were received by the taxpayer within the 24-month period
preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized
on the sale, exchange or other disposition of ordinary shares is subject to limitations.

Passive Foreign Investment Companies

We would be a passive foreign investment company, or PFIC, if:

| |  | 75% or more
      of our gross income, including the pro rata share of our gross income for
      any company, United States or foreign, in which we are considered to own
      25% or more of the shares by value, in a taxable year is passive income;
      or                                                                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | at least
      50% of the assets, averaged over the year and generally determined based
      upon value, including the pro rata share of the assets of any company of
      which we are considered to own 25% or more of the shares by value, in a
      taxable year are held for the production of, or produce, passive income.

Passive income generally consists of dividends, interest, rents, royalties, annuities, and income from
certain commodities transactions and from national principal contracts. Cash is treated as generating
passive income.

If we become a PFIC, each U.S. holder who has not elected to treat us as a qualified electing fund
(the QEF election), or who has not elected to mark the stock to market as discussed below, would,
upon receipt of certain distributions by us and upon disposition of the ordinary shares at a gain,
be liable to pay tax at the then prevailing highest tax rates on ordinary income plus interest on
the tax, as if the distribution or gain had been recognized ratably over the taxpayers holding
period for the ordinary shares. In addition, when stock of a PFIC is acquired by reason of death
from a decedent that is a U.S. holder, the tax basis of the shares does not receive a step-up to
fair market value as of the date of the decedents death, but instead would be equal to the
decedents basis if lower, unless all gain is recognized by the decedent. Indirect investments
in a PFIC may also be subject to special tax rules.

77

---

---

The PFIC rules above would not apply to a U.S. holder who makes a QEF election for all taxable years
that such shareholder has held the ordinary shares while we are a PFIC, provided that we comply with
certain reporting requirements. Instead, each U.S. holder who has made such a QEF election is required
for each taxable year that we are a PFIC to include in income a pro rata share of our ordinary earnings
as ordinary income and a pro rata share of our net capital gain as long-term capital gain, regardless
of whether we make any distributions of such earnings or gain. In general, a QEF election is effective
only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder
basis and generally may be revoked only with the consent of the Internal Revenue Service. Although
we have no obligation to do so, we intend to notify U.S. holders if we believe we will be treated
as a PFIC for any tax year in order to enable U.S. holders to consider whether to make a QEF election.
In addition, we intend to comply with the applicable information reporting requirements for U.S.
holders to make a QEF election. U.S. holders should consult with their own tax advisers regarding
eligibility, manner and advisability of making the QEF election if we are treated as a PFIC.

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

We believe that we will not be a PFIC for 2004.  The tests for determining PFIC status, however,
are applied annually, and it is difficult to make accurate predictions of future income and assets
in which are relevant to this determination. Accordingly, there can be no assurance that we will
not become a PFIC. U.S. holders who hold ordinary shares during a period when we are a PFIC will
be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for
U.S. holders who made a mark-to-market or QEF election. U.S. holders are strongly urged to consult
their tax advisors about the PFIC rules, including the eligibility, manner and consequences to them
of making a mark-to-market or QEF election with respect to our ordinary shares in the event that
we qualify as a PFIC.

Foreign Personal Holding Company

Under certain circumstances, the Internal Revenue Code also provides for the current payment of tax
by U.S. holders with respect to undistributed income of a foreign corporation in which they own interests.
If we or any of our non-U.S. subsidiaries is a foreign personal holding company, or FPHC, for a taxable
year, each U.S. holder who sold ordinary shares on the last day of our taxable year or, if earlier,
the last day of the year in which a required ownership test is met, is required to include in gross
income as a deemed dividend its pro rata portion of our undistributed income even if no cash dividend
is actually paid. In such case, the U.S. holder is generally entitled to increase its tax basis in
the ordinary shares by the amount of the deemed dividend. In a situation where there is an overlap
of income inclusion under both the PFIC and FPHC regimes, the FPHC rules will take precedence. The
FPHC rules, however, only apply in cases in which five or fewer U.S. holders own directly, indirectly
or constructively 50% or more of the stock of the foreign corporation. Accordingly, we do not expect
that the FPHC provisions will apply to ownership of our ordinary shares. In the event, however, that
our ownership changes and U.S. holders acquire control of us, these rules would apply.

78

---

---

Backup Withholding

A U.S. holder may be subject to backup withholding at a rate of 31% with respect to cash dividend payments
and proceeds from a disposition of ordinary shares. In general, backup withholding will apply only
if a U.S. holder fails to comply with certain identification procedures. Backup withholding will
not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt
organizations. Backup withholding is not an additional tax and may be claimed as a credit against
the U.S. federal income tax liability of a U.S. holder, provided that the required information is
furnished to the Internal Revenue Service.

Non-U.S. holders of Ordinary Shares

Except as provided below, a taxpayer that is not a U.S. holder generally will not be subject to U.S.
federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition
of, an ordinary share.

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

In general, non-U.S. holders will not be subject to the 31% rate of backup withholding with respect
to the payment of dividends on ordinary shares unless payment is made through a paying agent, or
office, in the United States. After January 1, 2001, however, if payment is made in the United States
or by a U.S. related person, non-U.S. holders will be subject to backup withholding. In general,
if a non-U.S. holder provides a taxpayer identification number, certifies to its foreign status,
or otherwise establishes an exemption, the non-U.S. holder will not be subject to backup withholding.
A U.S. related person for these purposes is a person with one or more current relationships with
the United States.

Non-U.S. holders generally will be subject to backup withholding at a rate of 31% on the payment of
the proceeds from the disposition of ordinary shares to or through the United States office of a
broker, whether domestic or foreign, unless the holder provides a taxpayer identification number,
certifies to its foreign status or otherwise establishes an exemption. Non-U.S. holders will not
be subject to backup withholding with respect to the payment of proceeds from the disposition of
ordinary shares by a foreign office of a broker. After January 1, 2001, however, non-U.S. holders
will be subject to backup withholding at a rate of 31% with respect to the payment of proceeds from
the disposition of ordinary shares effected outside the United States if the broker is a U.S. related
person, unless the holder provides a taxpayer identification number, certifies to its foreign status
or otherwise establishes an exemption.

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

ISRAELI TAXATION

The following is a summary of the current tax structure applicable to companies incorporated in Israel,
with special reference to its effect on us. The following also contains a discussion of the material
Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting
us. To the extent that the discussion is based on new tax legislation which has not been subject
to judicial or administrative interpretation, we cannot assure you that the views expressed in the
discussion below will be accepted by the Israel tax authorities or courts. This discussion is not
intended, and should not be construed, as legal or professional tax advice, and is not exhaustive
of all possible tax considerations.

79

---

---

Holders of our ordinary shares should consult his or her own tax advisors as to the particular tax
consequences of an investment in the ordinary shares including the effects of applicable Israeli
or foreign or other tax laws and possible changes in the tax laws.

Tax Reform

On January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No. 132), 5762-2002,
as amended, known as the Tax Reform, came into effect.

The Tax Reform, aimed at broadening the categories of taxable income and reducing the tax rates imposed
on employment income, introduced the following changes, among others:

| | (i)   | Reduction
      of the tax rate levied on capital gains (other than gains deriving from
      the sale of listed securities) derived after January 1, 2003, to a
      general rate of 25% for both individuals and corporations. Regarding assets
      acquired prior to January 1, 2003, the reduced tax rate will apply to a
      proportionate part of the gain, in accordance with the holding periods of
      the asset, before or after January 1, 2003, on a linear basis;                                                                                                                                                                                                                                                                              
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (ii)  | Imposition
      of Israeli tax on all income of Israeli residents, individuals and corporations,
      regardless of the territorial source of income, including income derived
      from passive sources such as interest, dividends and royalties;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (iii) | Introduction
      of controlled foreign corporation (CFC) rules into the Israeli tax structure.
      Generally, under such rules, an Israeli resident who holds, directly of
      indirectly, 10% or more of the rights in a foreign corporation whose shares
      are not publicly traded (or which has offered less than 30% of its shares
      or any rights to its shares to the public), in which more than 50% of the
      rights are held directly or indirectly by Israeli residents, and a majority
      of whose income in a tax year is considered passive income, will be liable
      for tax on the portion of such income attributed to his holdings in such
      corporation, as if such income were distributed to him as a dividend; and;
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (iv)  | Imposition
      of capital gains tax on capital gains realized by individuals resident in
      Israel as of January 1, 2003, from the sale of shares of publicly traded
      companies on the Tel Aviv Stock Exchange and from the sale of shares of
      publicly traded Israeli companies on certain other stock exchanges (such
      gain was previously exempt from capital gains tax in Israel in certain cases).
      For information with respect to the applicability of Israeli capital gains
      taxes on the sale of ordinary shares, see Capital Gains Tax
      below;                                                                                                                                                                      
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (v)   | Effectuation
      of a new regime for the taxation of shares and options issued to employees
      and officers (including directors).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (vi)  | Introduction
      of a tax rate of 25% on dividends paid by one Israeli company to another
      (which are generally not subject to tax), if the source of such dividends
      is income that was derived from sources outside of Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

80

---

---

General Corporate Tax Structure

Israeli companies are generally subject to company tax at the rate of 36% of taxable income (and are
subject to Capital Gains Tax at a rate of 25% for capital gains, other than gains deriving from the
sale of listed securities, derived after January 1, 2003). However, the effective tax rate payable
by a company that derives income from an approved enterprise (as defined below) may be considerably
less, as further discussed below.

Tax Benefits and Grants for Research and Development

Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures,
including depreciation on capital expenditures, in scientific research and development projects,
if the expenditures are approved by the relevant Israeli government ministry, determined by the field
of research, and the research and development is for the promotion of the enterprise and is carried
out by, or on behalf of, the company seeking such deduction. However, the amount of such deductible
expenses must be reduced by the sum of any funds received through government grants for the finance
of such scientific research and development projects. Expenditures not so approved or funded, are
deductible over a three-year period.

Law for the Encouragement of Capital Investments, 1959

Our facilities currently enjoy approved enterprise status under the Investments Law.

The Investments Law, as amended, provides that a proposed capital investment in eligible facilities
may, upon application to the Investment Center of the Ministry of Industry and Trade of Israel, be
designated as an approved enterprise. Each certificate of approval for an approved enterprise relates
to a specific investment program delineated both by its financial scope, including its capital sources,
and by its physical characteristics, for example, the equipment to be purchased and utilized pursuant
to the program.

The tax benefits derived from any such certificate of approval relate only to taxable income attributable
to the specific approved enterprise. Under an amendment to the Investments Law that was made within
the framework of the Tax Reform, it was clarified that tax benefits under the Investments Law shall
also apply to income generated by a company from the grant of a usage right with respect to know-how
developed by the approved enterprise, income generated from royalties, and income derived from a
service which is auxiliary to such usage right or royalties, provided that such income is generated
within the approved enterprises ordinary course of business. The tax benefits under the Investment
Law are not available with respect to income derived from products manufactured outside of Israel.

Taxable income of a company derived from an approved enterprise is subject to company tax at the rate
of 25%, rather than 36% as stated above, for the benefit period, a period of seven years commencing
with the year in which the approved enterprise first generated taxable income, limited to twelve
years from the year of commencement of production or 14 years from the beginning of the year of approval,
whichever is earlier, and, under certain circumstances, as further detailed below, extending to a
maximum of ten years from the commencement of the benefit period. In the event that a company is
operating under more than one approval or that its capital investments are only partly approved,
its effective company tax rate is the result of a weighted combination of the various applicable rates.

81

---

---

A company owning an approved enterprise may elect to forego certain government grants extended to approved
enterprises in return for an alternative package of tax benefits, which we have done. Under the alternative
package, a companys undistributed income derived from an approved enterprise will be exempt
from company tax for a period of between two and ten years from the first year of taxable income,
depending on the geographic location of the approved enterprise within Israel, and such company will
be eligible for a reduced tax rate under the Investments Law for the remainder of the benefits period.

For our approved enterprise we have elected the alternative benefits. Accordingly, we have waived grants
in exchange for tax exemptions. Therefore, our income derived from our 1992 approved enterprise program
is tax exempt for a period of four years, and was and will be subject to a reduced company tax rate
of between 10-25%, depending on the percentage of our ordinary shares held by non-Israeli residents,
for the following six years. Our income derived from our 1996 approved enterprise program is tax
exempt for a period of four years commencing in 1996 and will be subject to a reduced company tax
rate of between 10-25%, depending on the percentage of our ordinary shares held by non-Israeli residents,
for the following six years. Our income derived from our 1998 approved enterprise program will be
tax exempt for a period of two years and will be subject to a reduced company tax rate of between
10-25%, depending on the percentage of our ordinary shares held by non-Israeli residents, for the
following eight years. Our income derived from our 2000 approved enterprise program will be tax exempt
for a period of two years and will be subject to a reduced company tax rate of between 10-25%, depending
on the percentage of our ordinary shares held by non-Israeli residents, for the following eight years.
We may apply for additional programs or for extensions of our existing programs. However, there can
be no assurance that our application will be approved or that we will receive future benefits. Most
of our income has been generated through our approved enterprise.

The applicable Law regarding approved enterprise programs will expire on June 30, 2004.
Accordingly requests for new programs or expansions that are not approved on or before June 30, 2004
will not confer any tax benefits, unless the term of the law will be extended.

A company that has elected the alternative benefits and that subsequently pays a dividend out of income
derived from the approved enterprises during the tax exemption period will be subject to company
tax in respect of the grossed-up equivalent of the amount distributed, including the recipients
tax thereon, applying the rate which would have been applicable had the company not elected the alternative
benefits. This is generally 10% to 25%, depending upon the extent to which non-Israeli shareholders
hold our shares. The dividend recipient is taxed at the reduced rate of 15% applicable to dividends
from approved enterprises, if the dividend is distributed during the tax exemption period or within
a specified period thereafter. This tax must be withheld by us at the source, regardless of whether
the dividend is converted into foreign currency. Subject to certain provisions concerning income,
under the alternative benefits, all dividends are considered to be attributable to the entire company
and their effective tax rate is the result of a weighted combination of the various applicable tax
rates. However, we are not obligated to distribute exempt retained profits under the alternative
benefits, and we may generally decide from which annual profits to declare dividends.

The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation
on its property and equipment that are included in an approved investment program. We have not utilized
this benefit.

Grants and other incentives received by a company in accordance with the Investments Law remain subject
to final ratification by the Investment Center of the Israeli Ministry of Industry and Trade, such
ratification being conditional upon fulfillment of all terms of the approved program.

82

---

---

The benefits available to an approved enterprise are conditional upon the fulfillment of certain conditions
stipulated in the Investments Law and its regulations and the criteria set forth in the specific
certificate of approval, as described above. In the event that these conditions are violated, in
whole or in part, we would be required to refund the amount of tax benefits, with the addition of
the Israel consumer price index linkage adjustment and interest. We believe our approved enterprise
operates in substantial compliance with all such conditions and criteria.

Taxation under Inflationary Conditions

The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, is intended
to adjust the corporate tax system to the rate of inflation, i.e., to tax profits on an inflation-adjusted
basis.

Under the Inflationary Adjustments Law, results for tax purposes are measured in historical cost terms
and are subject to a series of adjustments based on movements in the Israel consumer price index.
We are taxed under this law. The discrepancy between the change in (1) the Israel consumer price
index and (2) the exchange rate of the NIS to the dollar, each year and cumulatively, may result
in a significant difference between taxable income and the income denominated in dollars as reflected
in our financial statements. In addition, subject to certain limitations, depreciation of fixed assets
and losses carried forward are adjusted for inflation on the basis of changes in the Israel consumer
price index.

The salient features of the Inflationary Adjustments Law can be described generally as follows:

| | (a) | A special
      tax adjustment for the preservation of equity whereby certain corporate
      assets are classified broadly into fixed (inflation immuned) assets and
      non-fixed assets. Where a companys equity, as defined in such law,
      exceeds the depreciated cost of fixed assets, a deduction from taxable income
      that takes into account the effect of the applicable annual rate of inflation
      on such excess is allowed, up to a ceiling of 70% of taxable income in any
      single tax year, with the unused portion permitted to be carried forward,
      linked to the increase in the consumer price index. If the depreciated cost
      of fixed assets exceeds a companys equity, then such excess multiplied
      by the applicable annual rate of inflation is added to taxable income.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (b) | Subject to
      certain limitation set forth in the Inflationary Adjustments Law, depreciation
      deductions on fixed assets and losses carried forward are adjusted for inflation
      based on the increase in the Israel consumer price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (c) | Gains on
      the sale of certain listed securities which are taxed at a reduced rate
      with respect to individuals following the Tax Reform (and which were previously
      exempt from tax) are taxable at a company tax rate in certain circumstances.
      However, dealers in securities are subject to the regular tax rules applicable
      to business income in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                             

83

---

---

However, the Minister of Finance may, with the approval of the Knesset Finance Committee, determine
by order, during a certain fiscal year (or until February 28th  of the following year) in which the rate of the increase of the price index would not exceed or shall
not have exceeded, as applicable, 3%, that all or some of the provisions of this law shall not apply
to such fiscal year, or,  that the rate of increase of the price index relating to such
fiscal year shall be deemed to be 0%, and to make the adjustments required to be made as a result
of such determination.

Law for the Encouragement of Industry (Taxes), 1969

We currently qualify as an Industrial Company within the definition of the Law for the Encouragement
of Industry (Taxes), 1969. According to the Industry Encouragement Law, an Industrial Company is
a company resident in Israel, at least 90% of the income of which in any tax year, determined in
NIS, exclusive of income from defense loans, capital gains, interest and dividends, is derived from
an Industrial Enterprise owned by it. An Industrial Enterprise is defined as an enterprise owned
by an Industrial Company and whose major activity in a given tax year is industrial production activity.

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

| | (a) | Deduction
      of purchases of know-how and patents over an eight-year period for tax purposes.                                                                                           
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                            
| | (b) | Deduction
      over a three-year period of expenses involved with the issuance and listing
      of shares on a stock exchange.                                                           
| |     |                                                                                                                                                                                            
| | (c) | An election
      under certain conditions to file a consolidated tax return with additional
      related Israeli Industrial Companies that satisfy conditions set forth in
      the law.
| |     |                                                                                                                                                                                            
| | (d) | Accelerated
      depreciation rates on equipment and buildings.                                                                                                                           

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

Capital Gains Tax

Israeli law generally imposes on residents and non-residents of Israel a tax on on the sale of any
capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets
located in Israel, including shares in Israeli companies by both residents and non-residents of Israel,
unless a specific exemption is available or unless a tax treaty between Israel and the shareholders
country of residence provides otherwise. The law distinguishes between the real gain and the inflationary
surplus. The real gain is the excess of the total capital gain over the inflationary surplus, computed
on the basis of the increase in the Israel consumer price index between the date of purchase and
the date of sale.

Pursuant to the Tax Reform, generally capital gains tax is imposed on Israeli residents at a rate of
15% on real gains derived on or after January 1, 2003 from the sale of shares in (i) companies
publicly traded on the Tel Aviv Stock Exchange (TASE) or; (ii) Israeli companies publicly
traded on Nasdaq or on a recognized stock exchange or regulated market in a country that has a treaty
for the prevention of double taxation with Israel (such as our company), or  (iii) companies
dually traded on both the TASE and Nasdaq or a recognized stock exchange or a regulated market outside
of Israel. This tax rate is contingent upon the shareholder not claiming a deduction for financing
expenses in connection with such shares, and does not apply to: (i) the sale of shares to a
relative (as defined in the Tax Reform); (ii) the sale of shares by dealers in securities; (iii)
the sale of shares by shareholders that report in accordance with the Inflationary Adjustment Law;
or (iv) the sale of shares by shareholders who acquired their shares prior to an initial public
offering (that are subject to a different tax arrangement). The tax basis of shares acquired prior
to January 1, 2003 will be determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, a request may be made to the tax authorities to
consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.

84

---

---

In December 2003 regulations promulgated pursuant to the Tax Reform were amended so that, in certain
circumstances, capital gains derived from the sale and subsequent (same day) repurchase of shares
traded on the TASE or from shares of Israeli companies publicly traded on a recognized stock exchange
or regulated market in a country that has a treaty for the prevention of double taxation with Israel,
may be taxed at a rate equal to the withholding tax rate applicable to revenues derived from such
sale. In accordance with an announcement published by the Israeli Income Tax Commission, the withholding
tax rate applicable to the sale of such shares until the end of 2003 tax year, which was equal at
such time to 1% of the revenues generated in their sale, was determined as the final tax rate applicable
to such sale. The amended regulations also determined that the day of such sale and repurchase shall
be considered the new date of purchase of such shares. The foregoing was not applicable to: (i) dealers
in securities; (ii) shareholders that report in accordance with the Inflationary Adjustments Law;
(iii) shareholders who acquired their shares prior to an initial public offering; (iv) in some cases,
shareholders that received their shares within the framework of an employer-employee relationship;
or (v) shareholders claiming a deduction for financing expenses in connection with such shares. The
regulations further provided that with respect to shares of Israeli companies traded on a stock exchange
outside of Israel, the market price determined at the close of the trading day preceding the day
of the sale and repurchase of such shares, shall constitute the new tax basis for any future sale of such shares.

Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale
of shares publicly traded on the TASE, provided such gains not derive from a permanent establishment
of such shareholders in Israel, and are exempt from Israeli capital gains tax on any gains derived
from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated
market outside of Israel, provided that such capital gains are not derived from a permanent establishment
in Israel and that such shareholders did not acquire their shares prior to the issuers initial
public offering. However, non-Israeli corporations will not be entitled to the exemption with respect
to gains derived from the sale of shares of Israeli companies publicly traded on the TASE, if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.

In some instances where our shareholders may be subject to Israeli tax on the sale of their ordinary
shares, the payment of the consideration may be subject to the withholding of Israeli tax at the
source.

85

---

---

U.S.-Israel Tax Treaty

Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of shares by a person who holds
the ordinary shares as a capital asset and who qualifies as a resident of the United States within
the meaning of the U.S.- Israel Tax Treaty and who is entitled to claim the benefits afforded to
such resident by the U.S.-Israel Tax Treaty will generally not be subject to the Israeli capital
gains tax unless such U.S. resident holds, directly or indirectly, shares representing 10% or more
of the voting power of our company during any part of the 12-month period preceding such sale, exchange
or disposition. A sale, exchange or disposition of shares by a U.S. resident who holds, directly
or indirectly, shares representing 10% or more of the voting power of our company at any time during
such preceding 12-month period would be subject to such Israeli tax, to the extent applicable; however,
under the U.S.-Israel Tax Treaty, such U.S. resident would be permitted to claim a credit for such
taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty
does not relate to state or local taxes.

Tax on Dividends

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel
or received in Israel. These sources of income include passive income such as dividends, royalties
and interest, as well as non-passive income from services rendered in Israel. On distributions of
dividends other than stock dividends, income tax at the rate of 25% is withheld at the source, unless
a different rate is provided in a treaty between Israel and the shareholders country of residence.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of shares who is
a resident of the United States will be 25% or 12.5% if such U.S. resident is a company which holds,
directly or indirectly, shares representing 10% or more of the voting power of our company during
any part of the 12-month period preceding the date of payment of such dividend. However, under the
U.S.-Israel Tax Treaty and the Investments Law, dividends generated by an approved enterprise are
taxed at the rate of 15%.

F.             Dividends and Paying Agents

Not applicable.

G.            Statement by Experts

Not applicable.

H.            Documents on Display

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended,
applicable to foreign private issuers and fulfill the obligations with respect to such requirements
by filing reports with the Securities and Exchange Commission. You may read and copy any document
we file with the Securities and Exchange Commission without charge at the Securities and Exchange
Commissions public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of such material may be obtained by mail from the Public Reference Branch of the Securities and Exchange
Commission at such address, at prescribed rates. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the public reference room.

86

---

---

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

I.              Subsidiary Information

Not applicable.

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since the majority of our revenues are paid in or linked to U.S. dollars, we believe that inflation
and fluctuations in the NIS/U.S. dollar exchange rate have no material effect on our revenues. Inflation
in Israel and U.S. dollar exchange rate fluctuations, however, have some influence on our expenses
and, as a result, on our net income. The cost of our Israel operations, as expressed in U.S. dollars,
is influenced by the extent to which any increase in the rate of inflation in Israel is not offset,
or is offset on a lagging basis, by a devaluation of the NIS in relation to the U.S. dollar.

A significant portion of our expenditures are employee compensation-related. Salaries are paid in NIS.
Annual salary increases during the first quarter of the year and are adjusted for changes in the
Israel consumer price index through annual salary increases during the first quarter of the year
and bi-annual partial adjustments. This increases salary expenses in United States dollar terms.
The devaluation of the NIS against the U.S. dollar decreases employee compensation expenditures as
expressed in dollars proportionally. Some of our other NIS-based expenses are either currently adjusted
to U.S. dollars or are adjusted to the Israel consumer price index.

Our results of operations are adversely affected by increases in the rate of inflation in Israel when
such increases are not offset, or are offset on a lagging basis, by a devaluation of the NIS against
the U.S. dollar. A devaluation of the NIS in relation to the U.S. dollar will have the effect of
decreasing the U.S. dollar value of our assets, mostly current assets, to the extent of the underlying
value of which is NIS-based. Such a devaluation would also have the effect of reducing the dollar
amount of any of our liabilities which are payable in NIS, unless such payables are linked to the dollar.

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

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

Not applicable.

| |  | PART II
| |  | -------
| |  |        

| | Item | 13. DEFAULTS, DIVIDEND ARREARAGES
      AND DELINQUENCIES
| | ---- | ---------------------------------------------------------

Not applicable.

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

Modification of Rights

Not applicable.

87

---

---

Use of Proceeds

The net proceeds of our initial public offering in 1996 were $11.2 million. The net proceeds of our
follow-on offering in 1999 were $7.7 million, and the net proceeds of our follow-on offering in 2000
were $34.9 million. These proceeds were invested in cash, cash equivalents and in short term bank
deposits and marketable securities.

| | Item | 15. CONTROLS AND PROCEDURES
| | ---- | ---------------------------
| |      |                            

In 2003, we established a Disclosure Controls Procedure Committee and adopted Disclosure Controls and
Procedures.

We carried out an evaluation, under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2003. Based on this evaluation, our principal
executive officer and principal financial officer have concluded that our disclosure controls and
procedures are effective to reasonably assure that information required to be included in our periodic
reports to the Securities and Exchange Commission is recorded, processed, summarized and reported
in a timely manner.

In addition, there have been no significant changes in our internal controls or in other factors that
could significantly affect those controls subsequent to the date of their last evaluation.

| | Item | 16. RESERVED                                      
| | ---- | --------------------------------------------------
| |      |                                                   
| | Item | 16A.              AUDIT COMMITTEE
FINANCIAL EXPERT
| |      |                                                   

Our board of directors has determined that  Meir Dvir, one of the members of our audit committee,  qualifies
as a financial expert under the applicable regulations.

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

In February 2004, we adopted a Code of Ethics and Business Conduct that applies to the Companys
principal executive officer, principal financial officer, principal accounting officer or controller
and  persons performing similar functions.

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

Audit Fees

For 2002 and 2003, our principal accountant, Kost Forer Gabbay & Kasierer, a member of Ernst &
Young Global, billed us aggregate amounts of approximately $187,000 and $120,000, respectively, for
the audit of our annual financial statements, review of our quarterly financial results, consultations
on various accounting issues and performance of local statutory audits.

Audit Related Fees

Not applicable.

Tax Fees

For 2002 and 2003, our principal accountant billed us aggregate amounts of approximately $81,000 and
$43,000, respectively, for services relating to tax compliance, tax advice and tax planning.

88

---

---

All Other Fees

Not applicable.

Pre-approval Policies and Procedures

Our audit committee will
  approve each audit and non-audit service to be performed by our independent
  accountant before the accountant is engaged.

|                                                                           |                                                                                                                                                                       
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM
      16D.EMEPTIONS
      FROM LISTING STANDARDS FOR AUDIT COMMITTEES
|                                                                           |                                                                                                                                                                       
|                                                                           | Not applicable.                                                                                                                                                       
|                                                                           |                                                                                                                                                                       
|Item17.FINANCIAL STATEMENTS                                               
|                                                                           |                                                                                                                                                                       
|.                                                                          | We have
      responded to Item 18 in lieu of this item                                                                                                               
|                                                                           |                                                                                                                                                                       
|Item18.FINANCIAL
      STATEMENTS                                         
|                                                                           |                                                                                                                                                                       
|                                                                           | The Financial
      Statements required by this item are found at the end of this annual report,
      beginning on page F-1.                                         
|                                                                          
|Item19.EXHIBITS                                                           
|                                                                          
|                                                                           | The exhibits
      list required by this Item is incorporated by reference to the Exhibit Index
      which appears before the first exhibit filed with this document.

89

---

---

SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has
duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Tel Aviv, Israel on the 30th  day of March, 2004.

| | TTI TEAM
      TELECOM INTERNATIONAL LTD.
| | -----------------------------------------
| |                                          
| |                                          
| | By: /s/ Meir Lipshes                     
| | Meir
      Lipshes                       
| | Chief
      Executive Officer            



90

---

---

EXHIBIT INDEX

(a)           Financial Statements

| | 1.            
Report of Independent Auditors               
| | ------------------------------------------------------------
| |                                                             
| | 2.            
Consolidated Balance Sheets                  
| |                                                             
| | 3.            
Consolidated Statements of Income            
| |                                                             
| | 4.            
Statements of Changes in Shareholders Equity
| |                                                             
| | 5.            
Consolidated Statements of Cash Flows        
| |                                                             
| | 6.            
Notes to Consolidated Financial Statements   
| |                                                             

(b)           Exhibits

|Exhibit
      No. | Exhibit                                                                                                      
|----------------- | -------------------------------------------------------------------------------------------------------------
|*1.1              | Memorandum
      of Association of Registrant, as amended.                                                   
|                  |                                                                                                              
|*1.2              | Articles
      of Association of Registrant, as amended.                                                     
|                  |                                                                                                              
|***4.1            | Agreement
      between the Registrant and Bezeq                                                             
|                  |                                                                                                              
|*4.2              | Investment
      Agreement  Axarte Ltd.                                                                     
|                  |                                                                                                              
|**10.1            | Form
      of Underwriting Agreement.                                                                        
|                  |                                                                                                              
|***10.2           | Specimen
      Certificate for Ordinary Shares.                                                              
|                  |                                                                                                              
|****10.3          | The
      Registrants Share Option Plan, dated January 15, 1995, as amended.                                
|                  |                                                                                                              
|****10.4          | The
      Registrants Share Option Plan, dated November 15, 1996.                                           
|                  |                                                                                                              
|*10.5             | The
      Registrants 2000 Employee Stock Purchase Plan.                                                    
|                  |                                                                                                              
|***10.6           | Agreement,
      dated October 9, 1996, between the Registrant and Team.                                     
|                  |                                                                                                              
|***10.7           | Registration
      Rights Agreement, dated October 22, 1996, between the Registrant and TSIL.                
|                  |                                                                                                              
|***10.8           | Share
      Purchase Agreement, dated October 23, 1996, among the Registrant, Team and
      ECI, as amended.
|                  |                                                                                                              
|*****10.9         | Lease,
      dated February 1, 1998, between the Registrant and Team.                                        
|                  |                                                                                                              
|******10.10       | Amendment
      to Lease Agreement dated September 2, 2002.                                                  
|                  |                                                                                                              
|10.11             | Consent
      of Independent Auditors of the Registrant                                                      

91

---

---

|11   | Code
      of Ethics and Business Conduct                                                                 
|---- | ----------------------------------------------------------------------------------------------------------
|     |                                                                                                           
|12.1 | Certification
      of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act
|     |                                                                                                           
|12.2 | Certification
      of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act
|     |                                                                                                           
|13.1 | Certification
      of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act
|     |                                                                                                           
|13.2 | Certification
      of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act

| | *      | Previously filed as an exhibit to TTIs annual report on Form 20-F for the fiscal year ended December
31, 2000, and incorporated herein by reference.                                                           
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                                                                 
| | **     | Previously
      filed as an exhibit to TTIs Amendment No. 1 to Registration Statement
      on Form F-1 (Registration No. 11590), and incorporated herein by reference.                                       
| |        |                                                                                                                                                                                                                 
| | ***    | Previously
      filed as an exhibit to TTIs Registration Statement on Form F-1 (Registration
      No. 333-5902), and incorporated herein by reference.                                                       
| |        |                                                                                                                                                                                                                 
| | ****   | English summary
      from Hebrew original was previously filed as an exhibit to TTIs Registration
      Statement on Form F-1 (Registration No. 333-5902), and incorporated herein
      by reference.        
| |        |                                                                                                                                                                                                                 
| | *****  | English summary
      from Hebrew original was previously filed as an exhibit to TTIs annual
      report on Form 20-F for the fiscal year ended December 31, 1998, and incorporated
      herein by reference.
| |        |                                                                                                                                                                                                                 
| | ****** | English
      translation from Hebrew original previously filed as an exhibit to TTIs
      annual report on Form 20-F for the fiscal year ended December 31, 2002,
      and incorporated herein by reference.
| |        |                                                                                                                                                                                                                 

92

---

---

TTI TEAM
  TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED
  FINANCIAL STATEMENTS

AS OF DECEMBER
  31, 2003

IN U. S.
  DOLLARS

INDEX

|                                                    | Page            
|--------------------------------------------------- | ----------------
|                                                    |                 
|Report of Independent
      Auditors                | F-2             
|                                                    |                 
|Consolidated Balance
      Sheets                   | F-3
      - F-4 
|                                                    |                 
|Consolidated Statements
      of Operations         | F-5             
|                                                    |                 
|Statements of
      Changes in Shareholders Equity | F-6             
|                                                    |                 
|Consolidated Statements
      of Cash Flows         | F-7
      - F-8 
|                                                    |                 
|Notes to Consolidated
      Financial Statements    | F-9
      - F-37

---

---

---

|***ERNST
      & YOUNG*** | n | Kost
      Forer Gabbay & Kasierer
      3 Aminadav St.
      Tel-Aviv 67067, Israel | n | Phone:
      972-3-6232525
      Fax:   972-3-5622555
|------------------------- | - | ------------------------------------------------------------------------------------ | - | -----------------------------------------------------

REPORT OF INDEPENDENT AUDITORS

To the Shareholders
  of

TTI TEAM
  TELECOM INTERNATIONAL LTD.

We
  have audited the accompanying consolidated balance sheets of TTI Team Telecom
  International Ltd. (the Company) and its subsidiaries as of December
  31, 2002 and 2003 and the related consolidated statements of operations, changes
  in shareholders equity and cash flows for each of the three years in the
  period ended December 31, 2003. These financial statements are the responsibility
  of the Companys management. Our responsibility is to express an opinion
  on these financial statements based on our audits.

We
  conducted our audits in accordance with auditing standards generally accepted
  in the United States. Those standards require that we plan and perform the audit
  to obtain reasonable assurance about whether the financial statements are free
  of material misstatement. An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements. An audit
  also includes assessing the accounting principles used and significant estimates
  made by management, as well as evaluating the overall financial statement presentation.
  We believe that our audits provide a reasonable basis for our opinion.

In
  our opinion, the consolidated financial statements referred to above present
  fairly, in all material respects, the consolidated financial position of the
  Company and its subsidiaries as of December 31, 2002 and 2003, and the consolidated
  results of their operations and cash flows for each of the three years in the
  period ended December 31, 2003, in conformity with accounting principles generally
  accepted in the United States.

|Tel-Aviv,
        Israel                                                        | KOST
        FORER GABBAY & KASIERER    
|------------------------------------------------------------------------------- | ----------------------------------------
|February 17, 2004 (except Note 16 for
        which the date is March 17, 2004) | A
        Member of Ernst & Young Global

F - 2

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**
|----------------------------------------------------------------------------
|CONSOLIDATED
        BALANCE SHEETS
      U.S.
        dollars in thousands 

|                                                                                  | December
      31,
|--------------------------------------------------------------------------------- | ------------------
|
|ASSETS                                                                            |                   
|                                                                                 
|CURRENT ASSETS:                                                                  
|Cash
      and cash equivalents                                                   | $                 
|Short-term
      bank deposits                                                    |                   
|Marketable
      securities (Note 3)                                              |                   
|Trade
      receivables (net of allowance for doubtful accounts - $ 7,920 in 2002
|and
      $ 8,070 in 2003) (Note 1c)                                              |                   
|Unbilled
      receivables                                                        |                   
|Other
      accounts receivable and prepaid expenses (Note 4)                     |                   
|                                                                                  |                   
|Total current
      assets                                                        |                   
|                                                                                  |                   
|LONG-TERM
      INVESTMENTS:                                                     
|Long-term
      bank deposits                                                     |                   
|Investment
      in other company                                                 |                   
|Severance
      pay fund                                                          |                   
|Long-term
      prepaid expenses                                                  |                   
|Deferred
      tax assets                                                         |                   
|Long-term
      trade and unbilled receivables (Note 1c)                          |                   
|                                                                                  |                   
|Total long-term
      investments                                                 |                   
|                                                                                  |                   
|PROPERTY
      AND EQUIPMENT, NET (Note 5)                                        |                   
|                                                                                  |                   
|OTHER INTANGIBLE
      ASSETS, NET (Note 6)                                       |                   
|                                                                                  |                   
|GOODWILL
      (Note 7)                                                           |                   
|                                                                                  |                   
|Total assets                                                                      | $                 
|                                                                                  |                   

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

F-3

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**                      
|--------------------------------------------------------------------------------------------------
|CONSOLIDATED
        BALANCE SHEETS
      **U.S.
        dollars in thousands, except share data**

|                                                                                  | December
      31,
|--------------------------------------------------------------------------------- | ------------------
|
|LIABILITIES
      AND SHAREHOLDERS EQUITY                                        |                   
|                                                                                 
|CURRENT LIABILITIES:                                                             
|Trade
      payables                                                              | $                 
|Related
      parties (Note 13)                                                   |                   
|Deferred
      revenues                                                           |                   
|Other
      accounts payable and accrued expenses (Note 8)                        |                   
|                                                                                  |                   
|Total
      current liabilities                                                   |                   
|                                                                                  |                   
|ACCRUED SEVERANCE
      PAY                                                       |                   
|                                                                                  |                   
|COMMITMENTS
      AND CONTINGENT LIABILITIES (Note 9)                            
|                                                                                 
|SHAREHOLDERS
      EQUITY (Note 11):                                            
|Share capital:                                                                   
|Authorized: 30,000,000 Ordinary shares of NIS 0.5 par value at December
      31,
|2002 and 2003; Issued and outstanding: 11,872,052 shares at December 31,         
|2002 and 2003                                                                     |                   
|Additional paid-in capital                                                        |                   
|Accumulated other comprehensive income (loss)                                     |                   
|Retained earnings (accumulated deficit)                                           |                   
|                                                                                  |                   
|Total
      shareholders equity                                                  |                   
|                                                                                  |                   
|Total
      liabilities and shareholders equity                                  | $                 
|                                                                                  |                   

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

F-4

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**                                
|------------------------------------------------------------------------------------------------------------
|CONSOLIDATED
        STATEMENTS OF OPERATIONS
      U.S.
        dollars in thousands, except per share data

|                                                                                    | Year
      ended December 31,
|----------------------------------------------------------------------------------- | -----------------------------
|
|Revenues
      (Note 14):                                                           |                              
|Products                                                                            | $                            
|Services                                                                            |                              
|                                                                                    |                              
|Total
      revenues                                                                |                              
|                                                                                    |                              
|Cost of revenues:                                                                  
|Products                                                                            |                              
|Services                                                                            |                              
|Impairment
      of capitalized software development costs                         
|(Note 6)                                                                            |                              
|                                                                                    |                              
|Total
      cost of revenues                                                        |                              
|                                                                                    |                              
|Gross profit                                                                        |                              
|                                                                                    |                              
|Operating
      expenses:                                                          
|Research
      and development, net (Note 15a)                                      |                              
|Selling
      and marketing                                                         |                              
|General
      and administrative                                                    |                              
|Allowance
      for doubtful accounts and write-off bad debts
            (Note 1c) |                              
|Goodwill
      write-off (Note 7)                                                   |                              
|                                                                                    |                              
|Total
      operating expenses                                                      |                              
|                                                                                    |                              
|Operating
      income (loss)                                                       |                              
|Financial
      income, net (Note 15b)                                              |                              
|                                                                                    |                              
|Income (loss)
      before income taxes                                             |                              
|Income taxes
      (Note 10)                                                        |                              
|                                                                                    |                              
|Net income
      (loss)                                                             | $                            
|                                                                                    |                              
|Earning (loss)
      per share (Note 12):                                          
|Basic
      net earnings (loss) per Ordinary share                                  | $                            
|                                                                                    |                              
|Diluted
      net earnings (loss) per Ordinary share                                | $                            
|                                                                                    |                              

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

F-5

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**                                    
|----------------------------------------------------------------------------------------------------------------
|STATEMENTS
        OF CHANGES IN SHAREHOLDERS EQUITY
      U.S.
        dollars in thousands, except share data

|                                                         | Number of
      shares | Share
      capital | Additional
      paid-in
      capital | Accumulated
      other
      comprehensive
      income (loss) | Retained
      earnings
      (accumulated
      deficit) | Total 
      comprehensive
      income (loss) | Total 
      shareholders
      equity
|-------------------------------------------------------- | ---------------------- | ------------------- | -------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------
|Balance as
      of January 1, 2001                      |                        | 11,383,014          |                                        | $                                                               | 1,737                                                     |                                                | $                                      
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Exercise
      of stock options                          |                        | 344,642             |                                        |                                                                 | 40                                                        |                                                |                                        
|Exercise
      of options granted to a consultant, net   |                        | 13,165              |                                        |                                                                 | 2                                                         |                                                |                                        
|Issuance
      of shares in respect of ESPP, net         |                        | 11,779              |                                        |                                                                 | 2                                                         |                                                |                                        
|Comprehensive
      income (loss):                      
|Unrealized
      losses on available-for-sale marketable
|securities, net                                          |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|Net
      income                                         |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Total comprehensive
      income                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Balance as
      of December 31, 2001                    |                        | 11,752,600          |                                        |                                                                 | 1,781                                                     |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Exercise
      of stock options                          |                        | 119,452             |                                        |                                                                 | 13                                                        |                                                |                                        
|Tax benefit
      related to exercise of options         |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|Comprehensive
      income (loss):                      
|Unrealized
      gains on available-for-sale marketable 
|securities, net                                          |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|Net
      loss                                           |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Total comprehensive
      loss                           |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Balance as
      of December 31, 2002                    |                        | 11,872,052          |                                        |                                                                 | 1,794                                                     |                                                |                                        
|Comprehensive
      loss:                               
|Unrealized
      losses on available-for-sale marketable
|securities, net                                          |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|Net
      loss                                           |                        | -                   |                                        |                                                                 | -                                                         |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Total comprehensive
      loss                           |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        
|Balance as
      of December 31, 2003                    |                        | 11,872,052          |                                        | $                                                               | 1,794                                                     |                                                | $                                      
|                                                         |                        |                     |                                        |                                                                 |                                                           |                                                |                                        

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

F-6

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**         
|-------------------------------------------------------------------------------------
|CONSOLIDATED
        STATEMENTS OF CASH FLOWS
      U.S.
        dollars in thousands

|                                                                 | Year
      ended December 31,
|---------------------------------------------------------------- | -----------------------------
|
|Cash flows
      from operating activities:                      |                              
|                                                                 |                              
|Net
      income (loss)                                          | $                            
|Adjustments required to reconcile net income (loss) to net cash 
|provided by operating activities:                               
|Depreciation and amortization                                    |                              
|Impairment of capitalized software development costs             |                              
|Impairment of goodwill                                           |                              
|Loss from sales of property and equipment                        |                              
|Trading marketable securities, net                               |                              
|Realized loss (gain) on available-for-sale marketable securities |                              
|Impairment of available-for-sale marketable securities           |                              
|Amortization of premium and accrued interest on                 
|available-for-sale marketable securities                         |                              
|Long-term prepaid expenses write-off                             |                              
|Accrued interest on short-term bank deposits                     |                              
|Severance pay, net                                               |                              
|Deferred tax assets, net                                         |                              
|Adjustments of deferred taxes due to foreign currency           
|translation
      differences                                    |                              
|Decrease (increase) in trade receivables                         |                              
|Decrease (increase) in unbilled receivables                      |                              
|Increase in long-term trade and unbilled receivables             |                              
|Decrease (increase) in other accounts receivable and prepaid    
|expenses                                                         |                              
|Increase (decrease) in trade payables                            |                              
|Increase (decrease) in related parties                           |                              
|Increase (decrease) in deferred revenues                         |                              
|Increase (decrease) in other accounts payable and accrued       
|expenses                                                         |                              
|Others                                                           |                              
|                                                                 |                              
|Net cash
      provided by (used in) operating activities        |                              
|                                                                 |                              
|Cash flows
      from investing activities:                     
|                                                                 |                              
|Acquisition of subsidiary, Axarte Limited (a)                    |                              
|Investment
      in short-term and long-term bank deposits       |                              
|Proceeds from short-term bank deposits                           |                              
|Investment
      in available-for-sale marketable securities     |                              
|Proceeds from sales and redemption of available-for-sale        
|marketable securities                                            |                              
|Capitalization of software development costs                     |                              
|Investment in other company                                      |                              
|Increase in long-term prepaid expenses                           |                              
|Purchase of property and equipment                               |                              
|Proceeds from sale of property and equipment                     |                              
|                                                                 |                              
|Net cash
      used in investing activities                      |                              
|                                                                 |                              

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

F-7

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**         
|-------------------------------------------------------------------------------------
|CONSOLIDATED
        STATEMENTS OF CASH FLOWS
      U.S.
        dollars in thousands

|                                                                | Year
      ended December 31,
|--------------------------------------------------------------- | -----------------------------
|
|Cash flows
      from financing activities:                     |                              
|                                                                |                              
|Short-term
      bank loan, net                                 |                              
|Proceeds
      from issuance of shares, net                     |                              
|Proceeds
      from exercise of options, net                    |                              
|                                                                |                              
|Net cash
      provided by (used in) financing activities       |                              
|                                                                |                              
|Increase
      (decrease) in cash and cash equivalents          |                              
|Cash and
      cash equivalents at the beginning of the year    |                              
|                                                                |                              
|Cash and
      cash equivalents at the end of the year          | $                            
|                                                                |                              
|Supplemental
      disclosure of cash flows information:       
|                                                               
|Cash
      paid during the year for:                           
|Interest                                                        | $                            
|                                                                |                              
|Taxes                                                           | $                            
|                                                                |                              
|Supplemental
      disclosure of non-cash financing activities:
|                                                                |                              
|Tax
      benefit related to exercise of options                | $                            
|                                                                |                              

|    |                                                              
|--- | -------------------------------------------------------------
|(a) | Acquisition
      of subsidiary, Axarte Limited:             
|    |                                                              
|    | Estimated
      fair value of assets acquired and liabilities
|    | assumed
      at the date of acquisition:                    
|    |                                                              
|    | Working capital
      deficit (excluding cash and cash       
|    | equivalents
      in the amount of $ 4)                      
|    | Property
      and equipment                                 
|    | Goodwill                                                     
|    | Acquired
      technology                                    
|    |                                                              
|    |                                                              
|    |                                                              

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

F-8

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 1:-        GENERAL

| | a. | TTI Team Telecom International Ltd. (TTI or the Company) was incorporated in
1990 and commenced its operations in September 1992.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                      

| | The Company designs, develops, markets and supports network management and operations support system
software for the communications industry.                                                                                                                                                                                                                                                                                                                                                              
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The Companys Netrac family of products performs and manages functions critical to the operations
of telecommunications service providers, such as fault management - monitoring equipment performance
to detect and analyze failures, performance management - providing traffic analysis and quality of
statistics service, configuration management - managing physical and logical connectivity within
the network and security management - controlling and protecting access to data and applications.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The Company has wholly-owned subsidiaries in the U.S., the Netherlands, the U.K., India, Malta, France,
Costa-Rica, Australia and in Hong-Kong.                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | As of December 31, 2003, the Company is 50.22% held by Team Software Industries Ltd., a wholly-owned
subsidiary of Team Computers and System Ltd. (Team), a public company listed for trade
on the Tel-Aviv Stock exchange.                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | As to principal markets and customers, see Note 14.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | b. | Acquisition of Axarte Limited (Axarte):
| | -- | -----------------------------------------
| |    |                                          

| | On January
      31, 2001, TTI invested in Axarte, U.K. software company, which owned complementary
      technology to TTIs system. Axarte developed network management and
      operations support system software for the communications industry with
      a focus on configuration and provisioning.          
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                       
| | The Companys
      investment in Axarte was in the form of a six-year convertible debenture
      with a call option, granted by the shareholders of Axarte, entitling TTI
      to acquire all of the equity interests in Axarte for £1 = $ 1.45 at
      any time prior to December 31, 2006.                      
| |                                                                                                                                                                                                                                                                                                                       
| | TTI managed
      and financed Axarte as well as controlled its board of directors under an
      agreement with all of the shareholders of Axarte, from January 31, 2001
      (the agreement date). The operations of Axarte are included in the consolidated
      statements of the Company from January 31, 2001.
| |                                                                                                                                                                                                                                                                                                                       
| | During 2001,
      TTI invested $ 4,000 in convertible debentures in Axarte. The convertible
      debentures would be automatically converted into Ordinary shares at any
      time upon the delivery of a written notice by TTI to Axarte.                                                                         
| |                                                                                                                                                                                                                                                                                                                       
| | On December
      31, 2001, TTI has exercised the call option. In consideration for the shares
      acquired, the Company paid £1 = $ 1.45 in cash.                                                                                                                                                                  

F-9

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 1:-        GENERAL (Cont.)

| | The acquisition has been accounted for on the basis of the purchase method of accounting, in accordance
with Accounting Principle Board Opinion No. 16 Business Combinations (APB No. 16)
as of January 31, 2001 and accordingly, the purchase price has been allocated based on the fair value
of the assets and liabilities of Axarte as of January 31, 2001 and resulted in recording goodwill
and acquired technology of approximately $ 1,211 and $ 4,119, respectively. The goodwill was
amortized on a straight-line basis over seven years. According to Statement of Financial Accounting
Standard Board No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), this
goodwill has no longer been amortized subsequent to December 31, 2001 but is subject to annual
impairment tests in accordance with the statement (see also Note 7). Acquired technology refers to
software development costs developed by Axarte for which technological feasibility was established
in compliance with  Statement of Financial Accounting Standards No. 86, Accounting
for Costs of Computer Software to be Sold, Leased or Otherwise Marketed (SFAS No. 86).
The acquired technology is being amortized since January 1, 2002 on a straight-line basis over
six years (see also note 6).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Intangible assets acquired had an estimated fair value of $ 5,330 as shown in the following table:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | Goodwill                  | $ | 1,211 | 
| | ------------------------- | - | ----- | 
| | Acquired
      technology |   | 4,119 | 
| |                           |   |      
| |                           | $ | 5,330 | 
| |                           |   |      

| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following
      represents the unaudited pro forma results of operations for the year ended
      December 31, 2001, assuming that the Axarte acquisition had been consummated
      as of January 1, 2001.
| |                                                                                                                                                                                                                

| |                                      | Year ended
      December 31,2001
| | ------------------------------------ | ---------------------------------
|
| | Revenues                             | $                                
| |                                      |                                  
| | Net income                           | $                                
| |                                      |                                  
| | Basic net
      earnings per share   | $                                
| |                                      |                                  
| | Diluted net
      earnings per share | $                                
| |                                      |                                  

| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | The pro-forma
      financial information is not necessarily indicative of the future consolidated
      results.
| |                                                                                                                  

F-10

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 1:-        GENERAL (Cont.)

| | c. | Termination of
      agreements:
| | -- | --------------------------------
| |    |                                 

| | On November 13, 2002, the Company received a letter of termination from a major customer, regarding
an agreement signed on January 30, 2002. The customer also obtained, after a court hearing, the payment
of a performance bond issued by a bank on the Companys behalf under the agreement. On January
23, 2003 the bond in the amount of approximately £1 million, was paid to the customer.                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company believes that this customer terminated the agreement unlawfully, and in violation of the
termination provisions set out in the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Companys management believes, in light of the facts surrounding its relationship with this
customer, and following consultations with legal counsel, that the Company has reasonably good prospects
of establishing that the customer was not entitled to terminate the agreement and by its conduct
repudiated the agreement. The Company cannot currently quantify the amount of damages that it would
receive if it were to succeed in a lawsuit against the customer, and the Company cannot estimate
the amount of damages that could be sought by the customer in a potential counterclaim. The Company
is currently considering its options with respect to the best manner in which to pursue damages from
this customer.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In 2002, the Company also signed an agreement for a similar project with an affiliate of the customer
referred to the above. Following a dispute that arose between the Company and such affiliate in 2002,
the parties signed a settlement agreement at the beginning of 2004, pursuant to which the parties
agreed to terminate the agreement, the Company repaid an amount of £100 thousand to the customer
and the parties waived all claims against each other.                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In 2002, the Company has recorded trade and unbilled receivables in the amount of $ 10,311,
as due from these customers. Due to the letter of termination received from the first customer and
managements concerns about termination by the second customer, as described above, the Company
has classified an amount of $ 2,855 as long-term trade and unbilled receivables, which
represents the amount whose collection is probable, in the managements opinion.                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In 2002, an amount of $ 7,456 was recorded as allowance for doubtful accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-11

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES

| | The consolidated financial statements have been prepared according to accounting principles generally
accepted in the United States (U.S. GAAP).
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                   

| | Use
      of estimates:
| | -----------------------
| |                        

| | The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                 

| | Financial
      statements in United States dollars:
| | ----------------------------------------------------
| |                                                     

| | A majority of the revenues of the Company and its subsidiaries is generated in U.S. dollars (dollar).
In addition, a substantial portion of the costs of the Company and its subsidiaries is incurred in
dollars. Companys management believes that the dollar is the primary currency of the economic
environment in which the Company and its subsidiaries operate. Thus, the functional and reporting
currency of the Company and its subsidiaries is the dollar.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation (SFAS No. 52). All transaction gains and losses from the remeasurement
of monetary balance sheet items are reflected in the statement of operations as financial operations
or expenses, as appropriate.                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | Principles
      of consolidation:
| | ----------------------------------
| |                                   

| | The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated upon consolidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                             

| | Cash
      equivalents:
| | -----------------------
| |                        

| | Cash equivalents
      include short-term highly liquid investments that are readily convertible
      to cash with original maturities of three months or less.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                 

| | Short-term
      and long-term bank deposits:
| | ---------------------------------------------
| |                                              

| | Short-term
      bank deposits are deposits with maturities of more than three months but
      less than one year. The deposits are in U.S. dollars and bear interest at
      an average rate of 1.64%. The short-term deposits are presented at their
      cost, including accrued interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                 

| |  | Long-term bank deposits are deposits with maturities of more than one year, are included in long-term
investments and presented at their cost. The deposits are in U.S. dollars and bear interest at an
average rate of 4.05%.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                               

F-12

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| | Marketable
      securities:
| | ----------------------------
| |                             

| |  | Management determines the classification of investments in obligations with fixed maturities and marketable
equity securities at the time of purchase and reevaluates such designations as of each balance sheet
date. At December 31, 2003 and 2002, all marketable securities covered by Statement of Financial
Accounting Standard No. 115 Accounting for Certain Investments in Debt and Equity Securities,
(SFAS No. 115) were designated as available-for-sale. Accordingly, these securities are
stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive
income (loss), a separate component of shareholders equity. Realized gains and losses on sales
of investments, as determined on a specific identification basis, are included in the consolidated
statement of operations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | According to the SECs issued Staff Accounting Bulletin No. 59 (SAB No. 59), management
is required to evaluate in each period whether the decline in value for a security is other than
temporary. The Companys available-for-sale securities declines were included in the consolidated
statements of operations as financial expenses (see Note 3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | Investment
      in other company:
| | ----------------------------------
| |                                   

| | The investment
      in this company is stated at cost, since the Company does not have the ability
      to exercise significant influence over operating and financial policies
      of the investee.                                                                                                                                                                                                                                                                                                  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Companys
      investment in  the other company is reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of
      an investment may not be recoverable, in accordance with Accounting Principle
      Board Opinion No. 18. The Equity Method of Accounting for Investments
      in Common Stock (APB No. 18). As of December 31,
      2003, based on managements most recent analysis, no impairment losses
      have been identified.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | Property
      and equipment:
| | -----------------------------
| |                              

| | Property
      and equipment are stated at cost, net of accumulated depreciation. Depreciation
      is calculated by the straight-line method over the estimated useful lives
      of the assets, at the following annual rates:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                   

|                                         | %                         
|---------------------------------------- | --------------------------
|                                         |                           
|Computers and peripheral
      equipment | 33                        
|Office furniture
      and equipment     | 6 - 20                    
|Motor vehicles                           | 15                        
|Leasehold improvements                   | Over the term of the lease

F-13

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  | Impairment
      of long-lived assets and identifiable intangible:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | The long-lived
      assets of the Company and its subsidiaries are reviewed for impairment in
      accordance with Statement of Financial Accounting Standard No. 144 Accounting
      for the Impairment for Disposal of Long-Lived Assets (SFAS No.
      144) whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. Recoverability of assets
      to be held and used is measured by a comparison of the carrying amount of
      an asset to the future undiscounted cash flows expected to be generated
      by the assets. If such assets are considered to be impaired, the impairment
      to be recognized is measured by the amount by which the carrying amount
      of the assets exceeds the fair value of the assets. Assets to be disposed
      of are reported at the lower of the carrying amount or fair value less costs
      to sell. As of December 31, 2003, no impairment losses have been identified.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Goodwill
      represents the excess of the costs over the fair value of net assets of
      businesses acquired. Goodwill that arose from acquisitions prior to July
      1, 2001 was amortized until December 31, 2001, on a straight-line basis
      over seven years. Under SFAS No. 142, goodwill acquired in a business combination
      on or after July 1, 2001 is not amortized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | SFAS No.142
      requires goodwill to be tested for impairment on adoption and at least annually
      thereafter or between annual tests in certain circumstances, and written
      down when impaired, rather than being amortized as previous accounting standards
      required. Goodwill is tested for impairment by comparing the fair value
      of the reporting unit with its carrying value. Fair value is determined
      using discounted cash flows. Significant estimates used in such methodology
      include estimates of future cash flows, future short-term and long-term
      growth rates and weighted average cost of capital for the reportable unit.
      Goodwill was written off as a result of the Companys interim SFAS
      No. 142 impairment analysis performed at September 30, 2003 (see also Note 7b).                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Income
      taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | The Company
      and its subsidiaries account for income taxes in accordance with Statement
      of Financial Accounting Standards No. 109, Accounting for Income Taxes
      (SFAS No. 109). This statement prescribes the use of the liability
      method whereby deferred tax asset and liability account balances are determined
      based on differences between financial reporting and tax bases of assets
      and liabilities and are measured using the enacted tax rates and laws that
      will be in effect when the differences are expected to reverse. The Company
      and its subsidiaries provide a valuation allowance, if necessary, to reduce
      deferred tax assets to their estimated realizable value.                                                                                                                                                                                                                                                            

F-14

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| | Revenue
      recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company
      and its subsidiaries market their products to telecommunications service
      providers both directly and through alliances with leading vendors of computer
      hardware, telecommunications equipment, test systems, and probes. The Companys
      products have been licensed to various types of telecommunications operators.
      The Company also generates revenues from services.                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Revenues
      from software licenses that require significant customization, integration,
      installation and development services are recognized based on Statement
      of Position No. 81-1 Accounting for Performance of Construction -
      Type and Certain Production - Type Contracts (SOP No. 81-1),
      using contract accounting on a percentage of completion method based on
      the relationship of actual labor days incurred to total labor days estimated
      to be incurred over the duration of the contract.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | According
      to SOP 81-1, costs that are incurred for a specific anticipated contract
      prior to the existence of a persuasive evidence of an agreement are deferred,
      subject to evaluation of their probable recoverability, and only if the
      costs can be directly associated with a specific anticipated contract. Such
      deferred costs are recorded as unbilled contract costs, in other accounts
      receivable and prepaid expenses.                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Provisions
      for estimated losses on uncompleted contracts are made in the period in
      which such losses are determined in the amount of the estimated loss on
      the entire contract. As of December 31, 2003, no such estimated losses
      were identified.                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Service revenues
      primarily consist of fees from maintenance and customer support. Revenues
      from maintenance and support contracts are recognized ratably over the life
      of the agreement, which is typically one year, or at the time when services
      are rendered.                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Estimated
      gross profit or loss from long-term contracts may change due to changes
      in estimates resulting from differences between actual performance and original
      forecasts. Such changes in estimated gross profit are recorded in results
      of operations when they are reasonably determinable by management, on a
      cumulative catch-up basis.                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |  | The Company believes that the use of the percentage of completion method is appropriate as the Company
has the ability to make reasonably dependable estimates of the extent of progress towards completion,
contract revenues and contract costs. In addition, contracts executed include provisions that clearly
specify the enforceable rights regarding services to be provided and received by the parties to the
contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases
the Company expects to perform its contractual obligations and its licensees are expected to satisfy
their obligations under the contract.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | Deferred
      revenues include unearned amounts received under maintenance and support
      contracts and amounts received from customers but not yet recognized as
      revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                      

F-15

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  | Research and development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Research and development costs incurred in the process of developing product improvements or new products,
are generally charged to expenses, as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | SFAS No. 86 requires capitalization of certain software development costs, subsequent to the establishment
of technological feasibility. Based on the Companys product development process, technological
feasibility is established upon completion of a working model.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Significant costs incurred by the Company, between completion of the working model and the point at
which the product is ready for general release, have been capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | The Company and its subsidiaries assess the recoverability of capitalized software development costs
in accordance with SFAS No. 86 at each balance sheet date by determining whether the amount by which
the unamortized capitalized cost of a computer software product exceeds the net realizable value.
The net realizable value is the estimated future gross revenues from that product reduced by the
estimated future costs of completing and disposing of that product, including the cost of performing
maintenance and customer support required to satisfy the Companys responsibility set forth
at the time of sale. Based on its most recent analyses, management believes that no further impairment
of capitalized software development costs exists as of December 31, 2003 (see also Note 6).
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Royalty and non-royalty bearing grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Royalty-bearing grants from the Government of Israel and others for the funding of approved research
and development projects are recognized at the time the Company is entitled to such grants on the
basis of the related costs incurred and recorded as a reduction in research and development costs
(see Note 15a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | During 2001 and 2002, the Company has received non-royalty-bearing grants from the European Union as
part of participation in a consortium of companies engaged in the development of a platform for the
management and control of IP over optical networks (DWDM). In addition, during 2002 and 2003, the
Company also received non-royalty-bearing grants for its participation in the MAGNET
project financed by the Government of Israel (see Note 15a).                                                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Grants from the European Union and MAGNET project are not required to be repaid and are
recognized at the time the Company is entitled to such grants on the basis of the related costs incurred
and recorded as a reduction in research and development costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Concentrations of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Financial instruments that potentially subject the Company and its subsidiaries to concentrations of
credit risk consist principally of cash and cash equivalents, short-term and long-term bank deposits,
trade and unbilled receivables, long-term trade and unbilled receivables and investments in marketable
securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-16

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| | The Companys
      and its subsidiaries cash and cash equivalents, short-term and long-term
      bank deposits are invested in U.S. dollar deposits with major Israeli and
      U.S. banks. Such deposits in the United States may be in excess of insured
      limits and are not insured in other jurisdictions. Management believes that
      the financial institutions that hold the Company and its subsidiaries
      investments are financially sound, and accordingly, minimal credit risk
      exists with respect to these investments.          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Companys
      marketable securities include investments in government and corporate debentures
      that are considered by management to be financially sound. Minimal credit
      risk exists with respect to these marketable securities, since management
      believes that the portfolio is well diversified and the institutions that
      hold the Companys investments are well established.                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Companys
      and its subsidiaries trade and unbilled receivables and long-term
      trade and unbilled receivables are derived from sales to large and solid
      customers. An allowance for doubtful accounts is determined with respect
      to those amounts that the Company and its subsidiaries have determined to
      be doubtful of collection. The Company and its subsidiaries perform ongoing
      credit evaluation of its customers (see Note 1c).                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
      and its subsidiaries have no off-balance-sheet concentration of credit risk
      such as foreign exchange contracts, option contracts or other foreign hedging
      arrangements.                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Basic
      and diluted net earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Basic net
      earnings (loss) per share is computed based on the weighted average number
      of Ordinary shares outstanding during each year. Diluted net earnings (loss)
      per share is computed based on the weighted average number of Ordinary shares
      outstanding during each year, plus dilutive potential Ordinary shares considered
      outstanding during the year, in accordance with Statement of Financial Accounting
      Standard No. 128, Earnings Per Share (SFAS No. 128).                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The total
      weighted average number of shares related to the outstanding options excluded
      from the calculations of diluted net earnings (loss) per share since they
      had an anti dilutive effect were 364,213, 297,704 and 0 for the years ended
      December 31, 2001, 2002 and 2003, respectively.                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Accounting
      for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
      has elected to follow Accounting Principles Board Statement No. 25, Accounting
      for Stock Options Issued to Employees (APB No. 25) and
      FASB Interpretation No. 44 Accounting for Certain Transactions Involving
      Stock Compensation (FIN No. 44) in accounting for its
      employee stock option plans. Under APB No. 25, when the exercise price of
      an employee stock option is equivalent to or above the market price of the
      underlying stock on the date of grant, no compensation expense is recognized.

F-17

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |  | The Company adopted the disclosure provisions of Financial Accounting Standards Board Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS
No. 148), which amended certain provisions of SFAS No. 123 Accounting for Stock-Based
Compensation to provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee compensation, effective as
of the beginning of the fiscal year. The Company continues to apply the provisions of APB No. 25,
in accounting for stock-based compensation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Pro forma information regarding the Companys net income (loss) and net earnings (loss) per share
is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee
stock options under the fair value method prescribed by SFAS No. 123.                                                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | The fair value for these options was estimated at the date of grant using a Black-Scholes Option Valuation
Model with the following weighted-average assumptions for 2001 (no options were granted to employees
in 2002 and 2003): risk-free interest rates of 2%; dividend yields of 0%; volatility factors of the
expected market price of the Companys Ordinary shares of 0.332 and weighted average expected
life of the options of three years.                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense
over the options vesting period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | Pro
      forma information under SFAS No. 123, is as follows:
| | --------------------------------------------------------------
| |                                                               

|                                                       | Year
      ended December 31,
|------------------------------------------------------ | -----------------------------
|
|Net income
      (loss) available to Ordinary shares - | $                            
|as
      reported                                     
|Deduct -
      stock-based employee compensation -    
|fair
      value                                       |                              
|                                                       |                              
|Pro forma:                                            
|Net
      income (loss)                                | $                            
|                                                       |                              
|Earnings
      (loss) per share:                      
|Earnings
      (loss) as reported                      | $                            
|                                                       |                              
|Diluted
      earnings (loss) as reported              | $                            
|                                                       |                              
|Pro forma
      basic earnings (loss)                  | $                            
|                                                       |                              
|Pro forma
      diluted earnings (loss)                | $                            
|                                                       |                              

| | The Company
      applies SFAS No. 123 and Emerging Issues Task Force No. 96-18 Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or in Conjunction with Selling, Goods or Services (EITF 96-18),
      with respect to options and warrants issued to non-employees. SFAS No. 123
      requires the use of option valuation models to measure the fair value of
      the options and warrants at the date of grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| | Fair
      value of financial instruments:
| | ------------------------------------------
| |                                           

| | The following
      methods and assumptions were used by the Company and its subsidiaries in
      estimating their fair value disclosures for financial instruments:                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                 
| | The carrying
      amount reported in the balance sheet for cash and cash equivalents, short-term
      and long-term bank deposits, trade receivables, unbilled receivables, trade
      payables and related parties approximates their fair value due to the short-term
      maturities of such instruments.
| |                                                                                                                                                                                                                                                                                                                 
| | The carrying
      amounts and the fair value of marketable securities is based on the quoted
      market prices (see Note 3).                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                 

| | Severance
      pay:
| | --------------------
| |                     

| | The Companys
      liability for severance pay is calculated pursuant to Israels Severance
      Pay Law based on the most recent salary of the employees multiplied by the
      number of years of employment, as of the balance sheet date. Employees are
      entitled to one months salary for each year of employment or a portion
      thereof. The Companys liability for all of its employees is fully
      provided by monthly deposits with insurance policies and by an accrual.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The deposited
      funds include profits accumulated up to the balance sheet date. The deposited
      funds may be withdrawn only upon the fulfillment of the obligation pursuant
      to Israels Severance Pay Law or labor agreements. The value of the
      deposited funds is based on the cash surrendered value of these policies,
      and includes immaterial profits.                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Severance
      pay expenses for the years ended December 31, 2001, 2002 and 2003 were $ 1,098,
      $ 1,120 and $ 1,196, respectively.                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | Advertising
      expenses:
| | ---------------------------
| |                            

| | Advertising
      expenses are charged to the statements of operations as incurred. Advertising
      expenses for the years ended December 31, 2001, 2002 and 2003 were $ 171,
      $ 220 and $ 186, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                     

F-19

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| | Impact
      of recently issued accounting standards:
| | -----------------------------------------------------
| |                                                      

| | In November
      2002, the FASB issued FASB Interpretation No. 45, Guarantors
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others, an Interpretation of FASB Statements
      No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN
      No. 45). FIN No. 45 elaborates on the disclosures to be made by a
      guarantor in its interim and annual financial statements about its obligations
      under certain guarantees that it has issued. It also clarifies that a guarantor
      is required to recognize, at the inception of a guarantee, a liability for
      the fair value of the obligation undertaken in issuing the guarantee. FIN
      No. 45 does not prescribe a specific approach for subsequently measuring
      the guarantors recognized liability over the term of the related guarantee.
      It also incorporates, without change, the guidance in FASB Interpretation
      No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others,
      which is being superseded. The disclosure of the provisions of FIN No. 45
      are effective for financial statements of interim or annual periods that
      end after December 15, 2002, and the provisions for initial recognition
      and measurement are effective on a prospective basis for guarantees that
      are issued or modified after December 31, 2002, irrespective of a guarantors
      year-end. The Company does not expect that the adoption of FIN No. 45 will
      have a material impact on its results of operations or financial position.                                           
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In January
      2003, the FASB issued Interpretation No. 46, Consolidation of Variable
      Interest Entities (FIN 46). The objective of FIN 46 is
      to improve financial reporting by companies involved with variable interest
      entities. A variable interest entity is a corporation, partnership, trust,
      or any other legal structure used for business purposes that either (a)
      does not have equity investors with voting rights or (b) has equity investors
      that do not provide sufficient financial resources for the entity to support
      its activities. FIN 46 requires a variable interest entity to be consolidated
      by a company if that company is subject to a majority of the risk of loss
      from the variable interest entitys activities or entitled to receive
      a majority of the entitys residual returns or both. FIN 46 also requires
      disclosures about variable interest entities that the company is not required
      to consolidate but in which it has a significant variable interest. The
      consolidation requirements of FIN 46 apply immediately to variable interest
      entities created after January 31, 2003. The consolidation requirements
      apply to older entities in the first fiscal year or interim period ending
      after March 15, 2004. Certain of the disclosure requirements apply in all
      financial statements issued after January 31, 2003, regardless of when the
      variable interest entity was established. As of December 31, 2003, the Company
      does not expect the adoption of FIN 46 to have a material impact on its
      consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In November
      2002, Emerging Issues Task Force (EITF) reached a consensus
      on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
      EITF Issue No. 00-21 provides guidance on how to account for arrangements
      that involve the delivery or performance of multiple products, services
      and/or rights to use assets. The provisions of EITF Issue No. 00-21 applied
      to revenue arrangements entered into in fiscal periods beginning after June
      15, 2003. Additionally, companies will be permitted to apply the consensus
      guidance in this issue to all existing arrangements as the cumulative effect
      of a change in accounting principle in accordance with APB Opinion No. 20,
      Accounting Changes. The adoption of EITF Issue No. 00-21 did
      not have a material impact upon the Companys financial position, cash
      flows or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-20

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

|               | In December
      2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
      Revenue Recognition, (SAB No. 104) which revises
      or rescinds certain sections of SAB No. 101, Revenue Recognition,
      in order to make this interpretive guidance consistent with current authoritative
      accounting and auditing guidance and SEC rules and regulations. The changes
      noted in SAB No. 104 did not have a material effect on the Companys
      consolidated results of operations, consolidated financial position or consolidated
      cash flows.
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | Certain amounts
      from prior years have been reclassified to conform to the current years
      presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|NOTE
      3:- | MARKETABLE
      SECURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | The following is a summary of available-for-sale marketable securities:
| | -----------------------------------------------------------------------
| |                                                                        

| |                                   | **December
      31,**
| | --------------------------------- | ----------------------
| |                                   |                       
| |                                   | **2002**              
| |                                   |                       
| |                                   |                       
|
| | Available-for-sale:               |                       
| | Government
         debentures    | $                     
| | Corporate
         debentures (*) |                       
| |                                   |                       
| |                                   | $                     
| |                                   |                       

| | (*) | As of December 31, 2003, the Company holds investments in structured notes in the amount of $ 4,900.
The structured notes are comprised mainly from inverse floaters and range accruals.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                         

| | Range accrual is a bond in which the investor coupon is dependent on the number of days that a reference
rate stays within a re-established collar, otherwise the bond pays 0%. The inverse floater is a bond
with a coupon rate of interest that varies inversely with changes in specified interest levels or
indices (for example, LIBOR).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                              

| | The
      unrealized gains on structured notes was immaterial.
| | --------------------------------------------------------------
| |                                                               

| | The net adjustment to unrealized holding gains (losses) on available-for-sale marketable securities
included as a separate component of shareholders equity, accumulated other comprehensive
income (loss) amounted to $ 285 and $ (214) in 2002 and 2003, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                            
| | During 2002, the Company recorded an impairment expense in the amount of $ 2,137 as a decline
in market value of available-for-sale securities deemed to be other than temporary. The amount was
recorded in the financial expenses.                                       
| |                                                                                                                                                                                                                                                                            
| | During 2003, the Company recorded proceeds from sales and redemption of available-for-sale securities
in the amount of $ 8,765 and related gains of $ 543 in financial income, net.                                                                                        
| |                                                                                                                                                                                                                                                                            

F-21

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

|NOTE
      3:- | MARKETABLE
      SECURITIES (Cont.)
|-------------- | -----------------------------------
|               |                                    

| | During 2001
      and 2002, the Company recorded an impairment expense in the amount of $
      612 and $ 368, respectively as a decline in market value of mutual
      funds securities deemed to be other-than-temporary.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                             
| | As of December
      31, 2002 and 2003, the Company no longer holds trading securities. During
      2001, the Company recorded losses of $ 249 on trading securities in
      the financial income, net item.              
| |                                                                                                                                                                                                                             
| | Aggregate
      maturities of available-for-sale securities for years subsequent to December
      31, 2003 are:                                                                                                            

| | Amortized
      
      cost |  | Estimated
      fair market 
      value |  
| | --------------------------- |  | ---------------------------------------- | -
| | **Available-for-sale:**     |  |                                          |  
| |                             |  |                                          |  
| | 2005                        |  |                                          | $
| | 2006                        |  |                                          |  
| | 2013                        |  |                                          |  
| | 2015                        |  |                                          |  
| | 2016                        |  |                                          |  
| | 2018                        |  |                                          |  
| |                             |  |                                          |  
| |                             |  |                                          | $
| |                             |  |                                          |  

NOTE 4:-        OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

|
|
|
|
|
|
|
|
|
|
|
|
|

F-22

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 5:-        PROPERTY AND EQUIPMENT, NET

|                                        
|----------------------------------------
|                                        
|**2002**                                
|
|Cost:                                   
|Computers
      and peripheral equipment
|Office
      furniture and equipment    
|Motor
      vehicles                    
|Leasehold
      improvements            
|                                        
|                                        
|                                        
|Accumulated
      depreciation:         
|Computers
      and peripheral equipment
|Office
      furniture and equipment    
|Motor
      vehicles                    
|Leasehold
      improvements            
|                                        
|                                        
|                                        
|Depreciated
      cost                  
|                                        

| | Depreciation expenses for the years ended December 31, 2001, 2002 and 2003 are $ 2,910, $ 3,474
and $ 3,299, respectively.
| | --------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                           

|NOTE
      6:- | OTHER
      INTANGIBLE ASSETS, NET
|-------------- | ----------------------------------
|               |                                   

|                                             | **December
      31,**
|-------------------------------------------- | ----------------------
|
|**2002**                                     | **2003**              
|                                             |                       
|a.     
      Original amounts:              |                       
|Capitalized
      software development costs |                       
|Acquired
      technology (see Note 1)       |                       
|                                             |                       
|                                             |                       
|                                             |                       
|Accumulated
      amortization:              |                       
|Capitalized
      software development costs |                       
|Acquired
      technology                    |                       
|                                             |                       
|                                             |                       
|                                             |                       
|Amortized
      cost                         |                       
|                                             |                       

| |    | *)         Including a onetime impairment charge in the amount
of $ 5,864 (see b below).                                                                                     
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                              
| | b. | During 2001, the Company purchased technology from Axarte (see also Note 1b) and capitalized software
development costs in the amount of $ 13,361 (the Netrac2 Technology).
| |    |                                                                                                                                                                              

| | The Netrac2
      Technology is amortized since January 1, 2002, using the straight-line method
      over the estimated economic life of the technology, which is six years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

|NOTE
      6:- | OTHER
      INTANGIBLE ASSETS, NET (Cont.)
|-------------- | ------------------------------------------
|               |                                           

| | During the first quarter of 2002, the Company developed new technology (ServiceView Technology)
in the amount of $ 2,000. On October 1, 2002, the Company began to amortize the ServiceView
Technology using the straight-line method over the estimated economic life of the technology,
which is three years. No software development costs were capitalized in 2003.                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On September 30, 2003, the net realizable value of the abovementioned technologies was periodically
reviewed by management, based on the estimated future gross revenues from such technologies reduced
by the estimated future costs for completing disposing each of them. This review indicated that the
net realizable value of the Netrac2 Technology and the ServiceView Technology exceed the unamortized
capitalized costs. An amount of $ 5,864 has been reduced and recorded as an impairment of capitalized
software costs included in the cost of revenues.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | c. | Amortization
      expense for the years ended December 31, 2001, 2002 and 2003 amounted to
      $ 0, $ 2,394 and $ 3,783, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                          
| | d. | Estimated
      amortization expenses for the years ended December 31:                                                                   

| | 2004 |  | $ | 1,407
| | ---- |  | - | -----
| | 2005 |  |   | 1,290
| | 2006 |  |   | 942  
| | 2007 |  |   | 942  
| |      |  |  
| |      |  | $ | 4,581
| |      |  |  

|NOTE
      7:- | GOODWILL
|-------------- | --------
|               |         

| | a. | The changes
      in the carrying amount of goodwill for the years ended December 31, 2002
      and 2003, are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------

| |                                       |  | **Total**
| | ------------------------------------- |  | ---------
| |                                       |  |          
| | Balance as of January
      1, 2002   |  | $        
| | Write-off charge                      |  |          
| |                                       |  |          
| | Balance as of December
      31, 2003 |  | $        
| |                                       |  |          

| | b. | During 2003,
      the sharp downturn in capital spending in the Companys major markets
      continued to negatively impact the Companys core business, resulting
      in substantially lower revenues than expected and additional operating losses.                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                  
| |    | Based upon
      these indications, the Companys management believes that these indications
      would reduce the fair value of the Company below its carrying value. As
      a result, the Company decided to perform an interim test for goodwill impairment
      and, as a result, recorded a $ 1,052 write-off of the remaining goodwill.
| |    |                                                                                                                                                                                                                                                                                                                                                  
| | c. | A pro forma
      chart reflecting the operations, had the Company adopted the non-amortization
      provisions of SFAS No. 142, was not presented due to immateriality.                                                                                                                                                                        

F-24

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 8:-        OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

| | **December
      31,**              
| | ------------------------------------
|
|
|
| | Employees
      and payroll accruals
| | Accrued expenses                    
| | Government
      authorities        
| | Others                              
| |                                     
| |                                     
| |                                     

NOTE 9:-        COMMITMENTS AND CONTINGENT LIABILITIES

| | a. | Lease commitments:
| | -- | ------------------
| |    |                   

| | In April 1998, the Company entered into an agreement with Team according to which the Company will
lease its facilities in Israel from Team for a period of five years, effective February 1, 1998.
In 2003, the Company exercised its renewal option for an additional four and a half years up until
August 2007. The Company and its subsidiaries rent their facilities and motor vehicles under various
operating lease agreements, which expire on various dates, the latest of which is in 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Aggregate minimum rental commitments under non-cancelable leases at December 31, 2003 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|
|
|
|
|
|
|
|
|
|
|
|

| | Facilities lease expenses for the years ended December 31, 2001, 2002 and 2003 were $ 1,001, $ 1,320
and $ 1,689, respectively.            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                            
| | Motor vehicles lease expenses for the years ended December 31, 2001, 2002 and 2003 were approximately
$ 408, $ 593 and $ 435, respectively.
| |                                                                                                                                            

| | b. | Royalties commitments:
| | -- | ----------------------
| |    |                       

| | Under the
      Companys research and development agreements with the Office of the
      Chief Scientist (OCS) and the Binational Industrial Research
      and Development Foundation (BIRD-F), and pursuant to applicable
      laws, the Company is required to pay royalties at the rate of 3%-5% of sales
      of products developed with funds provided by the OCS and BIRD-F, up to an
      amount equal to 100%-150% of the research and development grants (dollar-linked)
      received from the OCS and BIRD-F. The obligation to pay these royalties
      is contingent on actual sales of the products and, in the absence of such
      sales, no payment is required. Royalties payable with respect to grants
      received under programs approved by the OCS after January 1, 1999, are subject
      to interest on the U.S. dollar-linked value of the total grants received
      at the annual rate of LIBOR applicable to U.S. dollar deposits. Royalties
      payable with respect to grants received from BIRD-F are linked to the Consumer
      Price Index in the United States.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-25

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 9:-        COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

| | The Company has paid or occurred royalties relating to the repayment of such grants in the amount of
$ 357, $ 294 and $ 223 for the years ended December 31, 2001, 2002 and 2003, respectively. The amounts
were recorded in the cost of revenues. As of December 31, 2003, the Company has an outstanding contingent
obligation to pay royalties in the amount of approximately $ 2,962, in respect of these grants.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                      

| | c. | Guarantees:
| | -- | -----------
| |    |            

| | The Company has obtained performance guarantees in favor of certain customers from several banks in
Israel and in the U.S. amounting to $ 5,179, $ 5,110 and $ 4,242 for the years ended December
31, 2001, 2002 and 2003, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                         

| | d. | Litigation:
| | -- | -----------
| |    |            

| | During 2003,
      a dispute arose between the Company and one of its suppliers, according
      to which the supplier claimed that the Company, among other things, infringed
      its intellectual property rights. The Company believes that the these claims
      are unfounded. In any event, the Company recorded a provision in the amount
      of $ 150 in respect of the suppliers claims (see also Note 16)
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10:-      INCOME TAXES

| | a. | Measurement of results for tax purposes under the Income Tax Law (Inflationary Adjustments), 1985.
| | -- | --------------------------------------------------------------------------------------------------
| |    |                                                                                                   

| | Results for tax purposes are measured in terms of earnings in NIS after certain adjustments for increases
in Israels Consumer Price Index (CPI). As explained in Note 2, the financial statements
are presented in U.S. dollars. The difference between the annual change in the CPI and in the NIS\dollar
exchange rate causes a difference between taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not reserved
for deferred taxes on the difference between the reporting currency and the tax bases of assets and
liabilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | b.         Tax benefits under the Law for the Encouragement
of Capital Investments, 1959 (the law):
| | -----------------------------------------------------------------------------------------------------
| |                                                                                                      

| | Most of the
      Companys production facilities have been granted approved enterprise
      status under five separate investment programs and, as such, are entitled
      to tax benefits, under the above law. According to the law, the Company
      has elected the alternative benefits track, and has waived Government
      grants, in return for a tax exemption.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-26

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 10:-      INCOME TAXES (Cont.)

| | Upon the
      Companys Initial Public Offering that occurred in 1996, the Company
      became a foreign investment Company for the purposes of the
      aforementioned law. Accordingly, the Company is entitled to a 10-year period
      of benefits. Income derived from the Companys investment programs,
      is tax-exempt for the first two to four years and is entitled to a reduced
      tax rate of 10% to 25%, during the remaining benefit period of six to eight
      years (subject to the percentage of foreign ownership in each tax year).                                                                      
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The primary
      tax benefits available in respect of the approved enterprises are:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Income derived
      from the Companys first approved enterprise was tax exempt for four
      years (1994-1997) after which it was taxable at the rate of 20%-25% for
      six years ended in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Income derived
      from the Companys second approved enterprise was tax exempt for four
      years (1996-1999) after which it is taxable at the rate of 20%-25% for six
      years ending in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Income derived
      from the Companys third approved enterprise was tax exempt for two
      years (1998-1999) after which it is taxable at the rate of 20%-25% for eight
      years ending in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Income derived
      from the Companys fourth approved enterprise is tax exempt for two
      years (2000-2001) after which it is taxable at the rate of 20%-25% for eight
      years ending in 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Income derived
      from the Companys fifth approved enterprise is tax exempt for two
      years (2002-2003) after which it is taxable at the rate of 20%-25% for eight
      years ending in 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The period
      of tax benefits detailed above is subject to limits of 12 years from the
      year of commencement of production, or 14 years from the date of granting
      the approval, whichever is earlier.                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The tax-exempt
      profits that will be earned by the Companys approved enterprise can
      be distributed to shareholders, without imposing tax liability on the Company
      only upon the complete liquidation of the Company. As of December 31, 2003,
      retained earnings included approximately $ 19,000 of tax-exempt income
      earned by the Companys approved enterprise.                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The Company
      has decided to permanently reinvest its tax-exempt income. Accordingly,
      no deferred taxes have been provided on income attributable to the Companys
      approved enterprise. If these retained tax-exempt profits are distributed
      in a manner other than in the complete liquidation of the Company, they
      would be taxed at the corporate tax rate applicable to such profits as if
      the Company had not elected the alternative benefits (currently 20% for
      an approved enterprise) and an income tax liability of approximately $ 4,344
      would be incurred as of December 31, 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Income from
      sources other than the approved enterprise during the benefit period will
      be taxable at the regular corporate tax rate of 36%. By virtue of the Law,
      the Company is entitled to claim accelerated rates of depreciation on equipment
      used by the approved enterprise during five tax years.                                                                                                                                                                                                                                                                                                             

F-27

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 10:-      INCOME TAXES (Cont.)

| | The entitlement to the above benefits is conditional upon the Companys fulfilling the conditions
stipulated by the above law, regulations published hereunder and the instruments of approval for
the specific investments in the approved enterprises. In the event of failure to comply with these
conditions, the benefits may be canceled and the Company may be required to refund the amount of
the benefits, in whole or in part, including interest. As of December 31, 2003, management believes
that the Company is meeting all of the aforementioned conditions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | c. | Tax benefits
      under the Law for the Encouragement of Industry (Taxation), 1969:
| | -- | ------------------------------------------------------------------------------------
| |    |                                                                                     

| | The Company is an industrial company under the above law and, as such, is entitled to certain
tax benefits including accelerated depreciation rates and deduction of public offering expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                 

| | d. | On July 24, 2002, Amendment 132 to the Israeli Income Tax Ordinance (the Amendment) was
approved by the Israeli parliament and came into effect on January 1, 2003. The principal objectives
of the Amendment were to broaden the categories of taxable income and to reduce the tax rates imposed
on employees income.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                          

| | The material consequences of the Amendment applicable to the Company include, among other things, imposing
a tax upon all income of Israel residents, individuals and corporations, regardless of the territorial
source of income and certain modifications in the qualified taxation tracks of employee stock options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                         

| | e.         Deferred income taxes:
| | ---------------------------------
| |                                  

| | Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company and its subsidiaries deferred tax assets are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                

| | **December
      31,**                                    
| | ----------------------------------------------------------
|
|
|
| | Deferred
      tax assets:                                
| | Reserves
      and allowances                             
| | Net
      operating loss carryforward of subsidiaries     
| | Israel
      net operating loss carryforward              
| |                                                           
| | Total deferred
      tax assets before valuation allowance
| | Valuation
      allowance                                 
| |                                                           
| | Net deferred
      tax assets (included in other accounts 
| | receivable
      and prepaid expenses) - all domestic     
| |                                                           

F-28

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 10:-      INCOME TAXES (Cont.)

| | f. | The Companys subsidiaries in the U.S., the U.K. and Australia have estimated total available
carryforward tax losses of $ 11,529, $ 11,212 and $ 198, respectively, to offset against future taxable
income for an indefinite period. As of December 31, 2003, the Company recorded a deferred tax asset
of approximately $ 6,882, relating to the available net carryforward tax losses. A valuation allowance
for the entire balance was recorded due to the uncertainty of the future realization of the tax asset.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | The Company has provided a valuation allowance regarding tax loss carryforward on a portion of the
deferred tax assets, on which it is more likely than not that a tax benefit will not be realized.
During 2003, the Company increased the valuation allowance by $ 10,089 to $ 15,388.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                         

| | g.         Reconciliation of the theoretical tax expenses:
| | ----------------------------------------------------------
| |                                                           

| | A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory
rate applicable in Israel to income of the Company and the actual income tax as reported in the statements
of operations, is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                             

|                                                                                               | **Year
      ended December 31,**
|---------------------------------------------------------------------------------------------- | ---------------------------------
|
|
|
|Income (loss)
      before taxes, as reported in                                               |                                  
|the
      consolidated statements of operations                                                |                                  
|                                                                                               |                                  
|Statutory
      tax rate in Israel                                                             |                                  
|                                                                                               |                                  
|Theoretical
      tax expense (benefit)                                                        |                                  
|Increase
      (decrease) in taxes resulting from:                                             |                                  
|Approved
      enterprise benefit (1)                                                          |                                  
|Tax adjustment
      in respect of foreign                                                     |                                  
|subsidiaries
      different tax rate                                                          |                                  
|Tax adjustment
      in respect of inflation in Israel                                         |                                  
|Deductible
      issuance expenses and tax benefits                                            |                                  
|for
      options to employees in respect of which                                             |                                  
|deferred
      taxes were not provided                                                         |                                  
|Non-deductible
      expenses                                                                  |                                  
|Deferred
      taxes on losses for which valuation                                             |                                  
|allowance
      was provided                                                                   |                                  
|Taxes in
      respect of prior years                                                          |                                  
|                                                                                               |                                  
|Income taxes
      (tax benefit), as reported in the                                           |                                  
|statements
      of operations                                                                 |                                  
|                                                                                               |                                  
|(1)  
      Per share amounts of the tax benefit 
               resulting from the exemption: |                                  
|                                                                                               |                                  
|Basic                                                                                          |                                  
|                                                                                               |                                  
|Diluted                                                                                        |                                  
|                                                                                               |                                  

F-29

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 10:-      INCOME TAXES (Cont.)

| | h.         The Israeli
company has received final tax assessments until 1999.           
| | ----------------------------------------------------------------------------------------
| |                                                                                         
| | i.          The provision
for income taxes (tax benefits) is comprised of the following:
| |                                                                                         

|                                     
|-------------------------------------
|                                     
|**2001**                             
|
|Current taxes                        
|Taxes in
      respect of prior years
|Deferred
      income taxes (benefit)
|                                     
|                                     
|                                     
|Domestic                             
|Foreign                              
|                                     
|                                     
|                                     

| | j.         
      Income (loss) before income taxes
| | ---------------------------------------------------
| | (tax benefits) is comprised of the following:      

|Domestic |  |  | $ | 14,706 |  | $ | (9,409  | ) | $ | (11,371 | )
|-------- |  |  | - | ------ |  | - | ------- | - | - | ------- | -
|Foreign  |  |  |   | 389    |  |   | (2,030  | ) |   | (19,165 | )
|         |  |  |   |        |  |  
|         |  |  | $ | 15,095 |  | $ | (11,439 | ) | $ | (30,536 | )
|         |  |  |   |        |  |  

NOTE 11:-      SHAREHOLDERS EQUITY

| | The Companys Ordinary shares have been listed for trade on the NASDAQ National Market since TTIs
initial public offering (IPO) on December 4, 1996.                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                    
| | In 1999 and 2000, the Company effected two additional secondary offerings.                                                                                                         
| |                                                                                                                                                                                    
| | The Ordinary shares confer upon their holders the right to receive notice to participate and vote in
the Companys general meeting and the right to receive dividends, if declared.
| |                                                                                                                                                                                    

| | a. | Share options:
| | -- | --------------
| |    |               

| | Employee
      Share Option Plans:
| | ----------------------------------
| |                                   

| |  | During 1995, 1996, 1999, 2000 and 2001, the Board of Directors of the Company adopted share option
plans (as amended the Plans) pursuant to which 2,325,515 Ordinary shares were reserved
for issuance upon the exercise of options to be granted to certain directors and key employees of
the Company and its subsidiaries.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                

F-30

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**                                 
|-------------------------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands. except share data

NOTE 11:-     
  SHAREHOLDERS EQUITY (Cont.)

| |  | The Board of Directors is empowered, among other things, to designate the options, dates of grant and
the exercise price of options. Unless otherwise decided by the Board, the options will vest over
a period of one to three years of employment, and will be non-assignable.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                 
| |  | Pursuant to the Plans, as of December 31, 2003, an aggregate of 282,729 options of the Company are
still available for future grant.                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                 
| |  | Each option granted under the Plans to employees expires no later than five years from the date of
the grant. Any options which are canceled or forfeited before expiration become available for future
grants.                                                                 
| |  |                                                                                                                                                                                                                                                                                 

| | A summary of the stock options (except options to a non-employees) activities in 2001, 2002 and 2003
is as follows:
| | -------------------------------------------------------------------------------------------------------------------
| |                                                                                                                    

|                                   | Year ended December 31,           
|---------------------------------- | ----------------------------------
|
|
|                                   |                                   
|                                   | **Amount of
      
      options**
|                                   |                                   
|Outstanding
      at the beginning |                                   
|of
      the year                  | 852,886                           
|Granted                            | 250,134                           
|Exercised                          | (344,642                          
|Forfeited                          | -                                 
|Expired                            | -                                 
|                                   |                                   
|Outstanding
      at the end of   
|the
      year                     | 758,378                           
|Options exercisable
      at the  
|                                   |                                   
|end
      of year                  | 167,044                           
|                                   |                                   

F-31

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**                                 
|-------------------------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands. except share data

NOTE 11:-      SHAREHOLDERS EQUITY (Cont.)

| | The options
      outstanding as of December 31, 2003 have been separated into exercise prices,
      as follows:
| | -----------------------------------------------------------------------------------------------------------------

|**Exercise 
      Price** |  | Options outstanding as of December 31,
      2003 |  | Weighted average remaining contractual
      life |  | Weighted average exercise price |       | Options exercisable as of December 31,
      2003 |         | Weighted average exercise price
      of exercisable options |  
|------------------------- |  | ------------------------------------------------- |  | ------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------------------------- | ------- | ------------------------------------------------------------ | -
|                          |  |                                                   |  |                                                   |  |                                
|                          |  |                                                   |  | **years**                                         |  |                                 |       |                                                   |         |                                                              |  
|                          |  |                                                   |  |                                                   |  |                                 |       |                                                   |         |                                                              |  
|10.50                     |  | 59,666                                            |  | 0.83                                              |  | $                               | 10.50 |                                                   | 59,666  |                                                              | $
|12.88                     |  | 60,000                                            |  | 0.83                                              |  | $                               | 12.88 |                                                   | 60,000  |                                                              | $
|18.63-19.63               |  | 76,167                                            |  | 1.83                                              |  | $                               | 19.01 |                                                   | 76,167  |                                                              | $
|20.00-23.00               |  | 256,678                                           |  | 1.01                                              |  | $                               | 21.14 |                                                   | 250,678 |                                                              | $
|30.00                     |  | 17,667                                            |  | 1.86                                              |  | $                               | 30.00 |                                                   | 17,667  |                                                              | $
|                          |  |                                                   |  |                                                   |  |                                 |       |                                                   |         |                                                              |  
|                          |  | 470,178                                           |  | 1.11                                              |  | $                               | 18.72 |                                                   | 464,178 |                                                              | $
|                          |  |                                                   |  |                                                   |  |                                 |       |                                                   |         |                                                              |  

| | b. | Weighted-average
      fair values and exercise prices of options, whose exercise price equals
      or exceeds the market price of the shares on the date of grant, are as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                  |                             |       |         
|------------------------------------------------------------------------------------------------- | --------------------------- | ----- | --------
|                                                                                                  | **Year ended December 31,**
|                                                                                                  |                            
|                                                                                                  | **2001**                    |       | **2002**
|                                                                                                  |                             |       |         
|Weighted-average
      fair value on date of grant of    options at an exercise
      price that: |                             |       |         
|                                                                                                  |                             |       |         
|Equal
      to the fair value of the shares at the                                                |                             |       |         
|date
      of grant                                                                               | $                           | 3.84  |         
|                                                                                                  |                             |       |         
|Exceed
      the fair value of the shares at the                                                  |                            
|date
      of grant                                                                               | $                           | 1.53  |         
|                                                                                                  |                             |       |         
|Weighted-average
      exercise price of options                                                  |                            
|granted
      at an exercise price that:                                                          |                            
|                                                                                                  |                            
|Equal
      to the fair value of the shares at the                                                |                            
|date
      of grant                                                                               | $                           | 19.00 |         
|                                                                                                  |                             |       |         
|Exceed
      the fair value of the shares at the                                                  |                            
|date
      of grant                                                                               | $                           | 22.69 |         
|                                                                                                  |                             |       |         

| | c. | Dividends:
| | -- | ----------
| |    |           

| | In the event that cash dividends are declared in the future, such dividends will be paid in NIS or
in foreign currency subject to any statutory limitations. The Company does not intend to pay cash
dividends in the foreseeable future. The Company has decided not to declare dividends out of tax-exempt
earnings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                       

F-32

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**                                 
|-------------------------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands. except share data

|NOTE
      12:- | NET EARNINGS
      (LOSS) PER SHARE DATA
|--------------- | ----------------------------------------
|                |                                         

| | The
      following table sets forth the computation of basic and diluted net earnings
      (loss) per share.
| | --------------------------------------------------------------------------------------------------------------
| |                                                                                                               

| | a.        
      Numerator:
| | ---------------------------

|                                                      |                                   |            |         
|----------------------------------------------------- | --------------------------------- | ---------- | --------
|                                                      | **Year
      ended December 31,**
|                                                      | **2001**                          | **2002**   | **2003**
|Net income
      (loss) to holders of Ordinary shares | $                                 | 14,095     |         
|                                                      |                                   |            |         
|Numerator
      for basic and diluted net earnings   
|(loss)
      per share - income (loss) available to  
|holders
      of Ordinary shares                      | $                                 | 14,095     |         
|                                                      |                                   |            |         
|b.        
      Denominator:                         |                                   |            |         
|                                                      |                                   |            |         
|Denominator
      for basic net earnings (loss) per   |                                   |            |         
|share
      - weighted average of shares              |                                   | 11,490,422 |         
|                                                      |                                   |            |         
|Effect of
      dilutive securities:                 
|Employee
      stock options                          |                                   | 227,387    |         
|Options
      issued to consultants                   |                                   | 3,815      |         
|                                                      |                                   |            |         
|Dilutive
      potential Ordinary shares              |                                   | 231,202    |         
|                                                      |                                   |            |         
|Denominator
      for diluted net earnings (loss) per
|share
      - weighted average shares and assumed    
|exercise
      of options                             |                                   | 11,721,624 |         
|                                                      |                                   |            |         
|                                                      |                                   |            |         
|Basic net
      earnings (loss) per share             | $                                 | 1.23       |         
|                                                      |                                   |            |         
|Diluted net
      earnings (loss) per share           | $                                 | 1.20       |         
|                                                      |                                   |            |         

| | *) | Anti-dilutive.
| | -- | --------------

F-33

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 13:-      RELATED PARTY TRANSACTIONS AND BALANCES

| | Since the commencement of the Companys operations in 1992, Team has, from time to time, paid
the Company commissions in respect of sales by the Company of certain products represented and sold
by Team. This relationship is reflected in an agreement between the Company and Team dated October
1996 (the Agreement). Team generally pays the Company a commission at the rate of 15%
of the sales price of these products, up to a maximum of 50% of the amount received by Team from
these sales less the cost to Team.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In addition, Team provides to the Company certain administrative services, including computer servicing,
salary administration, automotive fleet maintenance and basic insurance coverage, and the Company
reimburses Team for the actual cost of such services. The Company and Team have agreed to indemnify
each other for liabilities resulting from acts or omissions of their respective employees constituting
intellectual property violations. The Agreement is automatically renewed for a successive terms of
one year on each December 31, and can be terminated by either party at the end of any such term upon
at least 60 days prior written notice. Regarding the rent commitment with Team, see also Note 9a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Since 1992, the Company has also purchased property and equipment, such as computer hardware, from
Team and Omnitek-Eichut Ltd. (Omnitek-Eichut), a subsidiary of Team. The Company pays
Team and Omnitek-Eichut prices for these assets that are no less favorable to the Company than those
it could obtain from unrelated third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In addition, Team supplies the Company with hardware, related software and support services for such
hardware for the Companys projects, in accordance with the agreement referred to above. Under
the agreement between the Company and Team, the Company is required to pay for such hardware, related
software and support services when it receives payment from its customers. In 2002, a disagreement
arose between the Company and Team regarding whether the Company is required to pay Team for hardware
and related software that it supplied to three of the Companys major customers as part of projects
for which the Company receives payments based on milestones which do not allocate specific amounts
for hardware and related software. Following negotiations to achieve a compromise with Team on this
issue, the Company agreed to pay Team the amount of $ 1,047 in respect of hardware and related
software supplied by Team as part of the Companys projects for these customers. When the Company
will receive additional payments for these projects, it is required to pay Team an additional payment
based on Teams pro rata share of the project. The aggregate additional amount that the Company
may have to pay to Team for all of these projects is $ 563.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In 2003, the Company paid Team $ 272 in respect of the above mentioned projects and executed a written
agreement with Team.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-34

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 13:-      RELATED PARTY TRANSACTIONS AND BALANCES (Cont.)

| | Transactions
      between Team and its affiliates and the Company:
| | -------------------------------------------------------------------

|                                                            |                               |       |         
|----------------------------------------------------------- | ----------------------------- | ----- | --------
|                                                            | Year
      ended December 31,
|                                                            |                              
|                                                            | **2001**                      |       | **2002**
|                                                            |                               |       |         
|Revenues:                                                   |                               |       |         
|                                                            |                               |       |         
|Commissions
      on product sales and payment for services | $                             | 974   |         
|                                                            |                               |       |         
|General and
      administrative expenses:                 
|                                                            |                               |       |         
|Rent
      and maintenance                                  | $                             | 1,299 |         
|                                                            |                               |       |         
|Administrative
      and management services                | $                             | 636   |         
|                                                            |                               |       |         
|Purchase
      of equipment                                 | $                             | 2,014 |         
|                                                            |                               |       |         

| | Balances
      between Team and the Company:
| | --------------------------------------------
| |                                             

|                    | December
      31,
|------------------- | ------------------
|
|                    |                   
|Current liabilities | $                 
|                    |                   

NOTE 14:-      CUSTOMERS AND GEOGRAPHIC INFORMATION

| | a.         Summary information about geographic areas:
| | ------------------------------------------------------
| |                                                       

| |  | The Company adopted Statement of Financial Accounting Standard No. 131, Disclosures About Segments
of an Enterprise and Related Information,(SFAS No. 131). The Company operates in
one reportable segment (see Note 1 for a brief description of the Companys business). The total
revenues are attributed to geographic areas based on the location of the end customer.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                

F-35

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 14:-      CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)

| | The following presents total revenues and long-lived assets as of and for the years ended December
31, 2001, 2002 and 2003:
| | ---------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                            

|              | 2001 |  | 2002 |        | 2003 |  
|------------- | ---- |  | ---- | ------ | ---- | -
|
|
|
|Israel        |      |  | $    | 4,565  |      | $
|United States |      |  |      | 33,177 |      |  
|Europe        |      |  |      | 16,133 |      |  
|Australia     |      |  |      | 359    |      |  
|South America |      |  |      | 5,078  |      |  
|Far East      |      |  |      | 177    |      |  
|South Africa  |      |  |      | 1,337  |      |  
|              |      |  |      |        |      |  
|              |      |  | $    | 60,826 |      | $
|              |      |  |      |        |      |  
|              |      |  |      |        |      |  

| | b.         Major customers data as a percentage of total revenues:
| | ------------------------------------------------------------------
| |                                                                   

|                 |  | Year ended
      December 31, | 
|---------------- |  | ----------------------------- | 
|
|
|                 |  |                               | 
|Customer
      A |  |                               | 
|Customer
      B |  |                               | 
|Customer
      C |  |                               | 
|Customer
      D |  |                               | 
|Customer
      E |  |                               | 

| | *)  | In 2002, the Company also recorded revenues of 7% and 6% each, from two affiliates of Customer E.
| | --- | -------------------------------------------------------------------------------------------------
| |     |                                                                                                  
| | **) | In 2003, the Company recorded revenues of 4% from an affiliate of Customer E.                    
| |     |                                                                                                  

NOTE 15:-      SELECTED STATEMENTS OF OPERATIONS DATA

| | a. | Research and development, net:
| | -- | ------------------------------
| |    |                               

|                                                          | Year ended
      December 31, | 
|--------------------------------------------------------- | ----------------------------- | 
|
|
|                                                          |                               | 
|Total cost                                                |                               | 
|Less - grants
      and participations                    |                               | 
|Less - capitalization
      of software development costs |                               | 
|                                                          |                               | 
|Research
      and development, net                       |                               | 
|                                                          |                               | 

F-36

---

---

|**TTI
        TEAM TELECOM INTERNATIONAL LTD.
        AND ITS SUBSIDIARIES**              
|------------------------------------------------------------------------------------------
|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      U.S.
        dollars in thousands

NOTE 15:-      SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)

| | b. | Financial
      income:
| | -- | -----------------------

|                                                      | **Year
      ended December 31,** | 
|----------------------------------------------------- | --------------------------------- | 
|
|
|
|Financial
      expenses:                             |                                   | 
|Foreign
      currency translation adjustments        |                                   | 
|Impairment
      of available-for-sale marketable     |                                   | 
|securities                                            |                                   | 
|                                                      |                                   | 
|                                                      |                                   | 
|                                                      |                                   | 
|Financial
      income:                               |                                   | 
|Foreign
      currency translation adjustments        |                                   | 
|Gain
      (loss) from sales of marketable securities |                                   | 
|Interest
      and other                              |                                   | 
|                                                      |                                   | 
|                                                      |                                   | 
|                                                      |                                   | 
|Financial
      income, net                           |                                   | 
|                                                      |                                   | 

NOTE 16:-      SUBSEQUENT EVENTS

| | In March
      17, 2004, the supplier filed a lawsuit against the Company in the amount
      of approximately $ 950 in respect of the dispute mentioned in Note
      9.                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                     
| | The Company
      is currently in the process of preparing its response to this lawsuit. The
      Companys management and legal advisors believe that the provision
      recorded in 2003 in respect of the abovementioned dispute is sufficient.

---

F-37

---

---