---

---

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

# 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, 2006

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

OR

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

Date of event requiring this shell company report
................................

Commission File Number
0-28986

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

# Israel(Jurisdiction of
incorporation or organization)

7 Martin Gehl Street
Kiryat Aryeh, Petach Tikva 49512 Israel
972-3-926-9700
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Ordinary Shares, par value NIS 0.5 per share
(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None



---

---



Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the
 close of the period covered by the annual report:
16,000,428 Ordinary Shares, par value NIS 0.5 per share

# 2,936,389 Series A
Convertible Preferred Shares, par value NIS 0.5 per share

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

Yes o No x

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

Yes o No x

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

Yes x No o

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

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

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

Item 17 o Item 18 x

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

Yes o  No x



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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                            | 18                                               
|       |                                                               | A. History and Development of the Company         | 18  
|       |                                                               | B. Business Overview                              | 19  
|       |                                                               | C. Organizational Structure                       | 29  
|       |                                                               | D. Property, Plants and Equipment                 | 29  
|       | Item 4A. UNRESOLVED STAFF COMMENTS                            | 29                                               
|       | Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 30                                               
|       |                                                               | A. Operating Results                              | 30  
|       |                                                               | B. Liquidity and Capital Resources                | 39  
|       |                                                               | C. Research and Development, Patents and Licenses | 40  
|       |                                                               | D. Trend Information                              | 41  
|       |                                                               | E. Off-Balance Sheet Arrangements                 | 41  
|       |                                                               | F. Tabular Disclosure of Contractual Obligations  | 41  
|       | Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 42                                               
|       |                                                               | A. Directors and Senior Management                | 42  
|       |                                                               | B. Compensation                                   | 44  
|       |                                                               | C. Board Practices                                | 44  
|       |                                                               | D. Employees                                      | 48  
|       |                                                               | E. Share Ownership                                | 49  



---

---



| |                                                                     |                                                            |   
| | ------------------------------------------------------------------- | ---------------------------------------------------------- | --
|
|
| |                                                                     |                                                            |   
| | Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS           | 50                                                        
| |                                                                     | A. Major Shareholders                                      | 50
| |                                                                     | B. Related Party Transactions                              | 52
| |                                                                     | C. Interests of Experts and Counsel                        | 54
| | Item 8. FINANCIAL INFORMATION                                       | 54                                                        
| |                                                                     | A. Consolidated Statements and Other Financial Information | 54
| |                                                                     | B. Significant Changes                                     | 56
| | Item 9. THE OFFER AND LISTING                                       | 56                                                        
| |                                                                     | A. Offer and Listing Details                               | 56
| |                                                                     | B. Plan of Distribution                                    | 56
| |                                                                     | C. Markets                                                 | 57
| |                                                                     | D. Selling Shareholders                                    | 57
| |                                                                     | E. Dilution                                                | 57
| |                                                                     | F. Expenses of the Issue                                   | 57
| | Item 10. ADDITIONAL INFORMATION                                     | 57                                                        
| |                                                                     | A. Share Capital                                           | 57
| |                                                                     | B. Memorandum and Articles of Association                  | 57
| |                                                                     | C. Material Contracts                                      | 62
| |                                                                     | D. Exchange Controls                                       | 63
| |                                                                     | E. Taxation                                                | 63
| |                                                                     | F. Dividends and Paying Agents                             | 70
| |                                                                     | G. Statement by Experts                                    | 71
| |                                                                     | H. Documents on Display                                    | 71
| |                                                                     | I. Subsidiary Information                                  | 71
| | Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 71                                                        
| | Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     | 71                                                        



---

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|        |                                                                                       |    |   
|------- | ------------------------------------------------------------------------------------- | -- | --
|
|
|PART II |                                                                                       |    | 71
|        | Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 71
|        | Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 72
|        | Item 15. CONTROLS AND PROCEDURES                                                      | 72
|        | Item 16. Reserved                                                                     | 72
|        | Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 72
|        | Item 16B. CODE OF ETHICS                                                              | 72
|        | Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 72
|        | Item 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES                      | 73
|        | Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 73
|        | Item 17. FINANCIAL STATEMENTS                                                         | 73
|        | Item 18. FINANCIAL STATEMENTS                                                         | 73
|        | Item 19. EXHIBITS                                                                     | 73



---

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INTRODUCTION

Unless
the context otherwise requires, all references in this annual report to:

| |  | "TTI,"
"us," "we," and "our" refer to TTI Team Telecom International Ltd. and its subsidiaries;
| | - | -----------------------------------------------------------------------------------------------

| |  | "ordinary
shares" are to our ordinary shares, par value NIS 0.5 per share;
| | - | --------------------------------------------------------------------------

| |  | "Series
A Preferred Shares" are to our Series A Convertible Preferred Shares, par value NIS 0.5
per                share;
| | - | -------------------------------------------------------------------------------------------------------------------------

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

| |  | the
"SEC" are to the United States Securities and Exchange Commission;
| | - | ----------------------------------------------------------------------

| |  | "NASDAQ"
are to the NASDAQ Global Market (formerly, the Nasdaq National Market);
| | - | --------------------------------------------------------------------------------

| |  | "dollars"
or "$" are to United States dollars; and
| | - | --------------------------------------------------

| |  | "NIS"
or "shekel" are to New Israeli Shekels.
| | - | ---------------------------------------------

Our
consolidated financial statements are prepared in United States dollars and in accordance
with generally accepted accounting principles in the United States, or GAAP. On March 27,
2007, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel,
was NIS 4.18 to $1.00.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements
in this annual report that are not statements of historical or current facts are
"forward-looking statements" within the meaning of Private Securities Litigation Reform
Act of 1995. These statements include but are not limited to statements concerning our
business outlook or future economic performance; future payments under contractual
obligations, anticipated revenues, expenses or other financial items; and introductions
and advancements in development of products, and plans, and objectives related thereto.
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 or in our reports on Form 6-K
submitted to the SEC. Unless we are required to do so under U.S. federal securities laws
or other applicable laws, we do not intend to update or revise any forward-looking
statements.

PART I

|Item 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND 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, 2004, 2005
and 2006, and the selected consolidated balance sheet data as of December 31, 2005 and
2006, which have been prepared in accordance with GAAP, from our audited consolidated
financial statements, which are included elsewhere in this annual report. We derived the
consolidated statements of operations data for the years ended December 31, 2002 and 2003
and the selected consolidated balance sheet data as of December 31, 2002, 2003 and 2004,
which have been prepared in accordance with GAAP, from audited consolidated financial
statements that are not included in this annual report.

6

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|                                           | December 31,
(dollars in thousands, except for share data)
|------------------------------------------ | ----------------------------------------------------------
|
|
|
|
|Statement of Income Data:                  |                                                           
|Revenues:                                  |                                                           
|Products                                   |                                                           
|Services                                   |                                                           
|                                           |                                                           
|Total revenues                             |                                                           
|Cost of revenues:                          |                                                           
|Products                                   |                                                           
|Services                                   |                                                           
|Impairment of capitalized software         |                                                           
|                                           |                                                           
|Total cost of revenues                     |                                                           
|                                           |                                                           
|Gross profit                               |                                                           
|                                           |                                                           
|Operating expenses:                        |                                                           
|Research and development, net              |                                                           
|Selling and marketing                      |                                                           
|General and administrative                 |                                                           
|Impairment of goodwill                     |                                                           
|Allowance for doubtful accounts and        |                                                           
|bad debt write-off                         |                                                           
|                                           |                                                           
|Total operating expenses                   |                                                           
|                                           |                                                           
|Operating loss                             |                                                           
|Other income                               |                                                           
|Financial income, net                      |                                                           
|                                           |                                                           
|loss before income taxes                   |                                                           
|Income taxes (benefit)                     |                                                           
|                                           |                                                           
|Netloss                                    |                                                           
|                                           |                                                           
|Deemed dividend associated with Beneficial |                                                           
|Conversion Feature                         |                                                           
|Net loss attributable to ordinary          |                                                           
|shareholders                               |                                                           
|                                           |                                                           
|Net Basic and diluted loss attributable to |                                                           
|ordinary shareholders                      |                                                           
|                                           |                                                           
|                                           |                                                           
|Weighted average number of shares used in  |                                                           
|computing:                                 |                                                           
|Basic net and diluted earnings (loss) per  |                                                           
|share attributed to ordinary               |                                                           
|shareholders                               |                                                           
|                                           |                                                           

|                          | December 31,
(dollars in thousands)
|------------------------- | -----------------------------------
|
|
|
|
|Cash and cash equivalents |                                    
|Short term bank deposits  |                                    
|Marketable securities     |                                    
|Short-term bank debt      |                                    
|Working capital           |                                    
|Total assets              |                                    
|Shareholders' equity      |                                    

7

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B. Capitalization and
Indebtedness

Not applicable.

C. Reasons for Offer and Use of Proceeds

Not applicable.

D. Risk Factors

# Risks Relating to Our
Business and Our Industry

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

We incurred net losses of $29.5
million in 2004, $9.1 million in 2005 and $3.8 million in 2006. Although we have been
profitable in the past, we may not be profitable or meet the level of expectations of the
investment community in the future, which could have a material adverse impact on our
share price. Even if we maintain profitability, we cannot assure that future net income
will offset our cumulative losses. In addition, our operating results may be adversely
affected by timing of sales of our products or a shift in our mix of products and
services.

We depend on a small number of
customers for a large portion of our revenues and the loss of any one major customer would
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 43% of our total revenues in 2004,
47% of our total revenues in 2005 and 42% of our total revenues in 2006. 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 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.

Spending in the global operational
support system, or OSS, market in which we operate is built on the need for service
providers to support new services and network equipment. In the past few years, we have
identified a slow down in global OSS spending which was overturned by a slight recovery
starting 2004. However, we are unable to predict these trends or the extent of the impact
that they may have on our results of operations. Nevertheless, if a slow-down in capital
expenditures in the OSS market resumes, it 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.

Recently, the communications
service provider industry has undergone a period of consolidation and mergers.
Consolidations and mergers of the providers and the resulting consolidation of customers
may delay or cause cancellations of significant sales of our products, which could
seriously harm our operating results.

Our customers are concentrated in the
public carrier communications market. The communications service provider industry is
currently undergoing a period of consolidation and mergers. Examples of this trend are the
SBC merger with AT&T (November 2005) and the AT&T merger with Belsouth (December
2006). Consolidations and mergers of the providers will result in less potential customers
and less networks to monitor and manage. Furthermore, the resulting consolidation and
merger of our prospective customers may delay or cause cancellations of significant sales
of our products, which could seriously harm our operating results.

In addition, in the past two years,
we have identified a trend of consolidation and acquisition in the OSS market. Examples of
this trend are the IBM acquisition of Micromuse (December 2005) and the IBM acquisition of
Vallemt (December 2006). These competitors consolidation could result in stronger
competition with a larger installation base that could threaten our market positioning and
decrease our sales. In addition, the potential for us to be a part of a merger
oracquisition, whether friendly or not, is also a realistic scenario that could affect our
customers acceptance and our financial performance.

8

---

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We may need additional capital in
the future and may not be able to secure adequate funds on terms acceptable to us.

In January 2005, we closed a private placement
transaction in which we raised approximately $14.6 million. Although we currently believe
that we have sufficient capital to finance our operations for at least the next twelve
months, we may need to raise additional capital in the near future. For example, if our
cash flows are less than expected, we may need to raise additional funds to respond to
unforeseen technological or marketing hurdles, satisfy unforeseen liabilities, or take
advantage of unanticipated opportunities. We may not be able to obtain funds at the time
or times needed on terms acceptable to us, or at all. If we are unable to obtain adequate
funds on acceptable terms, we may not be able to take advantage of market opportunities,
develop new products, or otherwise respond to competitive pressures. If additional funds
are raised through the issuance of equity securities, the percentage ownership of our then
current shareholders would be diluted.

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 may not have control.

Prospective users of our products
generally must make a significant commitment of resources. Sales cycles of our products
are often lengthy, generally ranging from 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:

| |  | emergence
of new types of networks and services;
| | - | ------------------------------------------------

| |  | changing
services and technologies;
| | - | -----------------------------------

| |  | evolving
industry standards;
| | - | ----------------------------

| |  | changing
regulatory environments; and
| | - | -------------------------------------

| |  | rapid
changes in communications service providers' requirements.
| | - | ----------------------------------------------------------------

In addition, 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.
Accordingly, our financial performance and growth is dependent on our ability to, among
other things:

| |  | enhance
and improve 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 (3G) networks;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | address
the increasingly sophisticated needs of our customers;
| | - | --------------------------------------------------------------

| |  | incorporate
new technologies and new infrastructures; and
| | - | ---------------------------------------------------------

9

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---



| |  | 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 on the market acceptance of our new modules and features supporting next-generation
network, or NGN, and if these investments do not achieve market acceptance, our business
and financial condition may be adversely affected.

We are in the process of developing,
enhancing and deploying our NGN modules and features to support next-generation network
architectures and services. We cannot assure you that our NGN modules and features will
receive market acceptance. If our NGN modules and features do not receive market
acceptance, we may not be able to recover significant resources we invested in the
development and enhancement of these modules and features and we may lose future revenues.
As a result, our business, financial condition and results of operations may be adversely
affected.

If
the NGN services (wireline and wireless communication service providers) growth slows,
demand for our NGN supporting modules and features may decline.

The success of our NGN supporting
modules and features will depend heavily on the continued acceptance of the next
generation services in the wireline and wireless communication service providers. If use
of the next generation services does not continue to grow or grows slower than expected,
the market for software that manages communications over NGN modules would be adversely
affected.

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 is expected to 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 strategic
relationships and our revenues may be reduced if such relationships are not successful. In
addition, our future growth will depend in part on our ability to form new strategic
relationships or exploit indirect sales channels that will market our products
effectively.

Our sales strategy includes direct
sales to customers as well as sales through original equipment,
system integrators and other indirect channels for sales and support of our products.
Specifically, we rely on strategic relationships with system integrators and hardware
vendors, such as Nortel and Siemens, 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 market our products effectively or generate significant revenues for us, a termination
of any of these relationships, or if we are unable to form additional strategic alliances
in the future that will prove beneficial to us, 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
about 20 countries worldwide and we are seeking to expand into other markets. We expect
our revenues from international sales to continue to account for a large portion of our
total revenues in the future. However, we may not be able to sustain or increase revenues
derived from our international operations. In addition, as we conduct business globally,
our future results could be adversely affected by a variety of uncontrollable and changing
factors and inherent risks, including the following:

| |  | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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---



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

We may not be able to effectively
manage these risks and these risks may lead to disputes with our customers and suppliers.
This may have an adverse effect on our operational margins.

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 occasionally perform a large
amount 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 occasionally perform a large
amount of our obligations to customers before receiving payment. In some instances, we
incur certain expenses prior to concluding 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.

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 in a competitive industry, we have often 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 payments covering only
costs incurred by us up to the date of termination. Our performance often largely
comprises services and customized products which we cannot recover and resell. As a
result, 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. For
example, see the discussion regarding the termination of a contract with a major customer
in 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 markets for network
management system, or NMS, OSS, and business support system, or BSS. Our current and
potential competitors include:

11

---

---



| |  | organizations information
technology, or IT, departments, some of which may be our customers or prospective
customers, that provide or may attempt to develop NMS, OSS and BSS applications for their
particular internal needs;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | providers
of NMS, OSS and BSS, such as Agilent Technologies, Syndesis Ltd, Hewlett-Packard,
Infovista, Oracle (Metasolv), IBM (Micromuse, Vallent) and Telecordia Technology;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | communications
equipment vendors, such as Nortel, Ericsson, Nokia and Lucent Technologies;
| | - | ------------------------------------------------------------------------------------------

| |  | systems
integrators who provide programming services to develop customer-specific applications,
such as CMGLogica, BusinessEdge, Accenture, Cap Gemini and IBM Global Services; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | managed
service providers, such as Nortel and Ericsson, that offer their customers management
services on top of their networks rather than building their own network operation
center, or NOC, and purchasing an independent management system.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, our competitive position may be
adversely affected by the recent trend towards consolidation amongst our competitors.

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.

Currency fluctuations
could reduce our revenues and profitability.

A 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.

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

In the coming future, we intend to
expand into new markets worldwide. 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.

Due to recent changes in our
senior management, we may not be able to achieve our objectives.

In March 2005, Menahem Tirosh
resigned from his position as our Chief Executive Officer. Meir Lipshes served as our
acting Chief Executive Officer from March 2005 to November 2005. From December 2005 to
November 2006, Ruben Markus served as our Chief Executive Officer until his resignation
and, since December 2006, Meir Lipshes is serving again as our acting Chief Executive
Officer. In addition, during 2006, several other members of our senior management left the
employment of the Company and as a result, we employed several new high-level officers in
2006. The difficulties inherent in selecting a suitable Chief Executive Officer and other
members of the management team, transitioning the Company under the leadership of new
management, and assimilating new management personnel into the Companys corporate
culture 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.

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.

12

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Our future success also depends on
our continuing ability to attract and retain 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.

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 currently have only one
registered patent. To protect our proprietary rights, we rely on a combination of trade
secret, copyright and trademark laws, nondisclosure and other contractual agreements and
technical measures.

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

| |  | a
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 currently rely on software that
we license from third parties, and we may in the future rely on software that we intend to
license from third parties. If we fail to maintain these licenses, we may experience
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. In the future, we may rely on
additional software that we intend to license from third parties. 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 may 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 our existing software licenses or
obtain future 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, including software that we license from third parties, to compete in our
markets. We are subject to a number of risks relating to intellectual property rights,
including the following:

| |  | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| |  | 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 or are
entitled to indemnification from third parties in connection therewith; 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.

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 (brand recognition).
| | - | ---------------------------------------------------------

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.

A securities class action lawsuit
against us could harm our business.

A shareholder class action lawsuit
was filed in September 2004 against us, Team Software Industries Ltd., which was then our
principal shareholder, and certain of our executive officers. The lawsuit alleges that
material misrepresentations and omissions concerning our operations and performance
artificially inflated our stock price, causing damages to investors. We filed a motion to
dismiss the complaint which motion was granted by an opinion on October 2006. The opinion
dismissed the amended and consolidated complaint but granted plaintiff the right to file a
second amended and consolidated complaint. The second amended and consolidated complaint
was filed on November 2006. We filed a motion to dismiss the second amended and
consolidated complaint on January 2007. Based on our review of the second amended and
consolidated complaint, we believe that the claims are without merit and intend to
vigorously defend the action. However, this purported class action is at an early stage
and we cannot predict the outcome of this dispute.In the event of an unfavorable
resolution, we may be required to pay damages and other costs in excess of the amounts
covered by our insurance. In addition, the defense of this action may divert the attention
of some of our management from other aspects of our business. Accordingly, this action
could have a materially adverse effect on our results of operations and financial
condition.

We may not be successful in our
ongoing lawsuit with a former major customer.

In November 2002, we received a
letter from a major customer notifying us of the termination of an agreement for the
supply by us of a Manager of Managers, or MOM system, and its intention to call the 1
million British pound performance bond issued by a bank on our behalf under the agreement.
We believe that the customer terminated the agreement unlawfully, and in violation of the
termination provisions set out in the agreement. We filed an application in an English
court on November 2002, requesting an injunction to prevent the customer from calling the
bond. On January 2003, an order was issued denying our request for the injunction to
continue, 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. 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.

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. The claim and particulars were served on the customer in December 2005 asking
the court to award us approximately £10.5 million (GBP). In March 2006 we were
served with the customers defense and a£12.4 million (GBP) counterclaim. The
trial is expected to take place in London in October 2007. We can not assure you regarding
the outcome of this proceeding.

14

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We have not yet completed our
evaluation of our internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act .

We
are considered a non-accelerated filer under applicable SEC rules. As such, we
are required to comply with internal control evaluation and certification requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 in the following manner: reporting by
management under Section 404(a) of the Sarbanes-Oxley Act will be required for thefiscal
year ending on December 31, 2007 and attestation by our auditors under Section 404(b) of
the Sarbanes-Oxley Act will be required for the fiscal year ending December 31, 2008. We
have begun to evaluate whether our existing internal control over financial reporting
systems is compliant with Section 404. As a result of this evaluation, we may be required
to implement new internal control procedures over financial reporting. We may also
experience higher than anticipated operating expenses and fees in this context, additional
commitment of managements time and may need to hire additional qualified personnel
in order to achieve compliance with Section 404. If we are unable to implement these
changes effectively or efficiently, or if our internal control is found to be ineffective
in future periods, it could harm our operations, financial reporting or financial results
and could result in our being unable to obtain an unqualified report on internal controls
from our independent auditor.

# 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 and hostilities between Israel
and the Palestinians, which has strained Israels relationship with its Arab citizens
and several Arab countries. The establishment in early 2006 of a government in the
Palestinian Authority by representatives of the Hamas militant group has created
additional unrest and uncertainty in the region. In July 2006, an armed conflict has took
place between Israel and Hezbollah, an Islamic movement based in Lebanon, which included
the firing of multiple rockets by Hezbollah throughout northern Israel as well as
retaliatory attacks by Israel throughout Lebanon. Any armed conflicts or political
instability in the region, including acts of terrorism or any other hostilities involving
or threatening Israel, 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 a 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 may 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. Even if we perform hedging transactions, they may not adequately
protect us 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, or the Investments Law. An approved enterprise is eligible for tax
benefits on taxable income derived from its approved enterprise programs. The benefits
available to an approved 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.

15

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Because we received grants from
the Israeli Office of the Chief Scientist, we are subject to ongoing restrictions.

We received royalty-bearing grants from
the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or
the Chief Scientist, for research and development programs that meet specified criteria.
We were obligated to pay royalties with respect to revenues derived from from products
developed with the grants received. As of December 31, 2006, we did not pay or accrue any
royalties to the Chief Scientist. However, the terms of the Chief Scientist grants limit
our ability to manufacture products or transfer technologies outside of Israel if such
products or technologies were developed using know-how developed with or based upon Chief
Scientist grants. In addition, any non-Israeli who becomes a holder of 5% or more of our
share capital is generally required to notify the Chief Scientist and to undertake to
observe the law governing the grant programs of the Chief Scientist, the principal
restrictions of which are the transferability limits described above.

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 are 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 our officers, our directors and us or to assert U.S. securities law
claims in Israel.

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

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

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

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

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

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

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

16

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

We
may be required to pay additional taxes relating to certain relocation expenses.

We have assessed that a tax exposure
contingency may exist with regard to relocation expenses of certain of our
subsidiaries employees and former employees. We cannot reasonably estimate the
related amount of loss, if any, for the tax contingency. Accordingly, and based on our
legal counsels opinion, we have not recorded an accrual for the said tax
contingency. If we are required to pay additional taxes on account of this contingency,
our future results may be adversely affected

# Risks Related to the
Market for Our Ordinary Shares

Our share price has decreased
significantly 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.
Our share price has decreased significantly since late 2002. 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.
| | - | --------------------------------------------------------------------------------

If we are characterized as a
passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.

If, for any taxable year, our passive
income, or our assets which produce passive income, exceed specified levels, we may be
characterized as a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes. This characterization could result in adverse U.S. tax consequences for our
U.S. shareholders, which may include having gains realized on the sale of our ordinary
shares treated as ordinary income, rather than as capital gains income, having potentially
punitive interest charges apply to those gains, and the denial of the taxation of certain
dividends paid by us at the lower rates applicable to long-term capital gains. Although we
do not believe that we have been a PFIC for any tax year through and including 2006, the
tests for determining PFIC status are applied annually and are based in part on reference
to the market value of our shares or valuing our assets, and it is difficult to make
accurate determinations about these items. Accordingly, we cannot make any assurances to
you about our status. U.S. shareholders are urged to consult with their own U.S. tax
advisors with respect to the U.S. tax consequences of investing in our ordinary shares.

17

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

As of March 21, 2007, we had
approximately 16.0 million ordinary shares issued and outstanding and approximately 6.6
million of additional ordinary shares which are issuable upon exercise of outstanding
options and warrants or which are issuable upon conversion of outstanding Series A
Preferred Shares. The issuance of a significant amount of additional ordinary shares on
account of the outstanding warrants and options or Series A Preferred Shares will dilute
our current shareholders holdings and may depress our share price. In addition, if
our shareholders sell substantial amounts of our ordinary shares, including shares issued
upon the conversion of outstanding Series A Preferred Shares, or upon the exercise of
warrants or 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
upon terms and conditions we deem appropriate. Furthermore, as described in Item 7B 
Related Party Transactions, certain of our shareholders have
registration rights with respect to approximately 3.3 million of our ordinary shares. Upon
registration and effectiveness of the registration statement covering such shares, these
shares will become freely tradeable for as long as the registration statement is
effective.

One person beneficially owns a
substantial amount of our shares and may influence our affairs.

As of March 21, 2007, Shlomo
Eisenberg, the former chairman of our board of directors, beneficially owned 4,229,142
ordinary shares, which represents approximately 22.3% of our voting power. As a result, he
may have an influence on the election of our directors and on decisions by our
shareholders on matters submitted to shareholder vote, including mergers, consolidations
and the sale of all or substantially all of our assets. This concentration of ownership of
our ordinary shares could delay or prevent proxy contests, mergers, tender offers,
open-market purchase programs or other purchases of our ordinary shares that might
otherwise give our shareholders the opportunity to realize a premium over the
then-prevailing market price for our ordinary shares. This concentration of ownership may
also adversely affect our share price.

The rights of the holders of our
Series A Preferred Shares are superior to those of the holders of our ordinary shares.

In December 2004, we issued 6,636,389
Series A Preferred Shares to the investors in the private placement transaction described
elsewhere in this annual report. As of March 21, 2007, 2,936,389 Series A Preferred Shares
remain outstanding. The preferential rights of the Series A Preferred Shares currently
include, among others:

| |  | weighted-average
anti-dilution protection in the event that we issue or are deemed to have issued (subject
to certain exceptions) ordinary shares at a price per share that is lower than the
conversion price in effect at the time of such issuance or deemed issuance, which could
result in dilution of the holdings of ordinary shareholders; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
preference in the event we are liquidated, which could result in the holders of our
ordinary shares recovering a lesser amount in the event of our liquidation than they
would have received had we not issued the Series A Preferred Shares.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

|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 and our legal form is a company
limited by shares. 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. Our address on the
Internet is http://www.tti-telecom.com. The information on our website is not incorporated
by reference into this annual report.

We commenced independent operations
in September 1992, as a subsidiary of Team Computers and Systems Ltd., or Team Computers,
after having operated as a division of Team Computers since 1988. In April 2005, Team
Computers distributed most of the ordinary shares of TTI held by it to Team
Computers shareholders, and we ceased to be a subsidiary thereof.

18

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

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

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

In January 2005, we completed a
private placement transaction in which we issued (i) 6,636,391 Series A Preferred Shares,
at a purchase price of $2.20 per share, resulting in aggregate proceeds (before expenses)
of approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our
ordinary shares. For additional details about this transaction, seeItem 10C
 Material Contracts  Private Placement of Series A Preferred Shares.

During 2006, our capital expenditures
totaled approximately $1.7 million (compared to $1.2 million during 2005 and $0.9 million
during 2004), which was principally used for purchasing computers and peripheral equipment
(including software and development tools) and motor vehicles. All of the above
expenditures were paid from internally generated funds.

B. Business Overview

# Introduction

We are a leading global provider of
Operations Support Systems (OSS) and Business Support Systems (BSS) for telecommunications
service providers. With 15 years of experience delivering our products and solutions to
industry leading companies in more than 20 countries, we have a proven track record
managing some of the worlds largest, most complex networks.

Our Netrac products deliver service
assurance and service fulfillment capabilities. Our Netrac software speeds problem
detection and resolution, streamlines work processes, improves quality of service, and
maximizes network uptime and availability. 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, Internet Protocol, or IP, cable, digital
subscriber line, or DSL and Voice Over IP, or VOIP, networks, allowing our customers to
streamline operations and efficiently and rapidly roll out new services.

We have a significant installed base
of solutions with approximately 50 customers, including some of the worlds largest
communications 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 products are 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 turn-key solution usually
incorporates third-party software and may incorporate services performed by third-party
integrators or subcontractors. Our software products are designed to work with a wide
range of network equipment manufacturers and varied technologies, thus increasing the
potential market for our systems.

Our Netrac service assurance
products, including fault, performance and service impact products, provide intelligence
to help carriers proactively and strategically manage their businesses in a complex
environment. Our service assurance solution monitor and assure the quality of network
services, and allow service providers to increase the utilization of their existing
resources and reduce capital and operational expenditures.

We continue to support our
fulfillment products (modules), which are already deployed and used by customers
throughout the world. In addition, we are occasionally cooperating with leading resource
management/inventory providers in order to broaden and enhance our offering. Our Netrac
service fulfillment products, consist of resource management, and service activation
products, which enable network service providers to efficiently enter, manage and fulfill
service orders for customers.

19

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Our Netrac mediation products serve
as the underlying support infrastructure for all products. They are uniquely capable of
interacting with all network equipment using variety of protocols in a service
providers multi-domain, multi-technology network  both collecting data and
sending commands to the network elements and element managers.

# Industry Background;
Market Opportunity

In the recent years, communication
service providers are upgrading their networks introducing new technologies such as
Internet Protocol Television, or IPTV, 3G and IP multimedia subsystems, or IMS . These
changes require adaptation of OSS systems to support new technologies and services. In
addition, new markets emerge in developing countries (e.g. India, China, Africa and more)
introducing new challenges and market potential.

Facing competition, the 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 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.

Our customers are concentrated in the
public carrier communications market. The communications service provider industry is
currently undergoing a period of consolidation and mergers. Examples of this trend are the
SBC merger with AT&T (November 2005) and the AT&T merger with Belsouth (December
2006). Consolidations and mergers of the providers will result in less potential customers
and less networks to monitor and manage. Furthermore, the resulting consolidation and
merger of our prospective customers may delay or cause cancellations of significant sales
of our products, which could seriously harm our operating results.

In the past two years, we identified
that the communications service provider industry is undergoing a period of consolidation
and mergers. Consolidations and mergers of the providers and the resulting consolidation
of customers may delay or cause cancellations of significant sales of our products, which
could seriously harm our operating results. In addition, the OSS market is undergoing a
period of merger and acquisition deals, such as the IBM acquisition of Micromuse (December
2005) and the IBM acquisition of Vallent (December 2006). These competitors
consolidation could result in stronger competition with a larger installation base that
could threaten our market positioning and decrease our sales. In addition, the potential
for us to be a part of a merger oracquisition, whether friendly or not, is also a
realistic scenario that could affect our customers acceptance and our financial
performance.

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 and wireless networks. We intend to leverage our extensive installed base of
solutions, customer contacts and relationships with equipment manufacturers to become an
integrated provider of OSS solutions for legacy and next-generation networks.

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 voice, long-distance, Internet,
wireless and video, 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.

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 availability and performance and introducing new services.

20

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Our Strategy

Our goal is to become the leading
provider of innovative services assurance products and services, for next generation
converged networks. 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 functionality services and technologies, including next-generation architectures and
managed IP services. We intend to strive to build strong brand recognition for our
products.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Capitalize
on our Worldwide Customer Base.  We intend to leverage our customer installed
base, including many industry-leading Tier 1 and Tier 2 operators, for additional sales.
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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expand
Presence in New and Existing Markets. We plan to capitalize on our global sales and
marketing presence to further penetrate markets, win new customers and broaden our
installed base.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Leverage
Installation Base for additional sales. 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 Alliances. Our strategic alliances with leading
software and hardware vendors enable us to leverage the marketing strengths and customer
base of our partners, thereby expanding our own installed base. Some of these partners
and system integrators 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Our Netrac Solutions

Our Netrac 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. Our expertise is
derived from 15 years of experience in developing and implementing software solutions for
diverse communications service providers around the world. We are currently leveraging
this expertise and continue to develop our Next Generation OSS, or NGOSS family of
products, including the NGN modules and features, to provide a comprehensive solution for
next-generation architectures and managed IP services.

Our Netrac products are built on our
Netrac infrastructure that provides our products graphical user interface, general system
services (Authentication, Authorization and Audit) and a communications backbone. We
continue in the process of moving from Power Builder based 2-tier architecture into a Java
2 Enterprise Edition, or J2EE based 3-tier architecture. J2EE is an industry recognized
redevelopment environment and the Power Builder is an industry recognized development
tool.

Our Netrac products provide the
following advantages:

| |  | 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 integrate with one
another to provide either a comprehensive solution or address specific functions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Advanced,
Stand-Alone Products. Our Netrac products deliver functionality in the areas of
service assurance and service fulfillment. Each product was developed based on years of
accumulated experience in telecommunications and OSS development. In addition, we
continuously enhance our products by incorporating customer-driven improvements derived
from other projects.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 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 networks via a unified management platform. As a
result, communication service providers will be able to manage heterogeneous networks
consisting of both their existing legacy networks and next-generation technologies,
protect investments in legacy systems and facilitate the migration to next-generation
architectures.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| |  | Convergence
Networks. Our Netrac suite of products is designed to manage convergence (wireline
and wireless) networks via one unified management platform. As a result, communication
service providers will be able to manage heterogeneous networks consisting of both
wireline and wireless technologies and protect investments in their systems.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Open
Architecture. Netracs open mature Application Protocol Interfaces, or APIs
enables communications service providers to integrate their internal and third party
systems and applications with their OSS environments, allowing the exchange of
information among these systems and applications. We continuously update our library of
APIs, enabling interfaces with customers internal and third party software systems.
We are active members of the Telemanagment Forum Multi-Technology Operations System
Interface, or TMF MTOSI standards group and follow its API guidelines.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 cost reductions.
Netracs libraries and ability to communicate with various network elements and
technologies result in faster 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 and BSS environment, along with
specific functionality development according to customers requirements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Products and Services

Our Netrac products are capable of
service assurance, provisioning and activation and managing complex wireline and wireless
networks encompassing various domains. Since the first quarter of 2003, we have been
reducing our activities in the SS7 field; however, we continue to support existing
customers.

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 9001:2000 standards by the Standards Institution of Israel.

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 the 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, supporting various elements command language and syntax.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mediation
Studioan integrated, user-friendly, graphically development environment for managing
Mediation libraries and project layer customizations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SecureAccessprovides a centralized gateway through which authorized users can view, access and
send commands to different network elements based on their security authorizations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Service Assurance Products

Our Netrac service assurance
products, 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, measure and ensure that appropriate service level agreements, or SLAs,
are enforced, enabling network service providers to rapidly and remotely identify and
correct any network bottlenecks or failures.

Fault Management Products

Our Netrac fault management products
detect alarms across all domains and alert controllers of impending faults. Our Fault
Management (FaM) module comes with a packaged set of add-on modules that enable existing
customers to leverage their investment in FaM for additional added-value benefits. The
fault management products perform root-cause analysis, manage trouble tickets from
creation to resolution and facilitate automatic response to network problems.

Our Netrac fault management products
include the following:

| |  | Service
Impact provides information on a problems impact on services and customers,
thus enabling service status and management of corrective actions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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. FaM also comes with alarm correlation
capabilities that help reduce the volume of alarms that personnel have to handle.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Dashboard
(FaM add-on module) is a Web based tool designed to provide a high-level, real-time
view of the state of the network. From one screen whose view can be customized to suit
user preferences, users can, among other things, see vital assurance statistics, filter
and review active alarms and interact with the NOC message boards.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reporter
(FaM add-on module) is a Web based tool that provides insight into the networks
long-term behavior by producing informative reports.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fam
Analyzer (FaM add-on module) is a Web based tool that provides insight into the
networks long-term behavior. It comes with a built-in statistical engine, converts
alarms and action events into counters which enables saving historical data for longer
periods of time.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FaultPro
(FaM add-on module) automates the resolution of recurring problems in the network. In
full automatic mode, it transmits corrective commands to the network. In automatic or
semi-automatic mode, FaultPro provides a list of possible corrective actions from which
NOC personnel can select the most appropriate one.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Correlator+ TRS
is an alarm correlation system that detects and isolates root-cause faults from the
incoming alarm volume using network-wide topology data. Using information on the physical
and logical connections that exist between network elements, Correlator +TRS reduces
large alarm volumes into root-cause alarms, thus considerably shortening, Mean Time To
Repair, or MTTR and the number of alarms operators must handle. The product includes a
rich, out of the box, set of rules and scenarios supporting various technologies
including Synchronous Digital Hierarchy, or SDH, Asynchronous Transfer Mode, or ATM, and
IP.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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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.

Our Netrac performance management
product includes:

| |  | Performance
Management Module (PMM) which 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Traffic
Guard (formerly called Trafic View)  (PMM add-on module) which provides operators with
near real-time network monitoring and traffic surveillance capabilities based on
performance measurements and xDR records. Traffic Guard detects traffic exceptions
using sophisticated smarts thresholds, alerting service providers to potential
performance malfunctions before they affect customers.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | CallExpert which transforms raw xDR records into 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Service Fulfillment
Products

Our Netrac service fulfillment
products, consisting of the NetSync product and service provisioning and activation
products, enable network service providers to efficiently enter, manage and fulfill orders
for services from their customers. Our provisioning products streamline the provisioning
process end-to-end, from order 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.

In addition, we are also cooperating
with leading resource management/inventory providers in order to broaden and enhance our
service fulfillment product offering.

Our Netrac service fulfillment
products include the NetSync,which synchronizes an inventory database with the
actual network. Sync produces discrepancy reports that detail any inconsistencies between
the inventory database and the actual network.

Provisioning solution

Our provisioning solution streamlines
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 solution 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:

| |  | NetOrder (former
Work Order) is an order management system that enables service providers to
effectively manage the service order and change order fulfillment processes. NetOrder
controls the entire process, from order creation and modification through tracking,
provisioning, and closure, culminating in efficient archiving for later comparison and
analysis. NetOrder streamlines fulfillment of network re-configuration and service orders
across multi-vendor, multi-technology and multi-domain networks.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Activateautomatically 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. This product also
enables scheduling of network activation operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NetTask manages
the manual tasks assigned to individuals or group of users as part of the order
fulfillment life cycle. NetTask is an add-on to the workflow engine that allows service
providers to automate the order process and the integration between the different OSS and
BSS systems involved, thus increasing the operational efficiency and accelerating
services and products roll out.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# 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, 2006, our
professional services personnel consisted of 154 people operating in North America,
Europe, Latin America and the Asia/Pacific region (including 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.

# Project Installation;
Maintenance and Customer Support

There are three distinct periods
which occur during the process of providing a solution to a customer: (i) a functional
specification period, (ii) an implementation period and (iii) a stabilization period. Each
period is divided into several phases; the number of phases is determined by the
complexity of the project. During the functional specification period, we define the
specific requirements of the customer and becomes familiar with its network. During the
implementation period, we perform the work necessary to bring the solution up to a point
where it is ready to begin to operate using real customer data. 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.
During the stabilization period (which we refer to as a warranty period in
many of our contracts with customers), we monitor the operation of the solution using real
data, and performs the work necessary to ensure that the solution is stabilized and
actually provides the functionality required by the particular customer. The stabilization
period typically lasts approximately one year, but can be longer or shorter based on the
particular solution. The project is considered completed when the stabilization period is
over.

At the end of the warranty period
(i.e., the stabilization period), the customer may elect to enter into a maintenance
contract with us under which we offer support services, typically based on a percentage of
the total license fee, but in some cases based on hourly rates. Our standard maintenance
and support contract entitles the customer to unlimited telephone support, product updates
and product maintenance during the support period. Support is provided via telephone,
remote-access and e-mail. 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; and
| | - | ------------------------------------------

| |  | preventive
maintenance activities.
| | - | ----------------------------------

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# Customers

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

| |  | incumbent
local exchange carriers, or ILECs;
| | - | --------------------------------------------

| |  | competitive
local exchange carriers, or CLECs;
| | - | ----------------------------------------------

| |  | long-distance
carriers;
| | - | -----------------------

| |  | wireless
service providers and resellers; and
| | - | ---------------------------------------------

| |  | managed
services vendors.
| | - | -------------------------

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

To date, we have approximately 50
customers of our software solutions in more than 20 countries (many of them are Tier 1 and
Tier 2 communication service providers).

# 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 alliances with leading software and hardware vendors and system
integrators.

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

Our sales and marketing efforts are
managed by a small group of senior managers with substantial experience in the
communications software market. The sales process for new customers generally requires a
significant investment of time and expenses and typically takes six to eighteen months.
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, India, Sweden, Costa Rica and several locations in the United States. In
addition, we have sales representatives and sales consultants located throughout the
world, including in Russia, Ukraine, Romania, Greece and Poland.

As of December 31, 2006, we employed
42 sales and marketing personnel. To date, we have established relationships with many
equipment, software and service providers, such as Nortel and Siemens. Through these
alliances, 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 NGN modules and features 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, 2006, we employed
123 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:

| |  | ability
to assess customers networks and understand their NMS, BSS and OSS requirements;
| | - | -----------------------------------------------------------------------------------------

| |  | familiarity
with a wide variety of communications protocols and interfaces;
| | - | ---------------------------------------------------------------------------

| |  | ability
to incorporate rule-based inference engines, data warehousing technology and replication
tools into our Netrac solutions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

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| |  | ability
to adapt our products to different kinds of existing and next-generation wireline and
           wireless 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 $11.3 million, or 30% of our revenues, for the year ended
December 31, 2004. Gross research and development expenses were approximately $9.2
million, or 21.2% of our revenues, for the year ended December 31, 2005. Gross research
and development expenses were approximately $9.6 million, or 20.9% of our revenues, for
the year ended December 31, 2006. We did not capitalize any amount invested for
development in since 2003. We anticipate that we will continue to invest substantially
amounts in 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, Trade and Labor, or the Chief
Scientist; the BIRD Foundation; and the European Union. We have relied on these grants for
the financing of a portion of our product development expenditures. Through December 2006
we recognized grants totaling $5.5 million from the Chief Scientist and the BIRD
Foundation for the development of various aspects of our products.

In 2004, we received a grant of
approximately $331,000 from the Chief Scientist, part of which relates to our
participation in a consortium of companies (commonly referred to as MAGNET) engaged in the
development of a management system for large networks. In 2005, we received a grant of
approximately $537,000 from the Chief Scientist as part of our participation in the MAGNET
program. In 2006, we received a grant of approximately $54,000 from the Chief Scientist as
the last payment for our participation in the MAGNET program. We are not required to repay
the MAGNET program grant nor are we required to pay any royalties in respect thereof.

During 2004, we received a grant of
approximately $75,000 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. We did not receive any grants from the European
Union since 2005.

As of December 31, 2006, 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 $2.7 million. Although we
have received grants in the past, and may continue to 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. For additional
details regarding terms and conditions relating to grants from the Chief Scientist, seeItem 5B  Grants from the Office of the Chief Scientist.

# 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 constant 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.

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
IT departments, some of which may be our customers or prospective customers, that provide
or may attempt to develop NMS, OSS and BSS applications for their particular needs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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| |  | providers
of NMS, OSS and BSS applications, such as Syndesis Ltd, Agilent Technologies,
Hewlett-Packard, Infovista, Oracle (Metasolv), IBM (Micromuse, Vallent) and Telecordia;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | communications
equipment vendors, such as Nortel, Ericsson, Nokia and Lucent Technologies;
| | - | ------------------------------------------------------------------------------------------

| |  | systems
integrators who provide programming services to develop customer-specific applications,
such as LogicaCMG, BusinessEdge Solutions, Accenture, Cap Gemini and IBM Global Services;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | managed
service providers, such as Nortel and Erricson, that offer their customers management
services on top of their networks rather than building their own network operation
center, or NOC, and purchasing an independent management system.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that our product offerings
in all of these categories are generally competitive on price and features and have
certain advantages and disadvantages as compared to competitors products. In
particular, we believe that our extensive experience in software development, and the fact
that our sole focus is communication service providers, enables us to create products that
meet our customers unique business and technological requirements.

# 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 only one
registered patent in the United States and one patent application pending in Europe. We
have also obtained trademark registrations for Netrac®, and our logo in the United
States  .

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 to enable them to continue to support the products purchased, in accordance with the
agreed upon terms that limit the right to use such software, and without transferring any
intellectual property rights in the licensed software to such customers. 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 or superior to our products. For example, we currently have one patent
application pending in Europe. If our pending patent application will be rejected, our
ability to protect the proprietary information underlying such application may be limited.
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.

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 (including components we license from third
parties that are embedded in 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:

28

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| |  | 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 embedded in our products or
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, InteliJ, Borland Microsoft, Actuate 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

A list of our subsidiaries appears in
Exhibit 8 to this annual report.

D. Property, Plants and
Equipment

We do not own any real property. Our
principal facilities, in which our corporate headquarters are located, comprise
approximately 50,100 square feet of office space, and are located in Petach Tikva, Israel.
These facilities are subleased from Team Computers, our former largest beneficial
shareholder, which sublease is scheduled to expire in August 2007. As we plan to relocate
our principal facilities, in March 2007, we have entered into a new lease agreement. Under
the lease, we will occupy, starting September 2007, approximately 48,000 square feet of
office space in Rosh Haayin, Israel. The lease is scheduled to expire on in September
2014, and the annual rent is approximately $900,000.

We also lease a facility in Yokneham,
Israel, used primarily as a development center, which occupies approximately 2,740 square
feet. This lease is scheduled to expire in December 31, 2007.

We also lease the following
facilities, used primarily as marketing and sales offices: approximately 4,135 square feet
in Hoboken, New Jersey, USA; approximately 11,223 square feet in Atlanta, Georgia, USA;
approximately 4,438 square feet in Lenexa, Kansas, USA; approximately 800 square feet in
Sydney, Australia; approximately 1,000 square feet in San Jose, Costa Rica; approximately
1560 square feet in South Africa and 430 square feet in Sweden.

Our leasing expenses for all of our
said facilities were approximately $1.4 million in 2006. We expect to pay total leasing
expenses for our facilities of approximately $1.2 million in 2007.

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

|Item 4A. |  | UNRESOLVED STAFF COMMENTS
|-------- |  | -------------------------

Not Applicable.

29

---

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|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.

# Overview

We commenced independent operations
in September 1992, as a subsidiary of Team Computers and Systems Ltd., an Israeli publicly
traded company, after having operated as a division of Team Computers since 1988. We are a
leading global provider of OSS and BSS for telecommunications service providers.

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 customization, implementation,
integration, development, training, consultancy, maintenance, and customer support. 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 new customer
ranges from $1 million to $6 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.

Our software licenses, in most cases,
require 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 when necessary
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 range 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 partners such as Nortel and Siemens accounted for approximately 14% of
our revenues in 2004, approximately 13% of our revenues in 2005 and approximately 12% of
our revenues in 2006. The contractual terms of our arrangement with our strategic partners
are similar to the terms of the arrangement with customers that are end-users (projects in
which we act as the prime contractor).

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.

30

---

---



# 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.

# 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 software licenses require significant
customization, integration, installation and development services. Our services revenues
consist primarily of fees derived from annual maintenance and customer support.

We recognize revenue in accordance
with Statement of Position No. 81-1, Accounting for Performance of Construction
 Type and Certain Production  Type Contracts (SOP 81-1),
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 project to which the contract relates. In general, we divide each project into
three distinct periods: (i) a functional specification period, (ii) an implementation
period and (iii) a stabilization period, as more fully described in Item 4B under
Project Installation: Maintenance and Customer Support. A project is
considered completed when the stabilization period is over.

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. As of December 31, 2004, 2005 and 2006, we
did not have such deferred costs.

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. Since 2004, no such estimated losses
were identified.

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.

Unbilled receivables include all
amounts which were recognized as revenues and had not been billed as of the balance sheet
date due to contractual or other arrangements with customers.

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 and our licensees are expected to satisfy their obligations under the contract.

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, 2005, 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. However, in the case of an other than temporary
decline in fair value, such decline will be reflected in the financial statements.
Amortization of premium and accretion of discounts are included in financial income, net.
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statements of operations. In 2005,
a decline in value that was considered other than temporary of two of our available for
sale securities resulted in reclassifying the accumulated unrealized loss of $301,000
relating to these investments. The amount was classified as financial expenses in the
consolidated statement of operation. In 2006, we have recorded loss of approximately
$1,167,000 from the sale of our marketable securities. The amount was classified as
financial expenses in the consolidated statement of operation included in this annual
report.

31

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---



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.

Accounting for
stock-based compensation and fair value of our common stock

Prior to January 1, 2006, we
accounted for our stock-based employee compensation plans using the intrinsic-value method
of accounting set forth in Accounting Principles Board Opinion, or APB, No. 25,
Accounting for Stock Issued to Employees. In accordance with APB 25 and
related interpretations, compensation expense for stock options is recognized based on the
excess, if any, of the fair value of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the shares. Generally,
the exercise price for stock options granted to employees is higher than the fair market
value of the shares at the date of grant, thereby resulting, under APB 25, in no
recognition of compensation expense.

On each grant date, we determine the
fair market value of the underlying common stock. In making that determination, we
consider several factors, including transactions in our securities between unaffiliated
third parties; the issuance to third parties of our convertible promissory notes,
convertible notes and Series A Preferred Stock; the liquidation preference and other
superior rights of the convertible notes and preferred stock; our operating and financial
performance and other company-specific milestones; and market trends for public companies
involved in similar businesses.

Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based Payment, for all share option grants subsequent
to that date. SFAS 123(R) requires us to determine the fair value of share options as of
the date of the grant, which is then amortized as share-based compensation expense in the
income statement over the vesting period of the option grant. We determined the fair value
of all our option grants subsequent to January 1, 2006 based on the grant-date fair value
estimated in accordance with SFAS 123(R), using the Black-Scholes valuation model, which
requires us to make assumptions regarding items that are inherently uncertain such as the
estimated term of the option, share price volatility, expected forfeiture rates and our
expected dividend yield.

The computation of expected
volatility is based on realized historical volatility of our stock prices. The computation
of the forfeiture rate is based on the employees prior vesting termination behavior.
We used the simplified method to establish the expected term of the awards as
allowed under SAB 107. This approach means that the expected term would be the mid-point
between the vesting date and the end of the contractual term.The interest rate for periods
within the contractual life of the award is based on the U.S. Treasury yield curve in
effect at the time of grant.

While management believes that these
assumptions are appropriate, the use of different assumptions could have a material impact
on the fair value of the option grant and the related recognition of share-based
compensation expense in the consolidated income statement.

The Company adopted SFAS 123(R) using
the modified prospective transition method, which requires the application of the
accounting standard as of January 1, 2006, the first day of the Companys fiscal year
2006. Under that transition method, compensation cost recognized in the year ended
December 31, 2006, includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions of SFAS
123(R). As required by the modified prospective method results for prior periods have not
been restated. The Company recognized compensation expenses for the value of these awards,
which has graded vesting, based on the accelerated attribution method over the requisite
service period of each of the award, net of estimated forfeiters. Estimated forfeitures
were based on actual historical pre-vesting forfeitures.

32

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# 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:

---

|                                                     | 2004 | 2005 | 2006
|---------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|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                           |      |      |     
|                                                     |      |      |     
|Total operating expenses                             |      |      |     
|                                                     |      |      |     
|                                                     |      |     
|Operating loss                                       |      |      |     
|Other Income                                         |      |      |     
|Financial income, net                                |      |      |     
|                                                     |      |     
|Loss before income taxes                             |      |      |     
|Income taxes (benefit)                               |      |      |     
|                                                     |      |      |     
|                                                     |      |     
|Net Loss                                             |      |      |     
|                                                     |      |      |     
|Deemed dividend associated with BCF                  |      |      |     
|                                                     |      |      |     
|Net Loss attributable to common shareholders         |      |      |     
|                                                     |      |      |     

The following table sets forth a
breakdown by geographical area of our revenues (including maintenance revenues) as a
percentage of total revenues for the periods indicated:

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

33

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---



# Comparison of 2004, 2005
and 2006

Revenues

|               | Year ended December 31, |  |  
|-------------- | ----------------------- |  | -
|
|
|
|
|Product sales  |                         |  | $
|               |                         |  |  
|Services       |                         |  |  
|               |                         |  |  
|Total revenues |                         |  |  

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.

The increase in our product revenues
and in our revenues from services in 2005 and 2006 compared to revenues in 2004 was
primarily attributable to increased expenditures by communication service providers which
resulted in additional sales of our products and to the improvement and optimization of
our sales procedures.

Cost of Revenues

|                                                     | Years ended December 31, |  |  
|---------------------------------------------------- | ------------------------ |  | -
|
|
|
|
|Cost of product sales                                |                          |  | $
|                                                     |                          |  |  
|Cost of services                                     |                          |  |  
|                                                     |                          |  |  
|Impairment of capitalized software development costs |                          |  |  
|                                                     |                          |  |  
|Total cost of revenues                               |                          |  |  
|                                                     |                          |  |  

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.

We recorded charges during 2004 and
2005 in connection with the impairment of capitalized software development costs of the
following software products (we did not capitalize any amount invested for development
since 2003 and since 2006 we have not recorded any costs in connection with impairment of
capitalized software development costs) :

| | Netrac
2
| | --------

| | The
Netrac 2 platform serves as the foundation for many of our products. Our products are
divided into six families: Mediation, Service Management, Fault Management, Performance
Management, xDR and Fulfillment. Each part of Netrac2 within the products varies as
described in the products families descriptions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ServiceView
| | -----------

| | The
ServiceView line of products manages service availability and SLAs. Monitoring service
levels helps service providers ensure that customers are benefiting from guaranteed
quality of service. The Service management products detect services in danger of
exceeding SLA thresholds and notify service providers of impending problems before
customers are affected and SLAs are jeopardized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

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| | The
table below describes the impairment charges attributed to each product during 2004 and
2005:
| | -------------------------------------------------------------------------------------------------

|U.S. Dollars in thousands) | 2004 | 2005
|-------------------------- | ---- | ----
|
|
|
|
|Netrac 2                   |      |     
|                           |      |     
|Service View               |      |     
|                           |      |     
|Total                      |      |     
|                           |      |     

| | The
events and circumstances surrounding these charges and the factors that led us to
conclude that the software was impaired are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Regarding
Netrac 2:
| | -------------------

| | 2004:
We started using more standard advanced commercial infrastructures (e.g., J2EE
application servers and web GUI) to improve performance and maintainability, which meant
that the use of the Netrac 2 platform in its projects declined and is predicted to
decline even further in the future. As a result, we predicted a significant decline in
its future revenues from this product.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2005:
The importance of infrastructure components that were developed for Netrac 2 declined. We
continued to develop and change the infrastructure (making the relative percentage of the
code that was capitalized smaller) and our use of more advanced commercial
infrastructures grew. We expect Netrac 2s capitalized value will be negligible in
our system and therefore, we have decided to reduce to zero the remaining capitalized
software value of Netrac 2, in the amount of $145,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Regarding
ServiceView:
| | ----------------------

| | 2004:
We lost many major ServiceView product-specific tenders, which caused us to change our
predictions as to the future gross revenues of this product. As such, we found that the
demand for this product in the telecom market was lower than we expected. In addition, we
discovered that parts of the old source code could not be effectively reused, which
required us to develop new code for this product using new infrastructures.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2005:
As we did not have any growth in revenues from the Service View product and as we
expected that the capitalized value of the Service View product would be negligible, we
decided to reduce to zero the remaining capitalized software value of Service View, in
the amount of $32,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimate
of Economic Lives
| | --------------------------

| | We
assessed the recoverability of capitalized software development costs in accordance with
SFAS 86 at each balance sheet date by determining whether the amount by which the
unamortized capitalized cost of a computer software product exceeded the net realizable
value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
third party specialist performed the evaluation tests under SFAS 86. The evaluation date
was December 31, 2004. In 2005, we did not perform evaluation tests as the amount of the
unamortized capitalized cost recorder was negligible. Instead, we decided to rely on
managements evaluation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
evaluations indicated that the net realizable value of each of the Netrac 2 technology
and the ServiceView technology was lower than their unamortized capitalized costs. The
evaluations were based on the estimated future gross revenues from such technologies
reduced by the estimated future costs for completing and disposing of each of them. There
were no changes in our estimations regarding the economic lives of these technologies and
this estimations are still effective in 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in Cost of Sales:

Cost of sales declined from $30
million in 2004 to $22.4 million in 2005, resulting from our plan to reduce costs and
increase efficiency in sales procedures and the additional termination of employees.Although cost of services was reduced only by approximately $500,000 in 2005 in
comparison to 2004, the service sales increased by $1.8 million.

Product sales and cost of sales in
2006 increased from $22.4 million in 2005 to $24.3 million in 2006, primarily due to the
increased sale activities associated with increased revenues in 2006 and certain projects
and services that we provided during 2006 which were less profitable compared to projects
performed in 2005. See also the discussion regarding Gross Profit below.

35

---

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Gross Profit

|($ in millions)                                | Years ended December 31, |  |  
|---------------------------------------------- | ------------------------ |  | -
|
|
|
|
|Product sales                                  |                          |  |  
|Services                                       |                          |  |  
|Impairment of capitalized software development |                          | 
|costs                                          |                          |  |  
|                                               |                          |  |  
|Total gross profit                             |                          |  | $
|                                               |                          |  |  

Gross profit as a percentage of revenues

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

The total gross profit increased to
$20.8 million in 2005 from $7.8 million in 2004. The increase in gross profit resulted
from the increase in our revenues, and decrease in cost of sales, which resulted from a
general improvement in the market condition, the completion of many ongoing projects and
from our plan to reduce costs and increase efficiency in sales procedures, the additional
termination of approximately 95 employees during 2005, and a significant investment in
product development and in the implementation processes.

Total gross profit increased to $21.8
million in 2006 from $20.8 million (excluding impermanent of capitalized software included
in 2005) in 2005. However, as a percentage of revenues, the gross profit decreased from
48.6% to 47.2% due to less profitable projects and services provided during 2006.

Operating Expenses

|($ in millions)               | Year ended December 31, |  |  
|----------------------------- | ----------------------- |  | -
|
|
|
|
|Research and development, net |                         |  | $
|Selling and marketing         |                         |  |  
|                              |                         |  |  
|General and administrative    |                         |  |  
|                              |                         |  |  
|Total operating expenses      |                         |  |  
|                              |                         |  |  

Research and Development Expenses,
Net. 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.

|($ in millions)               | Year ended December 31,
|----------------------------- | -----------------------
|
|
|
|
|Total cost                    |                        
|Less grant participations     |                        
|Research and development, net |                        

Gross research and development
expenditures increased 5% to $9.7 million in 2006, from $9.2 million in 2005. The increase
in 2006 was primarily due to our investment of additional resources in improving our
products, offering and infrastructures.

36

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Gross research and development
expenditures decreased 18.6% to $9.2 million in 2005, from $11.3 million in 2004, and were
offset by $0.1 million in grants recognized in 2005, compared to an offset of $0.6 million
in grants recognized in 2004. As a result, research and development expenses, net,
decreased 15% to $9.1 million in 2005 from $10.7 million in 2004. The decrease in research
and development net, in 2005 was primarily due to the termination of employment of
approximately 44 employees during 2005, and other steps that we have taken, including
embedding third party software in our products and improving our product development
process. For further information, see below under the heading Reaserch and
Development.

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 22.1% of total revenues in
2006, 27.8% of total revenues in 2005 and 51% of total revenues in 2004. The continuing
decrease in selling and marketing expenses in 2006 and 2005 is primarily due to the steps
taken by us, including improvements in our sales process and focusing on specific
territories.

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 4% to $6.3 million, or 14.6% of our total revenues in
2005, from $6.6 million, or 17.5% of total revenues in 2004. General and administrative
expenses increased 5.6% to $6.7 million or 14.5% of our total revenues in 2006, from $6.3
million, or 14.6% of total revenues in 2005. The reason general and administrative
expenses remained at approximately the same level in the last three years is due to our
decision to maintain the critical mass necessary to manage and support our global
business.

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 increased to
$0.7 million in 2006 from $0.2 million in 2005 due to the selling of the marketable
securities we held, during the third quarter of 2006, that were until such sale, subject
to impairment and therefore offseted our financial income. Our financial income decreased
to 0.2 million in 2005 from $1.3 million in 2004 due to impairment of marketable
securities and the devaluation of the Euro and British Pound against the US Dollar.

Allowance for doubtful accounts
and bad debt write off. The allowance for doubtful accounts consists of the balance of
the unpaid sums primarily under our agreement with a major customer. In the past, we
recorded in our financials approximately $6.8 million as allowance ,out of which $6.3
million are with respect to the said major customer. See the information about this
customer set forth below under the heading Item 8A  Legal Proceedings.
There was no allowance for doubtful accounts expenses since 2004.

# 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 of the
Israeli Ministry of Industry, Trade and Labor, the BIRD Foundation and the European Union.
The Chief Scientist and the European Union provided grants of approximately $406,000 for
the year ended December 31, 2004, approximately $537,000 for the year ended December 31,
2005 and approximately $54,000 for the year ended December 31, 2006. Of our total research
and development expenses, these grants accounted 3.6% in 2004, 5.9% in 2005 and 0.6% in
2006.

With respect to grants we received
from the Office of the Chief Scientist, we paid or accrued to the Israeli government
approximately approximately $4,000 for the year ended December 31, 2004 and approximately
$301,000 for the year ended December 31, 2005. We did not pay or accrue any amount for the
year ended December 31, 2006. 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 $6,000 for the year ended December 31, 2004,
approximately $9,000 for the year ended December 31, 2005 and approximately $2,000 for the
year ended December 31, 2006. We have not received grants from the BIRD Foundation since
1996.

We received grants of approximately
$331,000 in 2004, approximately $537,000 in 2005 and approximately $54,000 in 2006, from
the Chief Scientist, out of which approximately $331,000 in 2004 and $537,000 in 2005 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 MAGNET program grants, nor are we required to pay any royalties in respect
thereof.

37

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We received grants of approximately
$75,000 in 2004 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 grant from the European Union since
2004. We are not required to repay these grants, nor are we required to pay any royalties
in respect thereof.

# Corporate Tax Rate

Israeli companies are generally
subject to Corporate Tax on their taxable income at the rate of 31% for the 2006 tax year.
Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the
Tax Ordinance), which came into effect on January 1, 2006, the corporate tax
rate is scheduled to decrease as follows 29% for the 2007 tax year, 27% for the 2008 tax
year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli
companies are generally subject to capital gains tax at a rate of 25% for capital gains
(other than gains deriving from the sale of listed securities) derived after January 1,
2003. However, our facilities in Petach Tikva have been granted approved enterprise status
under the Law for Encouragement of Capital Investments, 1959, or the Investments Law.
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, as we intend to continue and file additional applications for approved
enerpise in the future .

Subject to compliance with applicable
requirements, the income derived from our approved enterprise facilities will be subject
through 2013 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
conditioned upon our fulfillment of conditions stipulated by the Investments Law, the
regulations promulgated thereunder and the 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. If the retained tax-exempt income were distributed, it would be taxed
at the corporate tax rate applicable to such profits as if we had not chosen the
alternative tax benefits (rate of 10%  25% based on the percentage of foreign
ownership) on the gross amount distributed. In addition, these dividends will be subject
to a 15% withholding tax. Accordingly, no deferred income taxes have been provided on
income attributable to our Approved Enterprise programs as the undistributed tax exempt
income is essentially permanent in duration.

Our effective tax rate was 25% in
2003, but since we incurred losses in that year, we were not required to pay taxes, and we
recorded deferred taxes expenses in the amount of $456,000. In 2004, we provided for a
full valuation allowance against our deferred tax assets in the amount of $1.6 million
because we did not believe that it is more likely than not that such deferred tax assets
will be realized. In 2005 and 2006, we still provide for a full valuation allowance
against our deferred tax assets.

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

For information about these risks and the
methods we employ to mitigate these risks, see Item 11. Quantitative and Qualitative Disclosures
about Market Risk.

The table below sets forth the annual
rate of inflation, the annual rate of devaluation (or revaluation) of the NIS against the
U.S. dollar and the gap between them for the periods indicated:

|                            | Year Ended December 31,
|--------------------------- | -----------------------
|
|
|
|
|Inflation (Deflation)       |                        
|Devaluation (Revaluation)   |                        
|Inflation (devaluation) gap |                        

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.

38

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B. Liquidity and Capital
Resources

We had cash and cash equivalents,
marketable securities and bank deposits of $20.4 million at December 31, 2004, $36.6
million at December 31, 2005 and $32.5 million at December 31, 2006.

Our operating activities provided
(used) cash of $(13.8) million for the year ended December 31, 2004, $4.7 million
for the year ended December 31, 2005 and $(2.6) million for the year ended December 31,
2006.

Our capital expenditures were
approximately $1.7 million in 2006, $1.1 million in 2005 and $0.9 million in 2004. We did
not invest in improvements of leased premises in 2004. Our capital investments for
improvements of leased premises were $0.6 million in 2005 and $0.02 million in 2006.

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.

In January 2005, we issued 6,636,391
Series A Preferred Shares to investors in a private placement transaction, at a price per
share of $2.20, for an aggregate investment of approximately $14.6 million (before
expenses). We also issued to the investors in the private placement transaction warrants
to purchase the number of ordinary shares equal to 40% of the number of Series A Preferred
Shares purchased by them, exercisable for a period of six years, at an exercise price per
share of $2.50.

Management believes our cash, cash
equivalents reserve, as well as cash flow from our operations in 2007 will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures for the
next twelve months.

# Market Risk

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

# Grants from the Office
of the Chief Scientist

The Government of Israel encourages
research and development projects through the Office of Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist, pursuant to
the Law for the Encouragement of Industrial Research and Development, 1984, and the
regulations promulgated thereunder, commonly referred to as the R&D Law. Grants
received under such programs are repaid through a mandatory royalty based on revenues from
products (and ancillary services) incorporating know-how developed with the grants. This
government support is condition upon our ability to comply with certain applicable
requirements and conditions specified in the Office of the Chief Scientists programs
and with the provisions of the R&D Law.

Generally, grants from the Chief
Scientist constitute up to 50% of qualifying research and development expenditures for
particular approved projects. Under the terms of these Chief Scientist projects, a royalty
of 3% to 5% is due on revenues from sales of products and related services that
incorporate know-how developed, in whole or in part, within the framework of projects
funded by the Chief Scientist. Royalty obligations are usually 100% of the dollar-linked
amount of the grant, plus interest. The royalty rates applicable to our programs range
from 3% to 3.5%.

The Israeli government is currently
in the process of formulating a proposed amendment to the royalty regulations promulgated
under the R&D Law. The amendment is expected to include changes to the royalty rates,
which would vary from company to company based on the amount of its revenues and approval
date of its program, up to a rate of 6%, and, as of 2006, to increase the rate of interest
accruing on grants by 1% per year. The amendment is expected to have retroactive effect
from January 1, 2006, although there is no assurance as to whether and when it will be
adopted.

The R&D 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 up to 300% of the
grant, depending on the portion of the total manufacturing volume that is performed
outside of Israel. The recent amendment to the R&D Law further permits the Chief
Scientist, among other things, to approve the transfer of manufacturing rights outside
Israel in exchange for an import of different manufacturing into Israel as a substitute,
in lieu of the increased royalties. The R&D Law also allows for the approval of grants
in cases in which the applicant declares that part of the manufacturing will be performed
outside of Israel or by non-Israeli residents and the research committee is convinced that
doing so is essential for the execution of the program. 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.

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The R&D 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 Chief Scientist. Such
approval is not required for the sale or export of any products resulting from such
research or development. The R&D Law further provides that the know-how developed
under an approved research and development program may not be transferred to any third
parties outside Israel, except in certain circumstances and subject to prior approval. The
Chief Scientist may approve the transfer of Chief Scientist-funded know-how outside Israel
in the following cases: (a) the grant recipient pays to the Chief Scientist a portion of
the sale price paid in consideration for such Chief Scientist-funded know-how (according
to certain formulas); or (b) the grant recipient receives know-how from a third party in
exchange for its Chief Scientist-funded know-how; or (c) such transfer of Chief
Scientist-funded know-how arises in connection with certain types of cooperation in
research and development activities.

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

The funds available for the Chief
Scientist grants out of the annual budget of the State of Israel have been reduced in the
past and may be further reduced in the future. We cannot predict whether, if at all, we
would be entitled to any future grants or the amounts of any such grants.

C. Research and
Development, Patents and Licenses

Our research and development efforts
are focused on enhancing our products and developing new modules 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 modules and enhancements is essential to maintaining our
competitive position in the marketplace.

We currently employ 111 full-time
employees in research and development. Gross research and development expenses were
approximately $11.3 million, or 30% of our revenues, for the year ended December 31, 2004.
Gross research and development expenses were approximately $9.2 million, or 21.2% of our
revenues, for the year ended December 31, 2005. Gross research and development expenses
were approximately $9.7 million, or 20.9% of our revenues, for the year ended December 31,
2006. 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.

Since we received grants from the
Chief Scientist, we are obligated to perform all manufacturing activities for projects
subject to the grants in Israel unless we receive an approval to perform any portion of
them outside of Israel. 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
Chief Scientist. Approval is not required for the sale or export of any products resulting
from the research and development based on these grants. For further information regarding
the Chief Scientist, see Item 5B  Liquidity and Capital Resources
Grants from the Office of the Chief Scientist.

40

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D. Trend Information

Spending in the global OSS market in
which we operate is built on the need for service providers to support new services and
network equipment. In the past few years, we have identified a slow down in global OSS
spending which was overturned by a slight recovery starting 2004. However, we are unable
to predict these trends or the extent of the impact that they may have on our results of
operations. Nevertheless, if a slow-down in capital expenditures in the OSS market
resumes, it 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.

The communications service provider
industry is currently undergoing a period of consolidation and mergers. Examples of this
trend are the SBC merger with AT&T (November 2005) and the AT&T merger with
Belsouth ( December 2006). Consolidations and mergers of the providers will result in less
potential customers and less networks to monitor and manage. Furthermore, the resulting
consolidation and merger of our prospective customers may delay or cause cancellations of
significant sales of our products, which could seriously harm our operating results.

In addition, in the past two years,
we have identified a trend of consolidation and acquisition in the OSS market. Examples of
this trend are the IBM acquisition of Micromuse (December 2005) and the IBM acquisition of
Vallemt (December 2006). These competitors consolidation could result in stronger
competition with a larger installation base that could threaten our market positioning and
decrease our sales. In addition, the potential for us to be a part of a merger
oracquisition, whether friendly or not, is also a realistic scenario that could affect our
customers acceptance and our financial performance.

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, 2006, our known contractual obligations by type of obligation and for the
periods indicated:

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

* This amount does not include lease
obligations from September 2007. We have signed a new lease agreement in March 2007, for
an initial period of 7 years. We expect the lease obligations to be approximately $900,000
per year, linked to CPI.

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.

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|Item 6. | DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|------- | ------------------------------------------

A. Directors and Senior
Management

Our directors and executive officers
are as follows:

|Name                   | Age | Position                                                             
|---------------------- | --- | ---------------------------------------------------------------------
|
|
|
|
|Meir Lipshes           | 61  | Chairman of the Board, acting Chief Executive Officer                
|Meir Dvir* (1)(2)      | 76  | Director                                                             
|Julie Kunstler*+(1)(2) | 51  | Director                                                             
|Doron Zinger*+(1)(2)   | 54  | Director                                                             
|Ilan Toker             | 37  | Director                                                             
|Lior Bregman*(2)       | 48  | Director                                                             
|Israel Ofer            | 52  | Chief Financial Officer                                              
|Michael Halperin       | 60  | Vice President of International Sales                                
|Moshe Moran            | 41  | Executive Vice President America Sales and Marketing                 
|Ronen Givon            |     | Vice President of Business Development                               
|Hanun Dvey-Aharon (3)  | 60  | Vice President of Project Delivery and Research and Development Group
|Shahar Ebel            | 36  | Chief Technology Officer                                             
|Duby Yoely             | 46  | Vice President Marketing and Solution Engineering                    

* Designated as an independent
director in accordance with NASDAQ Marketplace Rules.

+ External director in accordance with
the Companies Law.

(1)
          Member of audit committee

(2)
          Member of nomination and compensation committee

(3)
          Mr. Dvey-Aharon is expected to leave the Company during the second quarter of
          2007

Meir
Lipshes serves as our acting Chief Executive Officer since December 2006 and as our
Chairman of board of directors since January 2005. He has served as one of our directors
since we commenced independent operations in September 1992. Mr. Lipshes also served as
our Chief Executive Officer from January 1996 through September 2004 and from March 2005
through November 2005 (on an interim basis). Mr. Lipshes was one of the founders, and is a
current shareholder, of Team Software, our former 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.

Dr.
          Meir Dvir became a director in 1997. Since 1994, Dr. Dvir has served as
          President of Dea Shnia Ltd., a consulting company. Dr. Dvir additionally has
          held the following positions, among others: Board member of Bank Leumi Ltd. from
          1999 to 2005, Board member of TAT Technologies Ltd. since 1994, 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
          Israeli Aircraft Industries from 1982 to 1983. Dr. Dvir holds a Masters Degree
          and a Ph.D. in physics from the Hebrew University, Israel.

Julie
Kunstler became a director in August 2006. She is the managing director and founder of
Portview Communications Partners, a venture capital fund. From 1990 to 2002, she was the
managing director of HK Catalyst Strategy & Finanace Ltd. Ms. Kunstler is also the
Vice President of Business Development at Teknovus Inc., a developer of broadband access
semiconductor solutions. Ms Kunstler serves on the board of three privately held
companies; FiberZone Networks Ltd., Teknovus Inc and QST LLC. Ms. Kunstler holds a BA
degree in urban planning from the University of Cincinnati and an MBA degree from
University of Chicago.

Doron
Zinger became a director in 2004. Mr. Zinger serves as the chief executive officer of
RiT Technologies Ltd., a NASDAQ-listed company engaged in providing physical network
infrastructure control and management solutions. Mr Zinger is also a venture partner
(Telecommunications) with Giza Venture Capital Fund, a member of the Board of Directors of
Vsecure Ltd. Mr. Zinger was a member of the Advisory Board of Iamba Technologies Limited
until October 2004, member of the Advisory Board of Main.net communications Ltd until June
2004 and a member of the Advisory Board of Cellot until December 2004. 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, 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.

Ilan
Toker became a director in 2004. Mr. Toker is an executive of Arad Investments and
Industry Development Ltd. (a company the shares of which are publicly traded on the Tel
Aviv Stock Exchange), where he has served as the President since 2002, and as the Chief
Financial Officer since 2000. Since 1997 Mr. Toker has been the Chief Financial Officer of
Isras Investment Company Ltd. (a company the shares of which are publicly traded on the
Tel Aviv Stock Exchange, and an affiliate company of Arad Investments and Industrial
Development Ltd.). Mr. Toker is the Chief Financial Officer of Team Computers and Systems
Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange,
and an affiliate company of Arad Investments and Industrial Development Ltd.) Mr. Toker is
a director in Hassin Esh Ceramic Products Company (1990) Ltd. Mr. Toker holds a B.A.
degree in accounting and economics and an M.B.A. degree, both from Tel Aviv University.

42

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Lior
Bregman became a director in 2004. From 1988 to 2001 Mr. Bregman served as a Managing
Director with CIBC/Oppenheimer. Mr. Bregman was involved in the development of
CIBC/Oppenheimers high technology effort, with responsibility for its
telecommunication equipment research effort in general, and the wireless communication
area in particular, as well as its research on defense and Israeli companies. Mr.
Bregmans work was recognized by the Wall Street Journal and Institutional Investor
All Star surveys. Until 2001 Mr. Bregman was also a partner in Genesis I, an Israeli-based
venture capital fund, and also served on the investment committee of Genesis II. Prior to
joining CIBC/Oppenheimer, Mr. Bregman served as a research analyst at Hambrecht &
Quist. Mr. Bregman is currently a director of ViryaNet and in Vocaltec. Mr. Bregman holds
a B.A. degree from the Hebrew University of Jerusalem and an M.B.A. degree from Stanford
University.

Israel
Ofer, Chief Financial Officer from 1996, 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 B.A. degree in Finance and Accountancy from Tel Aviv
University. He is a certified public accountant in Israel.

Michael
Halperin joined us as Vice President of Sales in January 2006. He brings with him over
25 years of experience in the communications and telecom industries. Prior to joining us,
Mr. Halperin was employed as VP of Sales at ECI Telecom. Prior to ECI, Mr. Halperin served
as Senior VP of Global Marketing & Sales at Enavis (an ECI subsidiary). From 1993 to
2001, he was VP of Global Sales & Marketing at the Transport Systems Business
Unit/Division at Tadiran Telecom, which was later acquired by ECI. Mr. Halperin holds a
B.Sc degree from The Technion  Israel Institute of Technology.

Moshe
Moran Executive Vice President, America Sales and Marketing since December 2005,
joined us in 1994. Mr. Moran has managed our sales in North America since 2002. Since
joining us, Mr. Moran has held several senior key leadership positions including product,
project and customer support management, as well as sales. Mr. Moran has over 15 years of
experience in the telecommunications and software industry. Prior to joining us, Mr. Moran
worked in management and development positions in the software industry and in the Israeli
military. Mr. Moran holds a B.Sc degree in Computer Engineering from The Technion 
Israel Institute of Technology.

Ronen
Givon, Vice President of Business Development from December 2006, joined us in 1998.
Mr. Givon served as our Account Manager in several project word-wide, and were responsible
for special projects during the years (including contract negotiators). Prior to joining
TTI, Mr.Givon worked 7 years in Digital Equipment Corporation (DEC) as presales engineer,
project manager and program manager. Mr. Givon holds a BSc degree from Ben Gurion
University.

Hanun
Dvey-Aharon,Vice President of Projects Delivery and Development Group from April
2005, joined us in March 2004. Hanun Dvey-Aharon brings more than 20 years of R&D
management experience to the product group. Prior to joining us, Dr. Dvey-Aharon served
from September 2000 to January 2004 as Associate Vice President Technology at Ofek, an NGN
telecom professional services group. Prior to that, he worked at Telrad Networks as
Director of Network Management Systems, and at Elbit Systems as Technical and Software
Development Director. Dr. Dvey-Aharon holds a BSc degree in physics from the
Technion-Israel Institute of Technology and an MSc degree in computer science from Case
Western Reserve University.

Shachar
Ebel,Chief Technology Officer, joined us in March 2004. From 2000 to 2004, Mr. Ebel
has held various positions at Ofek, the NGN Telecom Professional Services group, including
Chief System Engineer and Senior OSS Consultant for Bezeq. Prior to that, Mr. Ebel was
System Engineering Department Manager for OSS Solutions at Telrad Networks, where he was
responsible for managing large-scale project engineering. Mr. Ebel holds a BSc degree in
electronic engineering and an MBA degree from Tel Aviv University.

Duby
Yoely, Vice President Marketing and Solution Engineering from 2005, joined us in 2001
as Engineering Group Manager, responsible for telecom solutions and professional services.
Since 2005 he has the responsibility for solution engineering (Pre-sale) and since the end
of 2006 responsible for the marketing activities as well. He has held telecom management
positions since 1989, when he joined Bezeq as an engineer. After ten years at Bezeq as NMC
Engineer and then manager, Mr. Yoely joined Partner (Orange IL), where he started as NOC
manager, taking part in building the new field of GSM operator network rollout. Mr. Yoely
holds a BSc degree in electrical engineering from The Technion-Israel Institute of
Technology.

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

43

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B. Compensation

Compensation to Directors:

In 2006, our directors, other than
Meir Lipshes, received annual compensation of approximately $11,250 each and approximately
$400 (approximately $200 per telephone meetings) per board meeting or per board committee
meeting in which they participate. We paid our directors, other than Meir Lipshes, the
aggregate amount of approximately $120,137 in 2006, out of which $101,119 was paid in
respect of their services in 2006. Our directors, other than Meir Lipshes, will continue
to receive the aforesaid compensation in 2007.

Total compensation paid to Meir
Lipshes during 2006 was $200,279 compared to $274,607 in 2005. The total amount of the
compensation paid during 2006 and 2005 includes pension, retirement and similar benefits.
We pay Meir Lipshes a monthly management fee of NIS 80,000 (approximately $18,935
according to the exchange rate prevailing on December 31, 2006) linked to the Consumer
Price Index, or CPI, plus applicable social benefits.

In November 2004, our board of
directors authorized the grant of options to purchase up to an additional 75,000 ordinary
shares to Meir Lipshes, at an exercise price of $3 per share. On December 29, 2004, the
option grant to Meir Lipshes was approved by our shareholders. All of the options granted
to Meir Lipshes have vested.The options expire on October 15, 2008.

In November 2006, our board of
directors authorized the grant of options to purchase up to 15,000 ordinary shares to each
of our directors (except for Meir Lipshes), at an exercise price of $3.5 per share. In
December 2006, the grant was approved by our shareholders. However, one of our directors,
Ilan Toker, decided to waive his right to receive these options. The options granted to
the directors, in a total amount of 60,000, vest over a period of 3 years and shall expire
in November 2011.

Compensation to executive
officers:

Total compensation during 2006 to the
members of senior management amounted to approximately $1.7 million. This amount includes
approximately $467,000 set aside by us to provide special bonuses, pension, retirement and
similar benefits. These figures for compensation include amounts paid in 2006 to members
of senior management whom we no longer employ.

Our employment agreements with our
executive officers located in Israel, provide for standard Israeli benefits, including,
among other things, 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% to 85% of their gross salary.

In May 2004, certain of these members
of senior management (other than Meir Lipshes) were granted options to purchase a total of
up to 80,000 ordinary shares for an exercise price of either $6 or the higher of $8 or the
average of the market price in the 30 days prior to the end 12 months from the date the
option was granted (i.e., the period between April 12, 2005 and May 11, 2005).All of these
options have vested. These options expire on September 30, 2009.

During 2006, certain of our executive
officers were granted options to purchase a total of up to 245,000 ordinary shares for an
exercise price of $3.5 per share. These options vest over a period of 3 years and shall
expire in January 2011. The 245,000 options exclude options that were granted to Ruben
Markus, our former Chief Executive Officer, in November 2005.

C. Board Practices.

We are subject to the provisions of
the Israeli Companies Law and the regulations promulgated thereunder. In addition, as a
NASDAQ-listed company, we are also subject to certain corporate governance standards
adopted by NASDAQ.

# 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.

44

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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 (as described below).

Under NASDAQ Marketplace Rules,
effective as of July 31, 2005, absent an exemption therefrom, a majority of our board of
directors must qualify as independent directors within the meaning of the NASDAQ
Marketplace Rules. Other than Meir Lipshes and Ilan Toker, all of our directors qualify as
independent directors under the new NASDAQ rules.

# Alternate Directors

Our articles of association provide
that a director may appoint, by written notice to the Company, any individual who is not a
member of the board of directors, to serve as an alternate director. An external director
may not appoint an alternate director, except in very limited circumstances. 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 and may not act as the
alternate for several directors. 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. Notwithstanding the foregoing, a director may serve as an alternate director on any
committee of our board of directors of which he or she is not already a member. At
present, there are no appointments of alternate 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 at least two external directors.
The Companies Law provides that a person may not be appointed as an external director if
the person or the persons relative, partner, employer or any entity under the
persons control, has, as of the date of the persons appointment to serve as
external director, or had, during the two years preceding 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:

| |  | 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.

Pursuant to an amendment to the
Companies Law, (1) each external director must have either accounting and financial
expertise or professional qualifications  (as such terms are defined in
regulations promulgated under the Companies Law) and (2) at least one of the external
directors must have accounting and financial expertise. We believe we satisfy
this requirement and that each of our external directors qualifies as having the requisite
accounting and financial expertise.

No person can serve as an external
director if the persons position or other business creates, or may create, 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.

45

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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 he or she may be reelected to one additional term of three
years. Thereafter, our external directors may be reelected by our shareholders for
additional periods of up to three years each only if the audit committee and the board of
directors confirm that, in light of the external directors expertise and special
contribution to the work of the board of directors and its committees, the reelection for
such additional period is beneficial to the Company. External directors may be removed
from office only by the same percentage of shareholders as is required for their election,
or by a court, 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. Julie Kunstler commenced her term as an external director in August 2006. Doron
Zinger commenced his term as an external director in April 2004 and was reelected in
December 2006.

Any committee of the board of
directors must include at least one external director and the audit committee must include
all of the external directors. 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.

# Committees of the Board

Subject to the provisions of the
Companies Law, our board of directors may delegate its powers to committees consisting of
board members. Our board of directors established the following committees:

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

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. The current members of our
audit committee are Julie Kunstler and Doron Zinger, our two external directors, and Meir
Dvir.

Since our ordinary shares are listed
on NASDAQ, we are also subject to NASDAQ rules and listing requirements. Under current
NASDAQ and SEC rules, effective as of July 31, 2005, our Audit Committee must have at
least three members and generally be comprised only of independent directors, each of whom
satisfies the respective independence requirements of the SEC and NASDAQ. In
addition, current NASDAQ rules require all of the members of the Audit Committee to be
financially literate and one of whom must possess accounting or related financial
management expertise. Our audit committee satisfies the requirements of the Companies Law
and the new SEC and NASDAQ rules. Our audit committee adopted a written charter specifying
the committees duties and responsibilities, which include, among other things, the
selection and evaluation of the Companys independent auditors.

46

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Compensation and
Nominating Committee

Effective July 31, 2005, the NASDAQ
rules require that director nominees be selected or recommended for the boards
selection either by a nominations committee composed solely of independent directors or by
a majority of independent directors, subject to certain exceptions. Similarly, the
compensation payable to a companys chief executive officer and other executive
officers must be approved either by a majority of the independent directors on the board
or a compensation committee comprised solely of independent directors, subject to certain
exceptions. Our compensation and nominating committee satisfies the requirements of the
new NASDAQ rules. Our compensation and nominating committee adopted a written charter
specifying the committees duties and responsibilities, which include, among other
things, the nomination of the Companys directors.The current members of our
compensation and nominating committee are Meir Dvir, Doron Zinger, Julie Kunstler and Lior
Bregman.

# Internal Auditor

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, among other things, whether the companys
conduct complies with applicable law 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 is Yardeni Gelfand & Co. C.P.A (ISR).

# Indemnification and
D&O Insurance

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 currently maintain
directors and officers liability insurance for the benefit of our office holders. For more
details, see in Item 10C below under the caption Exculpation, Insurance and
Indemnification of Office Holders.

# 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.
| | - | ------------------------------------------------------------

The duty of loyalty of an office
holder requires an office holder to act in good faith and for the benefit of the company,
and 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:

47

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| |  | the
office holders relatives. Relatives are defined to include 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 or any of his relatives 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.

D. Employees

The table below sets forth our
working force presented by field of employment and geographical breakdowns, during the
periods indicated:

|Approximate numbers of
employees by category of
activity | Research
& Development
& projects | Sales and marketing | Finance and
administration | Total
|-------------------------------------------------------- | --------------------------------- | ------------------- | -------------------------- | -----
|
|
|
|
|2006                                                     |                                   |                     |                            | 277  
|2005                                                     |                                   |                     |                            | 287  
|2004                                                     |                                   |                     |                            | 332  

|Approximate numbers of
employees by geographic
location | Israel | United States | Europe | Asia | Africa | Australia | Total
|------------------------------------------------------- | ------ | ------------- | ------ | ---- | ------ | --------- | -----
|
|
|
|
|2006                                                    |        |               |        | 247  |        |           | 87   
|2005                                                    |        |               |        | 254  |        |           | 91   
|2004                                                    |        |               |        | 333  |        |           | 113  

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.

48

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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. 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 on account of 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 to the pension component of such fund and the employer contributes an average of
approximately 5% to 6.1% of such salary. We also allocate 8.3% of the employees
salary on account of severance pay.

E. Share Ownership

# Security Ownership of
Our Directors and Executive Officers

The following table details, as of
March 21, 2007,the number of our ordinary shares owned (including the shares
underlying options or warrants held by such person that are exercisable within 60 days) by
our directors and executive officers:

| | Name and Address                                                                                                               | Number of
Shares
Owned | Percent of
Shares
Outstanding
| | ------------------------------------------------------------------------------------------------------------------------------ | ---------------------- | -----------------------------
|
|
|
|
| | Lior Bregman (1)                                                                                                               |                        |                              
| | Meir Lipshes (2) (3)                                                                                                           |                        |                              
| | All other members of senior management, as a group (consisting of 11
   persons, other than Lior Bergman and Meir Lipshes) (4) |                        |                              

|* | less
than 1% of our outstanding ordinary shares.
|- | ------------------------------------------------

|(1) | Lior
Bregman, our director, is the ownerof LB Capital Investments, which holds
                    approximately 1.3% of our outstanding shares, comprised of 181,818 of
our                     Preferred A Shares, and warrants to purchase 72,727 of our
ordinary shares at an                     exercise price of $2.5 per share, which expire
on January 2012.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
options exercisable into 75,000 ordinary shares, at an exercise price
                    of $3 per share, which expire on October 15, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As
of March 21, 2007, Team Computers and its wholly-owned subsidiary, Team
                    Software Industries Ltd., beneficially owned 150,450 of our ordinary
shares,                     representing approximately 0.8% of our outstanding share
capital and voting                     rights. As of March 21, 2007, Meir Lipshes, the
Chairman of our board of                     directors and our acting Chief Executive
Officer, owned approximately 8.5% of                     Team Computers shares. Mr.
Lipshes disclaims any beneficial interest in                     the ordinary shares
owned by Team Software or Team Computers in us.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The
number of shares owned consists solely of options exercisable into ordinary
                    shares within 60 days. The options have exercise prices ranging from
$3.5 per                     share to $8.0 per share, and expire between June 30, 2009
and January 10, 2011.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Options to Purchase Our
Ordinary Shares

From time to time, we grant our
employees and directors options to purchase our shares pursuant to our share option plans:

Old Plans

In November 1996, we adopted our
Share Option Plan, primarily designed for employees of TTI and its subsidiaries, and, from
time to time, we established and granted additional options under sub-plans. We refer to
such plan and sub-plans as the Old Plans because we do not grant any additional options
under such plans. As of March 15, 2007, 108,000 options, exercisable into 108,000 ordinary
shares at exercise prices ranging from $6.0 to $8.0 per share, remain outstanding under
the Old Plans.

49

---

---



The 2004 Plan

In December 2004, our shareholders
approved the adoption of the 2004 Employee Share Option Plan, or the 2004 Plan, and the
reservation of a pool of 1,000,000 ordinary shares for issuance thereunder. In August
2006, our shareholders increased this pool to a total of 1,500,000 shares. Pursuant to the
2004 Plan, primarily designed for employees of TTI and its subsidiaries, our board of
directors is empowered, among other things, to designate the optionees, dates of grant and
the exercise price of options granted under such plans. The terms of the 2004 plan are
described in Item 9 of our Notice and Proxy Statement for the Annual General Meeting of
our shareholders held on December 29, 2004, included in our report on Form 6-K, filed with
the SEC on December 2, 2004, which is incorporated herein by reference.

2006 Grants

In 2006, we granted options
exercisable into 755,500 ordinary shares, including the 60,000 options granted to our
directors and executive officers as described above. As of March 15, 2007, 574,666
ordinary shares remain available for grant (unless any options are forfeited or expired
without exercise, in which case the underlying shares shall again become available for
grant) under these plans.

Total Outstanding Options

The following table set forth, as of
March 15, 2007, the number of options outstanding under our Old Plans and 2004 Plan and
their respective exercise prices and expiration dates:

| | Number of Options  | exercise prices (range) | Expiration Date
| | ------------------ | ----------------------- | ---------------
|
|
|
|
| | 108,000            |                         |                
| | 75,000             |                         |                
| | 200,000            |                         |                
| | 230,000            |                         |                
| | 287,334            |                         |                
| | 29,000             |                         |                
| | 18,000             |                         |                
| | 26,000             |                         |                
| | 60,000             |                         |                
| | Total: 1,033,334** |                         |                

|* | The
higher of $8.0 or the average of the market price in the 30 days prior to the end 12
months from the date the option was granted (i.e., the period between April 12, 2005 and
May 11, 2005).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Out
of which options to purchase 359,333 ordinary shares are currently exercisable.
|-- | -----------------------------------------------------------------------------------

|Item 7. | MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- | -------------------------------------------------

A. Major Shareholders

Set forth below is information known
to us concerning our shareholders that are the beneficial owners of 5% or more of
outstanding ordinary shares or preferred shares as of March 21, 2007:

50

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|Name of shareholder                             | Number of
ordinary
shares held | Percentage
of our
outstanding
ordinary
shares * | Number of
preferred
shares held | Percentage
of our
outstanding
preferred
shares ** | Total
shares
beneficially
owned *** | Percentage
of our
outstanding
share
capital****
|----------------------------------------------- | ------------------------------ | ----------------------------------------------- | ------------------------------- | ------------------------------------------------- | ----------------------------------- | -----------------------------------------------
|
|
|
|
|Shlomo Eisenberg (1)(2)(3)                      |                                |                                                 |                                 | 4,229,142                                         |                                     |                                                
|Neuberger & Berman (4)(5)                       |                                |                                                 |                                 | 1,180,332                                         |                                     |                                                
|Rima Management, LLC and
   Richard Mashaal (6) |                                |                                                 |                                 | 1,090,705                                         |                                     |                                                
|S Squared Technology (7)                        |                                |                                                 |                                 | 363,637                                           |                                     |                                                

* Based on an aggregate of 16,000,428
ordinary shares outstanding as of March 21, 2007.

** Based on an aggregate of 2,936,389 preferred
shares outstanding as of March 21, 2007.

*** Includes shares underlying
options or warrants held by such person that are exercisable within 60 days. 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.

**** Based on an aggregate of
18,936,817 ordinary and preferred shares outstanding as of March 21, 2007.

|(1) | Shlomo
Eisenberg holds 594,836 ordinary shares, 67,468 ordinary shares through a
                    wholly owned corporation, and his wife, Tirza Eisenberg, holds
188,912 ordinary                     shares. In addition, Mr. Eisenberg, directly and
indirectly (through a wholly                     owned corporation), owns approximately
14.9% of Team Computers and Systems Ltd.                     and is also a member of the
controlling group of shareholders of Arad                     Investments and Industrial
Development Ltd. Therefore, Mr. Eisenberg may be                     deemed to
beneficially own the ordinary shares held by Arad, Team Computers and
                    Team Software Industries Ltd. (see below). Mr. Eisenberg disclaims
any such                     beneficial ownership.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Arad,
directly and indirectly (through a wholly owned corporation), holds
                    3,227,476 ordinary shares. In addition, Arad owns 60% of Team
Computers and,                     therefore, may be deemed to beneficially own the
ordinary shares held by Team                     Computers and Team Software. Arad
disclaims any such beneficial ownership. Arad                     is an Israeli company
whose shares are publicly traded on the Tel Aviv Stock                     Exchange.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Team
Software holds 145,150 ordinary shares. Team Computers holds 5,300 ordinary
                    shares. Since Team Computers holds 100% of the issued and outstanding
shares of                     Team Software, it may be deemed to beneficially own the
ordinary shares held by                     Team Software. Team Computers, an Israeli
company whose shares are publicly                     traded on the Tel Aviv Stock
Exchange, is a large computer vendor in Israel. In                     addition, as of
March 21, 2007, Meir Lipshes, the Chairman of our board of                     directors
and CEO, owned approximately 8.5% of Team Computers shares. Mr.
                    Lipshes disclaims any beneficial ownership. As of March 21, 2007,
Meir Lipshes                     owned approximately 2.9% of our outstanding shares
directly.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | As
of May 9, 2006, based on a Schedule 13D/A filed by Neuberger & Berman
                    with the SEC on May 25, 2006. Neuberger Berman, L.L.C., a Delaware
limited                     liability company (NB LLC), serves as the
investment adviser to                     LibertyView Special Opportunities Fund, L.P., a
Delaware limited partnership                     (LV Opportunities),
LibertyView Funds, L.P., a Delaware limited                     partnership (LV
Funds), and certain other investment funds and                     accounts
(together with LV Opportunities and LV Funds, the Funds).
                    Neuberger Berman, Inc., a Delaware corporation (NB Inc.),
serves as                     the sole owner and managing member of NB LLC. NB LLC may be
deemed to                     beneficially own the ordinary shares directly held by the
Funds and NB Inc. may                     be deemed to control NB LLC by virtue of its
position as the sole owner and                     managing member of NB LLC. The
3,980,325 shares reported as beneficially owned                     by NB LLC include
1,180,332 ordinary shares, 1,799,995 Series A Preferred                     Shares, and
999,999 warrants to purchase ordinary shares which are exercisable
                    within 60 days.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | LV
Opportunities holds 1,363,635 Series A Preferred Shares, and warrants to
                    purchase 545,454 ordinary shares which are exercisable within 60
days, with an                     exercise price of $2.50 per share. LV Funds holds
909,090 Series A Preferred                     Shares, and warrants to purchase 363,636
ordinary shares which are exercisable                     within 60 days, with an
exercise price of $2.50 per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | As
of December 31, 2006, based on a Schedule 13G filed by Rima Management, LLC
                    and Richard Mashaal with the SEC on February 8, 2007. The Schedule
13G indicates                     that Rima Management, LLC and Richard Mashaal share
voting and dispositive power                     as to the 1,318,005 ordinary shares (out
of which 227,300 Series A Preferred                     Shares and 90,920 warrants to
purchase ordinary shares which are exercisable                     within 60 days) .
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

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|(7) | As
of December 31, 2006, based on a Schedule 13G/A filed by S Squared
                    Technology, LLC with the SEC on February 14, 2007. The Schedule 13G/A
indicates                     that S Squared Technology LLC, or SST, holds a total of
991,283 ordinary shares                     (out of which 708,059 Series A Preferred
Shares and and warrants to purchase                     283,224 ordinary shares which are
exercisable within 60 days, with an exercise                     price of $2.50 per share
) and S Squared Technology Partners , LP , or SSTP,                     beneficially owns
281,445 ordinary shares (out of which 201,032 Series A                     Preferred
Shares, and warrants to purchase 80,413 ordinary shares which are
                    exercisable within 60 days, with an exercise price of $2.50 per
share). Seymour                     L. Goldblatt, the President of each of SST and SSTP,
and Kenneth A. Goldblatt,                     who beneficially own a majority of the
interests in SST disclaim beneficially                     ownership of the ordinary
shares held by SST and SSTP.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant changes in percentage
ownership by major shareholders during last three years

In January 2005, we completed a
private placement transaction in which we issued (i) 6,636,389 Series A Convertible
Preferred Shares, par value NIS 0.50 each, or the Series A Preferred Shares, at a purchase
price of $2.20 per share, resulting in aggregate proceeds (before expenses) of
approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our ordinary
shares, pursuant to a Purchase Agreement dated as of November 29, 2004. For more
information on the private placement transaction, see Item 10.C.  Private
Placement of Series A Preferred Shares.

In January 2005, Team Software
transferred 5,200,000 of our ordinary shares held thereby to Team Computers and Systems
Ltd., its parent company, such that Team Computers held 5,200,020 or our ordinary shares
directly and 762,530 of our ordinary shares through Team Software. In April 2005, Team
Computers distributed to its shareholders 5,166,062 ordinary shares, such that immediately
following the distribution, Team Computers held 719,488 of our ordinary shares,
representing approximately 3.9% of our outstanding share capital. Of the 5,166,062
ordinary shares distributed by Team Computers, 3,714,435 was distributed to Team
Computers controlling shareholders, including Arad Investments and Industrial
Development Ltd., Shlomo Eisenberg and Meir Lipshes (see the table above). In December
2006, Team Computers distributed additional 453,822 of our ordinary shares to its
shareholders.

# Voting Rights

The holders of our ordinary shares
and the holders of our Series A Preferred Shares each have one vote per share held. As of
March 21, 2007, approximately 44.2% of the Series A Preferred Shares are outstanding, and
approximately 55% of all Series A Preferred Shares issued have been converted into
ordinary shares.

# Record Holders

As of March 21, 2007, there were
approximately 41 record holders of our ordinary shares, of which 22 were record holders
with mailing addresses in the United States owning an aggregate of approximately 76% of
our outstanding ordinary 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 (including one U.S. nominee company, CEDE & Co., which held
approximately 73% of our outstanding ordinary shares as of said date).

As of March 21, 2007, there were
approximately 7 record holders of our Series A Preferred Shares, all of which were record
holders with mailing addresses in the United States.

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

B. Related Party
Transactions

# Sale of Products;
Services

Since the commencement of our
operations in 1992, Team Computers, our former parent company, has from time to time paid
us commissions in respect of the sale by us of certain products represented and offered 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. In connection with these
sales, we recorded commissions of approximately $249,000 in 2004, $93,000 in 2005 and
$65,000 in 2006.

52

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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 $207,000 in 2004, $169,000 in 2005 and $160,000 in 2006. We and Team Computers
have agreed to indemnify each other for liabilities resulting from the acts or omissions
of our 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.

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. The payments made by us to
Team Computers and Omnitek-Eichut in respect of such asset purchases were, in the
aggregate, approximately $555,000 in 2004, $398,000 in 2005 and $352,000 in 2006. We
believe that the terms of these purchases are not different in any material respect than
the terms we could receive from unaffiliated third parties.

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
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.

In December 2003, we issued a
purchase order to Team Computers with respect to third party software, Team Computers
represents in Israel, for the integration as part of our Netrac products. We have
purchased licenses to be deployed as part of our solution to be sold to our customers, as
part of our solution, in the initial amount of $100,000. The engagement with Team
Computers was approved by our Board of Directors on December 23, 2003.

# Registration Rights
Agreement

Pursuant to a Registration Rights
Agreement between us and Team Software, dated October 22, 1996, Team Software was entitled
to registration rights with respect to our ordinary shares held by it. We agreed that, at
the request of Team Software, but on no more than two occasions, we would 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 would include in such
registration Team Softwares shares, subject to certain limitations. All fees and
expenses incurred in connection with any registration would be borne by us, except that
Team Software would pay all fees and expenses of its own counsel and all underwriting
discounts and commissions relating to Team Softwares shares.

In June 2005, Team Software assigned
its rights under the Registration Rights Agreement. At the request of Arad Investment
& Industrial Development Ltd., one of the assignees, we filed a registration statement
covering 4,408,123 ordinary shares owned by Arad and affiliates, which was declared
effective in June 2006.

# Leased Facilities

From February 1998 to July 2005, we
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 $1.4
million during 2004, $1.4 million during 2005 and $1.2 million during 2006. We exercised
our option to extend the lease until August 31, 2007. However, we do not intend to extend
this lease further.

53

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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. In order to reduce our expenses, on July
14, 2005, we entered into another written amendment to the lease agreement according to
which the space leased by us was reduced by 1,258 square meters, and we agreed to pay to
Team Computers a penalty of NIS 466,526 (approximately $104,000), which is equivalent to
one-third of the pro rated rental fee for the returned space for the remainder of the
lease term. The amendment was approved by our shareholders on December 27, 2005. This
amount has been recorded as an expense in our general and administration expenses.

On July 14, 2005, Team Computers sold
this property and as such, we are now subleasing the property from Team Computers.

# Compensation to Directors

With respect to compensation
including options granted to our directors, see Item 6B under the caption
Compensation to Directors.

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

Dispute with a Former
Major Customer

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 an application in an English
court on November 18, 2002, requesting an injunction to prevent the customer from calling
the bond. During the hearings on this matter, the customer asserted (among other things)
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 (among other things) 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. An
interim injunction pending a further hearing was granted.

On January 23, 2003, an order was
issued denying our request for the injunction to continue, 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
court 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.The claim and particulars were served on the customer in December
2005 asking the court to award us approximately £10.5 million (GBP). In March 2006
we were served with the customers defense and a £12.4 million (GBP)
counterclaim. The trial is expected to take place in London in October 2007. We can not
assure you regarding the outcome of this proceeding.

Our management believes, in light of
the facts surrounding our relationship with this customer, that we have reasonably good
prospect of establishment that the customer was not entitled to terminate the agreement
and by its conduct repudiated the agreement and, accordingly, that we are likely to be
able to defeat the counterclaim. We cannot currently quantify the amount of damages that
we would receive if we were to succeed in a lawsuit against the customer, and we cannot
estimate the amount of damages that could potentially be awarded to the customer in a
potential counterclaim.

54

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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.

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, 2004, this amount was $3.3 million due to
the devaluation of the United States dollar against the British Pound. As of December 31,
2005, this amount was $2.9 million due to the devaluation of the United States dollar
against the British Pound. As of December 31, 2006 this amount was $3.3 million due to the
devaluation of the United States dollar against the British Pound. With respect to this
receivable, our management believes that the collection is probable (i.e., likely to
occur, as defined in SFAS 5) in light of (i) the solution delivered by us to the customer,
(ii) the approval by the customers users of the functionality of the solutions
delivered and (iii) the customers contractual obligations.

The balance, in the amount of $6.3
million was recorded in 2002 as allowance for doubtful accounts. We have not
recorded any amount as allowance for doubtful accounts in 2004 and 2005.

Putative Shareholder
Class Action

A putative shareholder class action
lawsuit was filed in September 2004 against the Company, Team Software Industries Ltd. and
certain of the Companys executive officers. The lawsuit purports to be a class
action filed on behalf of persons who held our shares during the period between February
6, 2002 and November 14, 2002. The complaint alleges that material misrepresentations and
omissions concerning the Companys operations and performance artificially inflated
the Companys stock price, causing damages to investors. We filed a motion to dismiss
the complaint which motion was granted by an opinion dated October 6, 2006. The opinion
dismissed the amended and consolidated complaint but granted plaintiff the right to file a
second amended and consolidated complaint. The second amended and consolidated complaint
was filed on November 9, 2006. We filed a motion to dismiss the second amended and
consolidated complaint on January 10, 2007. Based on our initial review of the
recently-filed second complaint, we believe that the claims are without merit and intend
to vigorously defend the actions. However, this purported class action is at an early
stage, and we cannot predict the outcome of this dispute.

Reimbursement of
Withholding Tax

During the years 1998 to 2000, we
granted Mr. Shlomo Eisenberg, the former chairman of our board of directors and a major
shareholder of TTI, an aggregate of 105,000 options to purchase our ordinary shares. In
the years 2001 to 2002, Mr. Eisenberg exercised a portion of his options and we withheld
Israeli income tax from income realized by Mr. Eisenberg upon such exercise of options, as
required under law.

At the end of 2005, we underwent a
tax deductions audit by the Israeli Tax Authority (ITA). As a result of such audit, the
ITA assessed an additional NIS 1.5 million in withholding taxes with respect to income
derived by Mr. Eisenberg from the exercise of his options. Following consultation with our
tax advisors, we paid the additional withholding tax amount assessed in the audit. The ITA
informed us that we are required to collect such additional tax from Mr. Eisenberg
otherwise such additional amount will be viewed as a benefit received by Mr. Eisenberg
from us, resulting in additional withholding tax being charged to us as a result of the
grant of such benefit.

We filed a NIS 1.6 million lawsuit
against Mr. Eisenberg and demanded reimbursement for the additional withholding tax from
Mr. Eisenberg. Based on advice from Israeli counsel, we believe that we are entitled to
such reimbursement. However, we cannot assure you that the court will accept our view. The
trail is expected to take place in September 2007.

Dispute with a Vendor

In April 2006, in connection with our
cancellation of a purchase order from Embarcadero Technologies Inc., Embarcadero filed a
lawsuit against us in the San Francisco Superior Court, alleging among other things,
breach of contract and intentional misrepresentation. We believe that the cancellation of
the purchase order and the return of Embarcaderos software by us was made in
accordance with applicable law and regulations. We answered and counterclaimed for
negligent and intentional misrepresentation based on false representation made by
Embarcaderos salesperson. Mediation of this case during January 2007 did not resolve
the dispute. No triall has been set as of yet. Since this claim is at its early stages, we
cannot predict the outcome of this dispute. In the event of an unfavorable resolution we
may be required to pay damages and other related costs of approximately $100,000. A
provision of such amount is included in our financial statements for 2006.

55

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# Dividend Policy

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.

B. Significant Changes

No significant change has occurred
since December 31, 2005, 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 Global 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.

|                       | High | Low
|---------------------- | ---- | ---
|
|
|
|
|2002:                  |      |    
|Full Year              |      |    
|2003:                  |      |    
|Full Year              |      |    
|2004:                  |      |    
|Full Year              |      |    
|2005:                  |      |    
|Full Year              |      |    
|First Quarter          |      |    
|Second Quarter         |      |    
|Third Quarter          |      |    
|Fourth Quarter         |      |    
|                       |      |    
|2006:                  |      |    
|Full Year              |      |    
|First Quarter          |      |    
|Second Quarter         |      |    
|Third Quarter          |      |    
|Fourth Quarter         |      |    
|                       |      |    
|Most Recent Six Months |      |    
|September 2006         |      |    
|October 2006           |      |    
|November 2006          |      |    
|December 2006          |      |    
|January 2006           |      |    
|February 2006          |      |    

On
March 26, 2007, the last reported sale price of our ordinary shares on the NASDAQ National
Market was $2.45 per share.

B. Plan of Distribution

Not applicable.

56

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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, and on December 29, 2004 and our
articles of association were further amended on December 27, 2005 and in August 2006. 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:

# 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. We are registered with the Israeli Registrar of
Companies under No. 52-004301-9.

Section 2 of our memorandum of
association 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.
See Item 6C  Board Practices.

57

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# 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.

# Ordinary Shares

The holders of our ordinary shares
have, among other rights generally available to shareholders of an Israeli company under
our Articles of Association, as amended, and under the Companies Law, the following
rights, preferences and restrictions:

| |  | one
vote at meetings of our shareholders in respect of each ordinary share held thereby;
| | - | ----------------------------------------------------------------------------------------

| |  | the
right to share pro rata in any distributions of dividends; and
| | - | ------------------------------------------------------------------

| |  | subject
to the liquidation preference of holders of any shares having preferred rights upon
liquidation, to share pro rata in the proceeds available for distribution upon
liquidation.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Series A Preferred Shares

The holders of our Series A Preferred
Shares have, among other rights generally available to shareholders of an Israeli company
under our Articles of Association, as amended, and under the Companies Law, the following
rights, preferences and restrictions:

| |  | weighted-average
anti-dilution protection in the event that following the closing of the private placement
transaction in which the Series A Preferred Shares were issued (i.e., January 3, 2005),
we issue or are deemed to have issued (subject to certain exceptions) ordinary shares at
a price per share that is lower than the conversion price in effect at the time of such
issuance or deemed issuance, which could result in dilution of the holdings of ordinary
shareholders;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | automatic
conversion into ordinary shares in the event that, at any time commencing two years from
the effective date (which has not occurred as of yet) of the registration statement which
we filed in connection with the aforesaid private placement, our ordinary shares trade at
a closing bid price of 100% above the price per share of $2.20 in the private placement
(i.e., $4.40) for a 20 consecutive trading day period, with an average daily trading
volume of at least 100,000 shares per day during such period;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | one
vote at meetings of our shareholders in respect of each ordinary share into which a
Series A Preferred Share held of record could be converted;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
right to share pro rata in any distributions of dividends; and
| | - | ------------------------------------------------------------------

| |  | in
the event of any voluntary or involuntary liquidation, dissolution or winding up of TTI,
the holders of Series A Preferred Shares then outstanding shall be entitled to be paid
out of the assets of TTI available for distribution to our shareholders, before any
payment shall be made to the holders of our ordinary shares or any other class or series
of stock ranking on liquidation junior to the Series A Preferred Shares by reason of
their ownership thereof, an amount equal to the greater of: (i) $2.20 per share (subject
to appropriate adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares), plus any dividends declared but
unpaid thereon, or (ii) such amount per share as would have been payable had each such
share been converted into ordinary shares immediately prior to such liquidation,
dissolution or winding up.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

It should be noted that the holders
of our Series A Preferred Shares also had additional rights, which expired. For example,
the Series A Preferred Shares had special voting rights which expired in April 2006, when
more than 35% of all Series A Preferred Shares issued have been converted into ordinary
shares.

58

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# Dividends

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

Dividends may be paid in assets or
shares, debentures, or debentures stock of our company or of other companies. 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.

# 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

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 (except in
connection with distributions), provided that the articles of association of the company
allow it to do so. Our articles of association allow us to exempt our office holders to
the fullest extent permitted by law.

# Insurance of Office
Holders

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

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

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

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

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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 or indemnification, the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the Companys interests;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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. We have obtained such approvals for the procurement of
liability insurance covering our officers and directors and for the grant of
indemnification letters to our officers and directors.

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 currently maintain
directors and officers liability insurance for the benefit of our office holders.

# 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. For purposes of the shareholder vote of each party, unless a court rules
otherwise, the merger will not be deemed approved if shares, representing a majority of
the voting power present at the shareholders meeting and which are not held by the other
party to the merger (or by any person who holds 25% or more of the voting power or the
right to appoint 25% or more of the directors of the other party), vote against the
merger. Upon the request of a creditor of either party to the proposed merger, the court
may delay or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not be
completed unless at least (1) 50 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 and
(2) 30 days have passed since the merger was approved by the shareholders of 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 45% or greater shareholder of the company. These requirements do not
apply if, in general, the acquisition (1) was made in a private placement that received
shareholder approval, (2) was from a 25% or greater shareholder of the company which
resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was
from a 45% or greater shareholder of the company which resulted in the acquirer becoming a
45% or greater shareholder of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
companys outstanding shares will be acquired by the offeror and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the
offer.

If, as a result of an acquisition of
shares, the acquirer will hold more than 90% of a companys outstanding shares, the
acquisition must be made by means of a tender offer for all of the outstanding shares. If
less than 5% of the outstanding shares are not tendered in the tender offer, all the
shares that the acquirer offered to purchase will be transferred to it. The Companies Law
provides for appraisal rights if any shareholder files a request in court within three
months following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquiror may not acquire
shares in the tender offer that will cause his shareholding to exceed 90% of the
outstanding shares.

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Finally, 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.

C. Material Contracts

Private Placement of
Series A Preferred Shares

On January 3, 2005, we completed a
private placement transaction in which we issued (i) 6,636,389 Series A Convertible
Preferred Shares, par value NIS 0.50 each, or the Series A Preferred Shares, at a purchase
price of $2.20 per share, resulting in aggregate proceeds (before expenses) of
approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our ordinary
shares, pursuant to a Purchase Agreement dated as of November 29, 2004.

The rights of the holders of Series A
Preferred Shares included:

| |  | weighted-average
anti-dilution protection in the event that following the closing of the transaction we
issue or are deemed to have issued (subject to certain exceptions) ordinary shares at a
price per share that is lower than the conversion price in effect at the time of such
issuance or deemed issuance;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
preference in the event of liquidation of TTI;
| | - | ------------------------------------------------

| |  | veto
rights over certain material actions by TTI; and
| | - | -----------------------------------------------------

| |  | the
right to nominate one member of our board of directors.
| | - | -----------------------------------------------------------

The Series A Preferred Shares will
automatically convert into ordinary shares in the event that, at any time commencing two
years from the effective date of the registration statement we filed in connection with
the private placement transaction, our ordinary shares trade at a closing bid price of
100% above the price per share of $2.20 (i.e., $4.40) for a 20 consecutive trading day
period, with an average daily trading volume of at least 100,000 shares per day during
such period.

The warrants are exercisable for a
period of 6 years, at an exercise price of $2.50 per ordinary share, and have weighted
average anti-dilution protection in the event that during the 6 year period following the
closing of the transaction, i.e., until January 2012, we issue or are deemed to have
issued (subject to certain exceptions) ordinary shares at a price per share that is lower
than the exercise price in effect at the time of such issuance or deemed issuance.

In addition, the purchasers of our
Series A Preferred Shares have rights of first offer in the event we propose to offer or
sell any of our ordinary shares in one or more transactions not including a public
offering prior to the first anniversary of the date upon which the registration statement
filed in connection with the private placement is declared effective by the SEC.

Pursuant to a Registration Rights
Agreement dated as of November 29, 2004, we agreed with the purchasers of our Series A
Preferred Shares and warrants to register for public resale 9,954,584 ordinary shares for
issuance upon conversion of the Series A Preferred Shares, representing 150% of the
initial number of issued Series A Preferred Shares issued to them in the private
placement, and the 2,654,556 ordinary shares issuable to them upon exercise of the
warrants. The investors had the right to receive payment for liquidated damages if a
registration statement on Form F-3 was not declared effective within 90 days (or 120 days
in the event the SEC conducts a review) following the closing of the private placement
transaction. We did not obtain effectiveness of the registration statement within the
timeframe set forth in our agreements with the investors. Therefore, from May 4, 2005 to
May 24, 2005, the date on which the Form F-3 was declared effective, we accrued liquidated
damages in the aggregate amount of approximately $200,000, which was at a rate equal to 2%
of each investors investment in the Company for each 30 day period, or pro rata for
any portion thereof, during the period for which the registration statement was not
declared effective. This amount was paid to the investors in June 2005.

In addition, we agreed to register
371,638 ordinary shares underlying the same number of warrants issued to Oppenheimer &
Co., the placement agent for the private placement transaction. These warrants are
exercisable for a period of 4 years, ending on January 2009, at an exercise price of $2.64
per ordinary share, and have weighted-average anti-dilution protection in the event that
during the 6 year period following the closing of the transaction, i.e., until January
2012, we issue or are deemed to have issued (subject to certain exceptions) ordinary
shares at a price per share that is lower than the exercise price in effect at the time of
such issuance or deemed issuance.

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As of March 21, 2007, 3,700,002
Series A Preferred Shares had been converted into Ordinary Shares and 2,936,389 remain
outstanding. As of March 21, 2007, 2,958,703 warrants remain outstanding.

Agreements with Team
Computers

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.

# 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 heading
Passive Foreign Investment Companies 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 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.

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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 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.

# Disposition of Shares

Except as provided under the passive
foreign investment 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 value 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Passive income generally consists of
dividends, interest, rents, royalties, annuities, and income from certain commodities
transactions and from notional 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.

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 were not a PFIC in
2006and will not be a PFIC in 2007, The tests for determination PFIC status are applied
annually. Our conclusions are based on an analysis of our financial position and future
income and assets, about which it is difficult to make accurate predictions. Accordingly,
there can be no assurance that we are not 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.

# Backup Withholding

A U.S. holder may be subject to
backup withholding at a rate of 28% 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.

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In general, non-U.S. holders will not
be subject to the 28% 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 28% 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. However,
          non-U.S. holders will be subject to backup withholding at a rate of 28% 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.

This summary does not discuss all the
aspects of Israeli tax law that may be relevant to a particular investor in light of his
or her personal investment circumstances or to some types of investors subject to special
treatment under Israeli law.

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.

# General Corporate Tax
Structure

Israeli companies are generally
subject to Corporate Tax on their taxable income at the rate of 31% for the 2006 tax year.
Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the
Tax Ordinance), which came into effect on January 1, 2006, the corporate tax
rate is scheduled to decrease as follows: 29% for the 2007 tax year, 27% for the 2008 tax
year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli
companies are generally subject to Capital Gains Tax at a rate of 25% for capital gains,
other than gains deriving from the sale of listed securities, derived after January 1,
2003. However, the effective tax rate payable by a company that derives income from an
approved enterprise (as defined below) may be considerably less, as further discussed
below.

# 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.

66

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# Law for the
Encouragement of Capital Investments, 1959

Our facilities currently enjoy
approved enterprise status under the Investments Law. See discussion below regarding an
amendment to the Investments Law that came into effect in 2005.

The Investments Law provided (prior
to its amendment in 2005) that 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. 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 corporate tax at the rate of 25%, rather than
regular corporate tax rates 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.

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.

Most of our production facilities in
Israel have been granted approved enterprise status under five separate
investment programs and, as such, are entitled to tax benefits, under the Investments Law.
According to the law, we have elected the alternative benefits track, and have
waived certain government grants in return for a tax exemption. Upon our initial public
offering in 1996, we became a foreign investment company for purposes of the
Investments Law. Accordingly, we are entitled to a ten year period of benefits. Income
derived from our 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
investments under our approved investments programs were accomplished during 1994-2005. As
of December 31, 2006 the benefit periods of the first program expired. The benefit periods
of the second, third and forth programs will expire in 2007, 2009 and 2011, respectively.
The benefit period of the fifth program has not yet commenced and will end in 2013. 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.

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.

67

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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.

If the retained tax-exempt income
were distributed, it would be taxed at the corporate tax rate applicable to such profits
as if we had not chosen the alternative tax benefits (rate of 10%  25% based on the
percentage of foreign ownership) on the gross amount distributed. In addition, these
dividends will be subject to a 15% withholding tax. Accordingly, no deferred income taxes
have been provided on income attributable to the Companys Approved Enterprise
programs as the undistributed tax exempt income is essentially permanent in duration.

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.

Amendment to the
Investments Law

On April 1, 2005, an amendment to the
Investments Law came into force. Pursuant to the amendment, a companys facility will
be granted the status of Approved Enterprise only if it is proven to be an
industrial facility (as defined in the Investments Law) that contributes to the economic
independence of the Israeli economy and is a competitive facility that contributes to the
Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and
not the Investment Center is responsible for an Approved Enterprise under the alternative
package of benefits, referred to as a Benefited Enterprise. A company wishing to receive
the tax benefits afforded to a Benefited Enterprise is required to select the tax year
from which the period of benefits under the Investment Law are to commence by notifying
the Israeli Tax Authority within 12 months of the end of that year. In order to be
recognized as owning a Benefited Enterprise, a company is required to meet a number of
conditions set forth in the amendment, including making a minimum investment in
manufacturing assets for the Benefited Enterprise and having completed a cooling-off
period of no less than two to four years from the companys previous year of
commencement of benefits under the Investments Law.

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

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

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

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

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

68

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The amendment applies to Approved
Enterprise programs in which the year of commencement of benefits under the Investments
Law is 2004 or later, unless such programs received approval from the Investment Center on
or prior to December 31, 2004 in which case the provisions of the amendment do not apply.

# 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 immune)
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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Law for the
Encouragement of Industry (Taxes), 1969

We believe that we currently qualify
as an Industrial Company within the definition of the Law for the Encouragement of
Industry (Taxes), 1969, or the Industry Encouragement Law. According to the Industry
Encouragement Law, an Industrial Company is a company resident in Israel, 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 corporate tax benefits
are available to Industrial Companies, including, among others:

| | (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 recognized stock market.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

| | (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.

69

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# Capital Gains Tax

Israeli law generally imposes a
capital gains tax 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 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.

As of January 1, 2006, the Israeli
tax rate applicable to capital gains derived from the sale of shares, whether listed on a
stock market or not, is 20% for Israeli individuals, unless such shareholder claims a
deduction for financing expenses in connection with such shares, in which case the gain
will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered
a significant shareholder at any time during the 12-month period preceding
such sale (i.e. such shareholder holds directly or indirectly, including jointly with
others, at least 10% of any means of control in the company), the tax rate will be 25%.
Israeli companies are subject to the corporate tax rate on capital gains derived from the
sale of listed shares, unless such companies were not subject to the Adjustments Law (or
certain regulations) as of August 10, 2005, in which case the applicable tax rate is 25%.
However, the foregoing tax rates will not apply to (i) dealers in securities, and (ii)
shareholders who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement).

The tax basis of shares acquired by
individuals prior to January 1, 2003 will be determined in accordance with the average
closing share price in the three trading days preceding January 1, 2003. However, a
request may be made to the tax authorities to consider the actual adjusted cost of the
shares as the tax basis if it is higher than such average price.  Non-Israeli residents are 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, that such shareholders are not subject to the Inflationary Adjustments Law 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 such exemption,
if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary 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.

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. On distributions of
dividends other than bonus shares or stock dividends, income tax is withheld at the source
at the rates: (i) 20%, or 25% for a shareholder that is considered a significant
shareholder at any time during the 12-month period preceding such distribution; of (ii)
15% for dividends generated by an Approved Enterprise (or Benefited Enterprise); 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
is 25% or 12.5% if such U.S. resident is a corporation which holds, directly or
indirectly, shares representing at least 10% or more of our issued voting power during the
part of the tax year which precedes the date of payment of the dividend and during the
whole of its prior tax year (and additional conditions under the U.S.-Israel Tax Treaty
are met). However, under the U.S.-Israel Tax Treaty dividends generated by an Approved
Enterprise (or Benefited Enterprise) are taxed at the rate of 15%.

F. Dividends and Paying
Agents

Not applicable.

70

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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 100 F Street, N.E., 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.

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

None.

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

# Modification of Rights

Not applicable.

# Use of Proceeds

Not applicable.

|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, 2006. 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 within the time period specified in the
SECs rules and forms and is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.

In addition, there were no changes in
the Companys internal control over financial reporting that occurred during the year
ended December 31, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

|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
and is independent 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
|--------- | --------------------------------------

Fees Paid to Independent
Public Accountants

In
the annual meeting held on December 28, 2006 our shareholders re-appointed Kost Forer
Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst & Young, to
serve as our independent registered accounting firm until the next annual meeting. The
following table sets forth, for each of the years indicated, the fees paid to Ernst &
Young and the percentage of each of the fees out of the total amount paid to them.

| |                   | Year Ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Audit (1)         |                        
| | Audit-related (2) |                        
| | Tax (3)           |                        
| | Other             |                        
| | Total             |                        

---

|(1) | Audit
fees consist of services that would normally be provided in connection
               with statutory and regulatory filings or engagements, including services
that                generally only the independent accountant can reasonably provide.
This included                audit of our annual financial statements, review of our
quarterly financial                results, consultations on various accounting issues
and performance of local                statutory audits.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

72

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|(2) | Audit-related
fees relate to assurance and associated services that are                performed by the
independent accountant, including: attest services that are not                required
by statute or regulation; accounting consultation; and consultation
               concerning financial accounting and reporting standards. In 2006, most of
these                fees were for services relating to the Section 404 of the
Sarbanes-Oxley Act of                2002 compliance process we have begun.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax
fees relate to services performed by the tax division for tax compliance,
               planning and advice.
|--- | -----------------------------------------------------------------------------------------------------------------

Pre-approval Policies and
Procedures

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

|Item 16D. | EXEMPTIONS
FROM LISTING STANDARDS FOR AUDIT COMMITTEES
|--------- | ------------------------------------------------------

Not applicable.

|Item 16E. | PURCHASE
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- | ---------------------------------------------------------------------

None.

|Item 17. | FINANCIAL
STATEMENTS
|-------- | --------------------

We have responded to Item 18 in lieu
of this item.

|Item 18. | FINANCIAL
STATEMENTS
|-------- | --------------------

The Financial Statements required by
this item are found at the end of this annual report, beginning on page F-1.

| |                                                  |    
| | ------------------------------------------------ | ---
|
|
|
|
| | Consolidated Financial Statements                |    
| |                                                 
| | Index to Financial Statements                    | F-1
| |                                                 
| | Report of Independent Registered Accounting Firm | F-2
| |                                                 
| | Consolidated Balance Sheets                      | F-3
| |                                                 
| | Consolidated Statements of Operations            | F-5
| |                                                 
| | Statements of Changes in Shareholders' Equity    | F-6
| |                                                 
| | Consolidated Statements of Cash Flows            | F-7
| |                                                 
| | Notes to Consolidated Financial Statements       | F-8

|Item 19. | 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.

73

---

---



# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant certifies 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 Petach Tikva, Israel on the 28 day of March, 2007.

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

74

---

---



# EXHIBIT INDEX

|Exhibit No. | Exhibit
|----------- | -------

---

|1.1 |  | Second
Amended and Restated Articles of Association of Registrant, as amended through December
27, 2005            (1) and Certificate of Amendment, dated August 10, 2006
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 |  | Memorandum
of Association of Registrant, as amended through December 29, 2004. (2)
|--- |  | ----------------------------------------------------------------------------------

|4.6 |  | The
Registrant's Share Option Plan, dated November 15, 1996. (3)
|--- |  | ----------------------------------------------------------------

|4.8 |  | 2004
Employee Share Option Plan, adopted December 29, 2004. (2)
|--- |  | ---------------------------------------------------------------

|4.9 |  | Agreement,
dated October 9, 1996, between the Registrant and Team. (4)
|--- |  | ----------------------------------------------------------------------

|4.10 |  | Registration
Rights Agreement, dated October 22, 1996, between the Registrant and TSIL. (4)
|---- |  | -------------------------------------------------------------------------------------------

|4.12 |  | Lease,
dated February 1, 1998, between the Registrant and Team. (5)
|---- |  | -------------------------------------------------------------------

|4.13 |  | Amendment
to Lease Agreement dated September 2, 2002. (6)
|---- |  | ---------------------------------------------------------

|4.14 |  | Second
Amendment to Lease Agreement dated July 14, 2005. (7)
|---- |  | ------------------------------------------------------------

|4.15 |  | Purchase
Agreement, dated November 29, 2004. (8)
|---- |  | ------------------------------------------------

|4.16 |  | Form
of Registration Rights Agreement, dated November 29, 2004. (8)
|---- |  | -------------------------------------------------------------------

|4.17 |  | Form
of Warrant issued on January 3, 2005. (8)
|---- |  | ----------------------------------------------

|4.18 |  | Specimen
Certificate for Series A Convertible Preferred Shares. (8)
|---- |  | -------------------------------------------------------------------

|8 |  | Subsidiaries
|- |  | ------------

|10.11 |  | Consent
of Independent Auditors of the Registrant
|----- |  | -------------------------------------------------

|11 |  | Code
of Ethics and Business Conduct. (9)
|-- |  | ----------------------------------------

|12.1 |  | Certification
of the Principal Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act
|---- |  | --------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Principal Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act
|---- |  | --------------------------------------------------------------------------------------------

|13.1 |  | Certification
of the Principal Executive Officer pursuant toss.906 of the Sarbanes-Oxley Act
|---- |  | --------------------------------------------------------------------------------------------

|13.2 |  | Certification
of the Principal Financial Officer pursuant toss.906 of the Sarbanes-Oxley Act
|---- |  | --------------------------------------------------------------------------------------------

|(1) | Previously
filed on TTI's Form 20-F for the year ended December 31, 2005, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------

|(2) | Previously
filed on TTI's Form 20-F for the year ended December 31, 2004, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------

|(3) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Previously
filed as an exhibit to TTI's Registration Statement on Form F-1 (Registration No.
333-5902), and     incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

75

---

---



|(5) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously
filed on TTI's Form 20-F for the year ended December 31, 2005, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------

|(8) | Previously
filed as an exhibit to TTI's Registration Statement on Form F-3, and incorporated herein
by reference.
|--- | -----------------------------------------------------------------------------------------------------------------

|(9) | Previously
filed on TTI's Form 20-F for the year ended December 31, 2003, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------

76

---

---

TTI TEAM
TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2006

IN U.S.
DOLLARS

INDEX

|                                                             |               
|------------------------------------------------------------ | --------------
|                                                             | Page          
|                                                             |               
|                                                             |               
|Report of Independent
  Registered Public Accounting Firm    | F  2         
|                                                             |               
|Consolidated Balance
  Sheets                                | F  3  F  4 
|                                                             |               
|Consolidated Statements
  of Operations                      | F  5         
|                                                             |               
|Consolidated Statements
  of Changes in Shareholders Equity | F  6         
|                                                             |               
|Consolidated Statements
  of Cash Flows                      | F  7         
|                                                             |               
|Notes to Consolidated
  Financial Statements                 | F  8  F  41

---

---

---



(ERNST & YOUNG LOGO)

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2005
and 2006 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, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting.
Our audits include consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and 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 at December 31, 2005 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Note 2 to the consolidated financial statements, the company
adopted the provision of Statement of Financial Accounting Standard
No. 123(R), Share-Based Payment, effective January 1, 2006.

|                   |                                 
|------------------ | --------------------------------
|Tel-Aviv,
  Israel | KOST FORER GABBAY & KASIERER    
|March 28,
  2007   | 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, |       
|                                                                                                  |  |                |       
|                                                                                                  |  | 2005           |        | 2006 |  
|                                                                                                  |  |                |        |      |  
|ASSETS                                                                                            |  |                |        |      |   |        | 
|                                                                                                  |  |                |        |      |   |        | 
|CURRENT ASSETS:                                                                                   |  |                |        |      |   |        | 
|Cash and cash equivalents                                                                         |  | $              | 18,034 |      | $ | 31,410 | 
|Short-term bank deposits                                                                          |  |                | 1,973  |      |   | 984    | 
|Marketable securities (Note
  3)                                                                  |  |                | 15,713 |      |   | -      | 
|Trade receivables (net of allowance for
  doubtful accounts - $ 6,865 in 2005 and 2006) (Note 1c) |  |                | 3,900  |      |   | 4,664  | 
|Unbilled receivables                                                                              |  |                | 964    |      |   | 2,834  | 
|Related parties (Note 13)                                                                         |  |                | 367    |      |   | 373    | 
|Other accounts receivable
  and prepaid expenses (Note 4)                                         |  |                | 2,218  |      |   | 2,265  | 
|                                                                                                  |  |                |        |      |   |        | 
|                                                                                                  |  |                |        |      |   |        | 
|Total current assets                                                                              |  |                | 43,169 |      |   | 42,530 | 
|                                                                                                  |  |                |        |      |   |        | 
|                                                                                                  |  |                |        |      |   |        | 
|LONG-TERM INVESTMENTS AND
  RECEIVABLES:                                                          |  |                |        |      |   |        | 
|Long-term bank deposits                                                                           |  |                | 881    |      |   | 97     | 
|Investment in a company                                                                           |  |                | 165    |      |   | 165    | 
|Severance pay fund                                                                                |  |                | 2,970  |      |   | 3,627  | 
|Long-term trade and
  unbilled receivables (Note 1c, 5)                                           |  |                | 3,937  |      |   | 3,324  | 
|                                                                                                  |  |                |        |      |   |        | 
|                                                                                                  |  |                |        |      |   |        | 
|Total long-term investments and
receivables                                                       |  |                | 7,953  |      |   | 7,213  | 
|                                                                                                  |  |                |        |      |   |        | 
|                                                                                                  |  |                |        |      |   |        | 
|PROPERTY AND EQUIPMENT, NET
  (Note 6)                                                            |  |                | 4,729  |      |   | 3,842  | 
|                                                                                                  |  |                |        |      |   |        | 
|                                                                                                  |  |                |        |      |   |        | 
|Total assets                                                                                      |  | $              | 55,851 |      | $ | 53,585 | 
|                                                                                                  |  |                |        |      |   |        | 

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 and per share data

|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                                               |  | December 31, |        
|                                                                                                                                                                                                                               |  |              |        
|                                                                                                                                                                                                                               |  | 2005         |         | 2006 |  
|                                                                                                                                                                                                                               |  |              |         |      |  
|LIABILITIES AND
  SHAREHOLDERS EQUITY                                                                                                                                                                                         |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                                                                           |  |              |         |      |   |         |  
|Trade payables                                                                                                                                                                                                                 |  | $            | 1,867   |      | $ | 2,508   |  
|Deferred revenues                                                                                                                                                                                                              |  |              | 10,226  |      |   | 8,333   |  
|Other accounts payable and
  accrued expenses (Note 7)                                                                                                                                                                         |  |              | 7,463   |      |   | 7,227   |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|Total current liabilities                                                                                                                                                                                                      |  |              | 19,556  |      |   | 18,068  |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|ACCRUED SEVERANCE PAY                                                                                                                                                                                                          |  |              | 3,852   |      |   | 5,022   |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|COMMITMENTS AND CONTINGENT
  LIABILITIES (Note 8)                                                                                                                                                                              |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|SHAREHOLDERS EQUITY (Note
  10):                                                                                                                                                                                              |  |              |         |      |   |         |  
|Share capital:                                                                                                                                                                                                                 |  |              |         |      |   |         |  
|Ordinary shares of NIS 0.5
  par value -                                                                                                                                                                                       |  |              |         |      |   |         |  
|Authorized: 30,000,000
  shares at December 31, 2005 and 2006; Issued and outstanding: 13,872,941 and
  16,000,431 shares at December 31, 2005 and 2006, respectively                                                          |  |              | 2,022   |      |   | 2,260   |  
|Preferred A shares of NIS
  0.5 par value                                                                                                                                                                                     |  |              |         |      |   |         |  
|Authorized: 6,636,391 at
  December 31, 2005 and 2006; Issued and outstanding: 4,636,391 and 2,936,391
  shares at December 31, 2005 and 2006, respectively: Aggregate liquidation
  preference of $6,460 at December 31, 2006 |  |              | 526     |      |   | 334     |  
|Additional paid-in capital                                                                                                                                                                                                     |  |              | 73,446  |      |   | 74,919  |  
|Accumulated other
  comprehensive loss                                                                                                                                                                                         |  |              | (336    | )    |   | -       |  
|Accumulated deficit                                                                                                                                                                                                            |  |              | (43,215 | )    |   | (47,018 | )
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|Total shareholders equity                                                                                                                                                                                                     |  |              | 32,443  |      |   | 30,495  |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  
|Total liabilities and shareholders
equity                                                                                                                                                                                     |  | $            | 55,851  |      | $ | 53,585  |  
|                                                                                                                                                                                                                               |  |              |         |      |   |         |  

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 share and
  per share data

|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                                                                  |  | Year ended December 31, |           
|                                                                                                                                  |  |                         |           
|                                                                                                                                  |  | 2004                    |            | 2005 |   | 2006       |  
|                                                                                                                                  |  |                         |            |      |   |            |  
|Revenues (Note 12):                                                                                                               |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                          |  | $                       | 21,670     |      | $ | 25,317     |   | $ | 27,554     |  
|Services                                                                                                                          |  |                         | 16,128     |      |   | 17,909     |   |   | 18,560     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Total revenues                                                                                                                    |  |                         | 37,798     |      |   | 43,226     |   |   | 46,114     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Cost of revenues:                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                          |  |                         | 16,645     |      |   | 13,015     |   |   | 14,783     |  
|Services                                                                                                                          |  |                         | 9,719      |      |   | 9,203      |   |   | 9,571      |  
|Impairment of capitalized
  software development costs                                                                            |  |                         | 3,597      |      |   | 177        |   |   | -          |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Total cost of revenues                                                                                                            |  |                         | 29,961     |      |   | 22,395     |   |   | 24,354     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Gross profit                                                                                                                      |  |                         | 7,837      |      |   | 20,831     |   |   | 21,760     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Operating expenses:                                                                                                               |  |                         |            |      |   |            |   |   |            |  
|Research and development,
  net (Note 13a)                                                                                        |  |                         | 10,744     |      |   | 9,136      |   |   | 9,578      |  
|Selling and marketing                                                                                                             |  |                         | 19,220     |      |   | 11,977     |   |   | 10,214     |  
|General and administrative                                                                                                        |  |                         | 6,586      |      |   | 6,325      |   |   | 6,679      |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Total operating expenses                                                                                                          |  |                         | 36,550     |      |   | 27,438     |   |   | 26,471     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Operating loss                                                                                                                    |  |                         | (28,713    | )    |   | (6,607     | ) |   | (4,711     | )
|Other income (Note 13c)                                                                                                           |  |                         | -          |      |   | -          |   |   | 150        |  
|Financial income, net (Note
  13b)                                                                                                |  |                         | 1,326      |      |   | 153        |   |   | 662        |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Loss before income taxes                                                                                                          |  |                         | (27,387    | )    |   | (6,454     | ) |   | (3,899     | )
|Income taxes (Note 9)                                                                                                             |  |                         | 2,107      |      |   | 624        |   |   | (96        | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Net loss                                                                                                                          |  |                         | (29,494    | )    |   | (7,078     | ) |   | (3,803     | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Deemed dividend associated
  with beneficial conversion feature of Preferred shares                                               |  |                         | -          |      |   | (1,981     | ) |   | -          |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Net loss attributable to
  Ordinary shares                                                                                        |  | $                       | (29,494    | )    | $ | (9,059     | ) | $ | (3,803     | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Basic and diluted net loss
  per share attributed to Ordinary shareholders                                                        |  | $                       | (2.48      | )    | $ | (0.72      | ) | $ | (0.20      | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of
  shares used for computing basic and diluted net loss per share attributed to
  Ordinary shareholders |  |                         | 11,872,941 |      |   | 12,577,392 |   |   | 15,075,881 |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  

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

F  5

---

---



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

|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | - | ----------------- |  | ------------------------------ | ---- | ----------------- | - | ----- | ---------------------------- | -------------------------------------------------------- | ------------------------------ |  | - | ---- | - | - | ------- | - | - | ------- | - | - | ------- | -
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              | Accumulated
  other
  comprehensive
  income
  (loss)**) |                                |  |   |      |   |   |        
|                                                                                                                           |  | Number of            |   | Share capital     |  | Additional
  paid-in
  capital |      |                   |   |       | Total
  comprehensive
  loss |                                                          | Total
  shareholders
  equity | 
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                             
|                                                                                                                           |  | Preferred
  A shares |   | Ordinary
  shares |  | Preferred
  A shares           |      | Ordinary
  shares |   |       |                              | accumulated
  deficit                                    |                                |  |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of January 1, 2004                                                                                              |  | -                    |   | 11,872,052        |  | $                              | -    |                   | $ | 1,794 |                              | $                                                        | 58,871                         |  | $ | (214 | ) | $ | (4,662  | ) |   |         |   | $ | 55,789  |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Exercise of stock options                                                                                                  |  | -                    |   | 889               |  |                                | -    |                   |   | *) -  |                              |                                                          | 10                             |  |   | -    |   |   | -       |   |   |         |   |   | 10      |  
|Comprehensive loss:                                                                                                        |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Other comprehensive loss - unrealized losses on
available-for-sale
  marketable securities                                 |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | -                              |  |   | (12  | ) |   | -       |   | $ | (12     | ) |   | (12     | )
|Net loss                                                                                                                   |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | -                              |  |   | -    |   |   | (29,494 | ) |   | (29,494 | ) |   | (29,494 | )
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                                   |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   | $ | (29,506 | ) |   |         |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2004                                                                                            |  | -                    |   | 11,872,941        |  |                                | -    |                   |   | 1,794 |                              |                                                          | 58,881                         |  |   | (226 | ) |   | (34,156 | ) |   |         |   |   | 26,293  |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Issuance of Convertible Preferred A shares and warrants,
net                                                               |  | 6,636,391            |   |                   |  |                                | 754  |                   |   | -     |                              |                                                          | 12,584                         |  |   | -    |   |   | -       |   |   |         |   |   | 13,338  |  
|Deemed dividend associated with beneficial Conversion feature of
  Preferred A shares                                      |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | 1,981                          |  |   | -    |   |   | (1,981  | ) |   |         |   |   | -       |  
|conversion of Convertible Preferred A shares                                                                               |  | (2,000,000           | ) | 2,000,000         |  |                                | (228 | )                 |   | 228   |                              |                                                          | -                              |  |   | -    |   |   | -       |   |   |         |   |   | -       |  
|Comprehensive loss:                                                                                                        |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Other comprehensive loss - unrealized losses on available-for-sale
  marketable securities, net of impairment (See Note 3) |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | -                              |  |   | (110 | ) |   | -       |   | $ | (110    | ) |   | (110    | )
|Net loss                                                                                                                   |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | -                              |  |   | -    |   |   | (7,078  | ) |   | (7,078  | ) |   | (7,078  | )
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                                   |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   | $ | (7,188  | ) |   |         |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2005                                                                                            |  | 4,636,391            |   | 13,872,941        |  |                                | 526  |                   |   | 2,022 |                              |                                                          | 73,446                         |  |   | (336 | ) |   | (43,215 | ) |   |         |   |   | 32,443  |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Exercise of warrants                                                                                                       |  | -                    |   | 427,490           |  |                                | -    |                   |   | 46    |                              |                                                          | 1,022                          |  |   | -    |   |   | -       |   |   |         |   |   | 1,068   |  
|conversion of Convertible Preferred A shares                                                                               |  | (1,700,000           | ) | 1,700,000         |  |                                | (192 | )                 |   | 192   |                              |                                                          | -                              |  |   | -    |   |   | -       |   |   |         |   |   | -       |  
|Share-based compensation                                                                                                   |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | 451                            |  |   | -    |   |   | -       |   |   |         |   |   | 451     |  
|Comprehensive loss:                                                                                                        |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Other comprehensive loss - realized losses on available-for-sale
marketable
  securities, net of impairment (See Note 3)   |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | -                              |  |   | 336  |   |   | -       |   | $ | 336     |   |   | 336     |  
|Net loss                                                                                                                   |  | -                    |   | -                 |  |                                | -    |                   |   | -     |                              |                                                          | -                              |  |   | -    |   |   | (3,803  | ) |   | (3,803  | ) |   | (3,803  | )
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                                   |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   | $ | (3,467  | ) |   |         |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2006                                                                                            |  | 2,936,391            |   | 16,000,431        |  | $                              | 334  |                   | $ | 2,260 |                              | $                                                        | 74,919                         |  | $ | -    |   | $ | (47,018 | ) |   |         |   | $ | 30,495  |  
|                                                                                                                           |  |                      |   |                   |  |                                |      |                   |   |       |                              |                                                          |                                |  |   |      |   |   |         |   |   |         |   |   |         |  

|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|*)  | Represents an amount lower than
  $1.                                                                                                 
|    |                                                                                                                                       
|**) | Accumulated other
  comprehensive income (loss) on account of unrealized gains (losses) on
  available-for-sale marketable securities.

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, |        
|                                                                                                             |  |                         |        
|                                                                                                             |  | 2004                    |         | 2005 |   | 2006    |  
|                                                                                                             |  |                         |         |      |   |         |  
|Cash flows from operating activities:                                                                        |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Net loss                                                                                                     |  | $                       | (29,494 | )    | $ | (7,078  | ) | $ | (3,803 | )
|Adjustments required to reconcile net loss to net cash provided by
  (used in) operating activities:         |  |                         |         |      |   |         |   |   |        |  
|Depreciation and amortization                                                                                |  |                         | 3,530   |      |   | 2,258   |   |   | 2,589  |  
|Impairment of capitalized software development costs                                                         |  |                         | 3,597   |      |   | 177     |   |   | -      |  
|Gain from sale of property and equipment                                                                     |  |                         | (5      | )    |   | (157    | ) |   | (73    | )
|Amortization of premium and accretion of accrued interest on
  available-for-sale marketable debt securities |  |                         | (87     | )    |   | 411     |   |   | 1,305  |  
|Accrued interest on short-term bank deposits                                                                 |  |                         | 36      |      |   | 27      |   |   | (23    | )
|Accrued severance pay, net                                                                                   |  |                         | (199    | )    |   | (142    | ) |   | 513    |  
|Deferred tax assets, net                                                                                     |  |                         | 1,647   |      |   | -       |   |   | -      |  
|Share-based compensation                                                                                     |  |                         | -       |      |   | -       |   |   | 451    |  
|Decrease (increase) in trade receivables, net                                                                |  |                         | 3,983   |      |   | 2,855   |   |   | (764   | )
|Decrease (increase) in unbilled receivables                                                                  |  |                         | 5,099   |      |   | 527     |   |   | (1,870 | )
|Increase (decrease) in balance with related parties                                                          |  |                         | (1,326  | )    |   | (217    | ) |   | 34     |  
|Decrease (increase) in other accounts receivable and prepaid
expenses                                        |  |                         | (327    | )    |   | 1,047   |   |   | (47    | )
|Decrease (increase) in long-term trade and unbilled
receivables                                              |  |                         | (230    | )    |   | (669    | ) |   | 613    |  
|Increase (decrease) in trade payables                                                                        |  |                         | (1,043  | )    |   | (1,678  | ) |   | 641    |  
|Increase (decrease) in deferred revenues                                                                     |  |                         | 1,051   |      |   | 5,584   |   |   | (1,893 | )
|Increase (decrease) in other accounts payable and accrued
expenses                                           |  |                         | 7       |      |   | 1,792   |   |   | (276   | )
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Net cash provided by (used in) operating activities                                                          |  |                         | (13,761 | )    |   | 4,737   |   |   | (2,603 | )
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Cash flows from investing activities:                                                                        |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Investment in short-term and long-term bank deposits                                                         |  |                         | (2,801  | )    |   | (2,487  | ) |   | (188   | )
|Proceeds from short-term bank deposits                                                                       |  |                         | 2,754   |      |   | 2,901   |   |   | 1,984  |  
|Investment in available-for-sale marketable securities                                                       |  |                         | (1,096  | )    |   | (19,148 | ) |   | -      |  
|Proceeds from sale of available-for-sale marketable
securities                                               |  |                         | 6,366   |      |   | 15,540  |   |   | 14,744 |  
|Purchase of property and equipment                                                                           |  |                         | (925    | )    |   | (1,145  | ) |   | (1,746 | )
|Proceeds from sale of property and equipment                                                                 |  |                         | 67      |      |   | 293     |   |   | 117    |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Net cash provided by (used in) investing activities                                                          |  |                         | 4,365   |      |   | (4,046  | ) |   | 14,911 |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Cash flows from financing activities:                                                                        |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Short-term bank credit                                                                                       |  |                         | 967     |      |   | (967    | ) |   | -      |  
|Proceeds from issuance of Convertible Preferred A shares and
warrants,
  net                                 |  |                         | -       |      |   | 12,838  |   |   | -      |  
|Exercise of warrants,                                                                                        |  |                         | -       |      |   | -       |   |   | 1,068  |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Net cash provided by financing activities                                                                    |  |                         | 967     |      |   | 11,871  |   |   | 1,068  |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Increase (decrease) in cash and cash equivalents                                                             |  |                         | (8,429  | )    |   | 12,562  |   |   | 13,376 |  
|Cash and cash equivalents at the beginning of the year                                                       |  |                         | 13,901  |      |   | 5,472   |   |   | 18,034 |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Cash and cash equivalents at the end of the year                                                             |  | $                       | 5,472   |      | $ | 18,034  |   | $ | 31,410 |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Supplemental disclosure of cash flows information:                                                           |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Cash paid during the year for:                                                                               |  |                         |         |      |   |         |   |   |        |  
|Taxes                                                                                                        |  | $                       | 289     |      | $ | 171     |   | $ | 1,707  |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Non-cash activities:                                                                                         |  |                         |         |      |   |         |   |   |        |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  
|Reclassification of receivables on account of Convertible Preferred A
  shares                               |  | $                       | 289     |      | $ | 500     |   | $ | -      |  
|                                                                                                             |  |                         |         |      |   |         |   |   |        |  

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

F  7

---

---



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

|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL
|            |        
|            | a.      | TTI Team
  Telecom International Ltd. (TTI or the Company), an Israeli corporation,
  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, Costa-Rica, Australia and Hong-Kong.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         | As to
  principal markets and customers, see Note 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | b.      | On April 19,
  2005, 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, has distributed to its shareholders Ordinary shares
  of the Company that it owned, such that immediately following the
  distribution, Team held approximately 4.6% of the Companys outstanding share
  capital.                                                                                                                                                                                                                                                                                                                                                           
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         | As of
  December 31, 2006, Team holds 0.79% of the Companys outstanding share
  capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | 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 ($1.96 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 based on the opinions of consultations
  and its 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 claim and particulars were served on the customer in December 2005
  asking the court to award the Company approximately £10.5 million (($ 21
  million).  In March 2006, the Company
  was served with the defense and £12.4 million ($ 24 million) counterclaim. The
  trial is expected to take place in London in October 2007. The Company can
  not be assured of the outcome of this proceeding.

F  8

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                     
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                                                          | As of
  December 31, 2006 an amount of £1,694 ($ 3,324) is outstanding with respect to
  this customer net of allowance for bad debts in a total amount of $ 6,301.
  This balance is classified as long-term trade and unbilled receivables on the
  balance sheet.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                     
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | The
  consolidated financial statements have been prepared according to United
  States generally accepted accounting principles (U.S. GAAP), applied on a
  consistent basis, as follows:                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 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 these estimates.                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | Financial statements in United States dollars:                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | A majority
  of the revenues of the Company and its subsidiaries is generated in United
  States dollars (dollar). The 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 (SFAS) No. 52, Foreign Currency Translation. All
  transaction gains and losses of the remeasured monetary balance sheet items
  are reflected in the statement of operations as financial income 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 and Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | Cash and
  cash equivalents include short-term, highly liquid investments that are
  readily convertible to cash with maturities of three months or less at
  acquisition.                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 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 3.18% and 4.01% for 2005 and 2006, respectively. The
  short-term deposits are presented at their cost, including accrued interest.                                                                                              

F  9

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | 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 3.82% and 4.10%
  for 2005 and 2006, respectively.                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | Marketable securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | Management
  determines the appropriate classification of its investments in corporate
  marketable debt securities at the time of purchase and reevaluates such
  determinations at each balance sheet date. At December 31, 2005, all
  marketable securities covered by SFAS 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.                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | Investment in another 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, 2006 and 2005, 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 shorter of the term of the lease or useful life | 

F  10

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | Impairment of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | The
  long-lived assets of the Company and its subsidiaries are reviewed for
  impairment in accordance with SFAS No. 144, Accounting for the Impairment
  for Disposal of Long-Lived Assets 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.
  During 2005 and 2006, no impairment was identified.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | The Company
  and its subsidiaries account for income taxes in accordance with SFAS No.
  109, Accounting for Income Taxes. 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. As of December
  31, 2006, a full valuation allowance was provided by the Company.                                 
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 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s software licenses require significant customization,
  integration, installation and development services. The Company also
  generates revenues from maintenance and customer support services.                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | Revenues are
  recognized based on Statement of Position No. 81-1, Accounting for
  Performance of Construction - Type and Certain Production - Type Contracts
  (SOP 81-1), using contract accounting using the 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 project to which the
  contract relates. In general, the Company divides each project into three
  distinct periods: (i) a functional specification period, (ii) an
  implementation period and (iii) a stabilization period. A project is
  considered completed when the stabilization period is over.                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 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.                                                                                                                                                                                                                                            

F  11

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | In all cases
  the Company expects to perform its contractual obligations and its licensees
  are expected to satisfy their obligations under 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 pre-contract costs, in other accounts receivable
  and prepaid expenses. As of December 31, 2005 and 2006, the Company does not
  have such deferred costs.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 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, 2005 and 2006, no such estimated losses
  were identified.                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | Unbilled
  receivables include all amounts which were recognized as revenues and had not
  been billed as of the balance sheet date due to contractual or other
  arrangements with customers.                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 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.                                                                                                                                                                 
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | Service
  revenues primarily consist of fees from maintenance and customer support.
  Revenues from maintenance and support contracts are recognized ratably over
  the term of the agreement, which is typically one year, or at the time when
  services are rendered.                                                                                                                                                                                                                                                 
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | Deferred
  revenues are recognized for payments received under maintenance and support
  contracts in advance of the culmination of the earning process.                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 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,
  Accounting for the Costs of Computer Software to be Sold Leased or Otherwise
  Marketed (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. No software
  development costs were capitalized in 2004, 2005 and 2006.                                                   

F  12

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | The Company
  and its subsidiaries assessed 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. Through
  December 31, 2005 all capitalized costs were written off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | During 2004,
  2005 and 2006, the Company received non-royalty-bearing grants for its
  participation in the MAGNET project financed by the Government of Israel.
  In addition, in 2004 the Company 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). Grants from the European Union and MAGNET projects
  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, and current and long-term
  trade and unbilled receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | The
  Companys and its subsidiaries cash and cash equivalents, short-term and
  long-term bank deposits are mainly 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s
  and its subsidiaries investments are financially sound, and accordingly,
  minimal credit risk exists with respect to these investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | The
  Companys revenue is generated primarily in the United States and Europe. To
  a lesser extent, revenue is generated in Israel, South Africa and South
  America. Most customers are among the largest telecommunications companies in
  the world. Concentration of credit risk with respect to short-term and
  long-term trade and unbilled receivables is limited by ongoing credit
  evaluation and account monitoring procedures. The Company evaluates accounts
  receivable to determine if they will ultimately be collected. In performing
  this evaluation, significant judgments and estimates are involved, such as
  past experience, credit quality of the customer, age of the receivable and
  current economic conditions that may affect a customers ability to pay. An
  allowance for doubtful accounts is determined with respect to those specific
  amounts that the Company and its subsidiaries have determined to be doubtful
  of collection. See also note 1b.

F  13

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 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 loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | The Company
  applies the two class method as required by EITF No. 03-6, Participating
  Securities and the Two-Class Method under FASB Statement No. 128 (EITF No.
  03-6). EITF No. 03-6 requires the loss per share for each class of shares
  (ordinary and preferred shares) to be calculated assuming 100% of the
  Companys earnings are distributed as dividends to each class of shares based
  on their contractual rights.                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | In
  compliance with EITF 03-6, the series of preferred shares are not
  participating securities in losses, and therefore are not included in the
  computation of net loss per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | Basic net
  losses per share are computed based on the weighted average number of shares
  of Ordinary Shares outstanding during each year. Diluted net losses per share
  is computed based on the weighted-average number of shares of common stock
  outstanding during the period, plus dilutive potential shares considered
  outstanding during the period, in accordance with Statement of Financial
  Standard No. 128, Earnings Per Share.                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | For the
  years ended December 31, 2004, 2005 and 2006 all outstanding options and warrants
  were excluded from the calculations of diluted net loss per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | Accounting for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | On January 1, 2006,
  the Company adopted Statement of Financial Accounting Standards No. 123
  (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the
  measurement and recognition of compensation expense for all share-based
  payment awards made to employees and directors including employee stock
  options under the Companys stock plans based on estimated fair values. SFAS
  123(R) supersedes the Companys previous accounting under Accounting Principles
  Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
  25) for periods beginning in fiscal 2006. In March 2005, the Securities and
  Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107)
  relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in
  its adoption of SFAS 123(R).
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | SFAS 123(R) requires
  companies to estimate the fair value of equity-based payment awards on the
  date of grant using an option-pricing model. The value of the portion of the
  award that is ultimately expected to vest is recognized as expense over the
  requisite service periods in the Companys consolidated statement of
  operations. Prior to the adoption of SFAS 123(R), the Company accounted for
  equity-based awards to employees and directors using the intrinsic value
  method in accordance with APB 25 as allowed under Statement of Financial
  Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
  123).                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | No stock-based employee
  compensation costs were recognized in the Statement of Operations during the
  two years in the period ended December 31, 2005, as all options granted under
  those plans had an exercise price equal or higher then the market value of
  the underlying ordinary share on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F  14

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | The Company
  adopted SFAS 123(R) using the modified prospective transition method, which
  requires the application of the accounting standard as of January 1,
  2006, the first day of the Companys fiscal year 2006. Under that transition
  method, compensation cost recognized in the year ended December 31, 2006,
  includes: (a) compensation cost for all share-based payments granted prior
  to, but not yet vested as of January 1, 2006, based on the grant date fair
  value estimated in accordance with the original provisions of Statement 123,
  and (b) compensation cost for all share-based payments granted subsequent to
  January 1, 2006, based on the grant-date fair value estimated in accordance
  with the provisions of SFAS 123(R). As required by the modified prospective
  method results for prior periods have not been restated. The Company
  recognized compensation expenses for the value of these awards, which has
  graded vesting, based on the accelerated attribution method over the requisite
  service period of each of the award, net of estimated forfeitures. Estimated
  forfeitures were based on actual historical pre-vesting forfeitures.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | As a result
  of adopting SFAS 123(R) on January 1, 2006, the Companys loss before taxes
  and net loss for the year ended December 31, 2006, is $434 higher than if it
  had continued to account for share-based compensation under Opinion 25. Basic
  and diluted loss per share for the year ended December 31, 2006 is $0.03
  higher than if the Company had continued to account for share-based
  compensation under APB 25.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | The fair
  value for options granted in 2004, 2005 and 2006 is amortized over their
  vesting period and is estimated at the date of grant using a Black-Scholes
  options pricing model with the following weighted average assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                |  |                           |   |      |     |      |  |     |   | 
| | ------------------------------ |  | ------------------------- | - | ---- | --- | ---- |  | --- | - | 
| |                                |  | Year ended
  December 31, |  
| |                                |  |                           |  
| | Employee Stock Options         |  | 2004                      |   | 2005 |     | 2006 | 
| |                                |  |                           |   |      |     |      | 
| |                                |  |                           |   |      |     |      |  |     |   | 
| | Expected volatility            |  | 60                        | % |      | 57  | %    |  | 45  | % | 
| | Risk-free interest             |  | 3                         | % |      | 4.5 | %    |  | 5   | % | 
| | Dividend yield                 |  | 0                         | % |      | 0   | %    |  | 0   | % | 
| | Expected life of up to (years) |  | 2                         |   |      | 2.6 |      |  | 3.4 |   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  computation of expected volatility is based on realized historical stock
  price volatility of the Company. The computation of the expected life and
  forfeiture rate are based on the employees expected exercise and on prior to
  and post vesting termination behavior. The interest rate for period within
  the contractual life of the award is based on the U.S. Treasury yield curve
  in effect at the time of grant.                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company
  recognizes these compensation costs net of a forfeiture rate and recognizes
  the compensation costs for only those shares expected to vest on a
  straight-line basis over the requisite service period of the award, which is
  generally the option vesting term of four years. SFAS 123(R) requires
  forfeitures to be estimated at the time of grant and revised, if necessary,
  in subsequent periods if actual forfeitures differ from those estimates.

F  15

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | The pro forma information
  regarding net loss per share required by SFAS No. 123 has been determined as
  if the Company accounted for its stock-based compensation plans under the
  fair value method. Had compensation cost for its stock-based compensation
  plans been determined in accordance with SFAS No. 123, its net loss and loss
  per share would have been reduced to the pro forma amounts indicated below:

| |                                                                               |  |                           |         |      |   |        |  
| | ----------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------ | -
| |                                                                               |  | Year ended
  December 31, |        
| |                                                                               |  |                           |        
| |                                                                               |  | 2004                      |         | 2005 |  
| |                                                                               |  |                           |         |      |  
| |                                                                               |  |                           |         |      |   |        |  
| | Net loss, as
  reported                                                       |  | $                         | (29,494 | )    | $ | (9,059 | )
| | Add: Stock-based employee compensation
  intrinsic value                      |  |                           | -       |      |   | -      |  
| | Deduct: Stock-based compensation expense
  determined under fair value method |  |                           | (88     | )    |   | (81    | )
| |                                                                               |  |                           |         |      |   |        |  
| |                                                                               |  |                           |         |      |   |        |  
| | Pro forma net
  loss                                                          |  | $                         | (29,582 | )    | $ | (9,140 | )
| |                                                                               |  |                           |         |      |   |        |  
| |                                                                               |  |                           |         |      |   |        |  
| | Basic and
  diluted net loss per share, as reported                           |  | $                         | (2.48   | )    | $ | (0.72  | )
| |                                                                               |  |                           |         |      |   |        |  
| |                                                                               |  |                           |         |      |   |        |  
| | Basic and
  diluted net loss per share, pro forma                             |  | $                         | (2.49   | )    | $ | (0.73  | )
| |                                                                               |  |                           |         |      |   |        |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 bank credit, short-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
  amount of the Companys long-term bank deposits is estimated by discounting
  the future cash flows using the current interest rates for long-term bank
  deposit of similar terms and maturities. The carrying amount of the long-term
  bank deposit does not significantly differ from its fair value.                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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.

F  16

---

---



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

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 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, 2004, 2005 and 2006 were
  $ 1,381, $ 961 and $ 1,236, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | Advertising
  expenses are charged to the statements of operations as incurred. Advertising
  expenses for the years ended December 31, 2004, 2005 and 2006 were $ 125, $ 64
  and $ 110 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | Comprehensive income (loss):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | The Company
  accounts for comprehensive income in accordance with SFAS No. 130, Reporting
  Comprehensive Income. This Statement establishes standards for the reporting
  and display of comprehensive income and its components in a full set of
  general purpose financial statements. Comprehensive income generally
  represents all changes in shareholders equity during the period except those
  resulting from investments by, or distributions to, shareholders. The Company
  determined that their only item of comprehensive income relates to unrealized
  losses on available-for-sale marketable securities.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | Impact of recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | In
  July 2006, the FASB issued FASB Interpretation 48, Accounting for
  Income Tax Uncertainties (FIN 48). FIN 48 defines the threshold for
  recognizing the benefits of tax return positions in the financial statements
  as more-likely-than-not to be sustained by the taxing authority. The
  recently issued literature also provides guidance on derecognition,
  measurement and classification of income tax uncertainties, along with any
  related interest and penalties. FIN 48 also includes guidance concerning
  accounting for income tax uncertainties in interim periods and increases the
  level of disclosures associated with any recorded income tax uncertainties.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | FIN 48 is
  effective for fiscal years beginning after December 15, 2006. The
  differences between the amounts recognized in the statements of financial
  position prior to the adoption of FIN 48 and the amounts reported after
  adoption will be accounted for as a cumulative-effect adjustment recorded to
  the beginning balance of retained earnings. The company is currently
  assessing the effect of the adoption of the provisions of FIN 48 on its
  financial position and results of operations.                                                                                                                                                                                

F  17

---

---



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

|            |                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | ------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                  
|            |                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 2.                                                                        | In
  September 2006, the FASB issued Statement of Financial Accounting
  Standards (SFAS) 157, Fair Value Measurements. SFAS 157 defines fair
  value, establishes a framework for measuring fair value in generally accepted
  accounting principles (GAAP) and expands disclosures about fair value
  measurements. SFAS 157 is effective for fiscal years beginning after
  November 15, 2007 and interim periods within those fiscal years. The Company
  is currently evaluating the effect that the adoption of SFAS 157 will have on
  its financial position and results of operations.                                                                                  
|            |                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 3.                                                                        | In
  February 2007, the FASB issued SFAS No. 159, The Fair Value Option
  for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS
  No. 159 permits companies to choose to measure certain financial
  instruments and certain other items at fair value. The standard requires that
  unrealized gains and losses on items for which the fair value option has been
  elected be reported in earnings. SFAS No. 159 is effective for the
  company beginning in the first quarter of fiscal year 2008, although earlier
  adoption is permitted. The company is currently evaluating the impact that
  SFAS No. 159 will have on its consolidated financial statements
|            |                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 3:    | MARKETABLE SECURITIES                                                    
|            |                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | The
  following is a summary of available-for-sale marketable securities:

| |  |                            |   |                             |   |                                   |  |   |     | 
| |  | -------------------------- | - | --------------------------- | - | --------------------------------- |  | - | --- | 
| |  | December 31, 2005          |  
| |  |                            |  
| |  | Gross
  unrealized
  gains |   | Gross
  unrealized
  losses |   | Estimated
  fair
  market
  value | 
| |  |                            |   |                             |   |                                   | 
| |  |                            |   |                             |   |                                   |  |   |     | 
| |  | $                          | - |                             | $ | 336                               |  | $ | 301 | 
| |  |                            |   |                             |   |                                   |  |   |     | 

|            |                                                                                                                                                                                                                                                                                     
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | The net
  adjustment to unrealized holding losses on available-for-sale marketable
  securities included as a separate component of shareholders equity,
  accumulated other comprehensive income (loss) amounted to ($12), ($110) and
  336 in 2004, 2005 and 2006 respectively.
|            |                                                                                                                                                                                                                                                                                     
|NOTE 4:    | OTHER ACCOUNTS RECEIVABLE AND PREPAID
  EXPENSES                                                                                                                                                                                                                                    

| |                    |  |              |       |      |   |       | 
| | ------------------ |  | ------------ | ----- | ---- | - | ----- | 
| |                    |  | December 31, |      
| |                    |  |              |      
| |                    |  | 2005         |       | 2006 |  
| |                    |  |              |       |      |  
| |                    |  |              |       |      |   |       | 
| | Prepaid expenses   |  | $            | 1,461 |      | $ | 1,059 | 
| | Loans to employees |  |              | 269   |      |   | 252   | 
| | Others             |  |              | 488   |      |   | 954   | 
| |                    |  |              |       |      |   |       | 
| |                    |  |              |       |      |   |       | 
| |                    |  | $            | 2,218 |      | $ | 2,265 | 
| |                    |  |              |       |      |   |       | 

F  18

---

---



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

|            |                                         
|----------- | ----------------------------------------
|NOTE 5:    | LONG-TERM TRADE AND UNBILLED RECEIVABLES

| |                                                                                              |  |              |       |      |   |       | 
| | -------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                                                                              |  | December 31, |      
| |                                                                                              |  |              |      
| |                                                                                              |  | 2005         |       | 2006 |  
| |                                                                                              |  |              |       |      |  
| | Long-term unbilled and
  trade receivables related to termination of agreement - See Note 1c |  | $            | 2,923 |      | $ | 3,324 | 
| | Other long-term trade
  receivable                                                           |  |              | 1,014 |      |   | -     | 
| |                                                                                              |  |              |       |      |   |       | 
| |                                                                                              |  |              |       |      |   |       | 
| |                                                                                              |  | $            | 3,937 |      | $ | 3,324 | 
| |                                                                                              |  |              |       |      |   |       | 

|            |                            
|----------- | ---------------------------
|NOTE 6:    | PROPERTY AND EQUIPMENT, NET

| |                                      |  |              |        |      |   |        | 
| | ------------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
| |                                      |  | December 31, |       
| |                                      |  |              |       
| |                                      |  | 2005         |        | 2006 |  
| |                                      |  |              |        |      |  
| | Cost:                                |  |              |        |      |   |        | 
| | Computers and peripheral
  equipment |  | $            | 13,394 |      | $ | 14,224 | 
| | Office furniture and
  equipment     |  |              | 1,181  |      |   | 1,439  | 
| | Motor vehicles                       |  |              | 4,232  |      |   | 4,422  | 
| | Leasehold improvements               |  |              | 3,453  |      |   | 3,527  | 
| |                                      |  |              |        |      |   |        | 
| |                                      |  |              |        |      |   |        | 
| |                                      |  |              | 22,260 |      |   | 23,612 | 
| |                                      |  |              |        |      |   |        | 
| | Accumulated depreciation:            |  |              |        |      |   |        | 
| | Computers and peripheral
  equipment |  |              | 12,034 |      |   | 12,886 | 
| | Office furniture and
  equipment     |  |              | 818    |      |   | 945    | 
| | Motor vehicles                       |  |              | 2,566  |      |   | 2,815  | 
| | Leasehold improvements               |  |              | 2,113  |      |   | 3,124  | 
| |                                      |  |              |        |      |   |        | 
| |                                      |  |              |        |      |   |        | 
| |                                      |  |              | 17,531 |      |   | 19,770 | 
| |                                      |  |              |        |      |   |        | 
| |                                      |  |              |        |      |   |        | 
| | Depreciated cost                     |  | $            | 4,729  |      | $ | 3,842  | 
| |                                      |  |              |        |      |   |        | 

|            |                                                                                                                                
|----------- | -------------------------------------------------------------------------------------------------------------------------------
|            | Depreciation expenses for the years ended
  December 31, 2004, 2005 and 2006 were $ 2,827, $ 2,154 and $ 2,589,
  respectively.
|            |                                                                                                                                
|NOTE 7:    | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES                                                                                    

| |                                |  |              |       |      |   |       | 
| | ------------------------------ |  | ------------ | ----- | ---- | - | ----- | 
| |                                |  | December 31, |      
| |                                |  |              |      
| |                                |  | 2005         |       | 2006 |  
| |                                |  |              |       |      |  
| |                                |  |              |       |      |   |       | 
| | Employees and payroll accruals |  | $            | 3,724 |      | $ | 4,621 | 
| | Accrued expenses               |  |              | 1,364 |      |   | 1,721 | 
| | Government authorities         |  |              | 2,180 |      |   | 567   | 
| | Related party (1)              |  |              | -     |      |   | 40    | 
| | Others                         |  |              | 195   |      |   | 278   | 
| |                                |  |              |       |      |   |       | 
| |                                |  |              |       |      |   |       | 
| |                                |  | $            | 7,463 |      | $ | 7,227 | 
| |                                |  |              |       |      |   |       | 
| |                                |  |              |       |      |   |       | 
| | (1)
  See note 11.             |  |              |       |      |   |       | 

F  19

---

---



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

|            |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | -------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8:    | 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
  (see also note 11). 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 2011.
|            |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                        | Aggregate
  minimum rental commitments under non-cancelable leases at December 31, 2006
  are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                         |  |            |       |                  |   |       |  |   |       | 
| | ----------------------- |  | ---------- | ----- | ---------------- | - | ----- |  | - | ----- | 
| | Year ended December 31, |  | Facilities |       | Motor
  vehicles |   | Total | 
| |                         |  |            |       |                  |   |       | 
| |                         |  |            |       |                  |   |       |  |   |       | 
| | 2007                    |  | $          | 970   |                  | $ | 46    |  | $ | 1,016 | 
| | 2008                    |  |            | 456   |                  |   | 30    |  |   | 486   | 
| | 2009                    |  |            | 318   |                  |   | 10    |  |   | 328   | 
| | 2010                    |  |            | 328   |                  |   | -     |  |   | 328   | 
| | 2011                    |  |            | 257   |                  |   | -     |  |   | 257   | 
| |                         |  |            |       |                  |   |       |  |   |       | 
| |                         |  |            |       |                  |   |       |  |   |       | 
| |                         |  | $          | 2,329 |                  | $ | 86    |  | $ | 2,415 | 
| |                         |  |            |       |                  |   |       |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Facility
  lease expenses for the years ended December 31, 2004, 2005 and 2006 were
  $ 1,702, $ 1,657 and $ 1,432, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In March
  2007 the Company signed a new lease agreement in Israel. Under this agreement
  the Company will lease, starting September 2007 a new facility for its
  principal office instead of its current one. The lease is schedule to expire
  in September 2014 and the annual rent is approximately $ 900.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Motor
  vehicle lease expenses for the years ended December 31, 2004, 2005 and 2006
  were approximately $ 211, $ 122 and $ 106, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | b. | Royalty
  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  20

---

---



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

|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | ---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8:    | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | The Company
  has paid or accrued royalties relating to the repayment of such grants in the
  amount of $ 223, $ 10 and $ 2 for the years ended December 31, 2004, 2005 and
  2006, respectively. The amounts were recorded in the cost of revenues. As of
  December 31, 2006, the Company has an outstanding contingent obligation to
  pay royalties in the amount of approximately $ 2,743 in respect of these
  grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | c.                                             | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | The Company
  has obtained performance guarantees in favor of certain customers from
  several banks in Israel amounting to $ 2,343 and $ 1,809 for the years ended
  December 31, 2005 and 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | The Company
  has obtained other guarantees in favor of facility and car leasers from bank
  in Israel amounting to $ 11 and $ 62 for the years ended December 31, 2005 and
  2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | d.                                             | Litigation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | Securities
  class action:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | A
  shareholders class action lawsuit was filed in September 2004 against the
  Company, Team Software Industries Ltd. and certain of the Companys executive
  officers. The lawsuit purports to be a class action filed on behalf of
  persons who held the Companys shares during the period between February 6,
  2002 and November 14, 2002. The complaint alleges that material
  misrepresentations and omissions concerning the Companys operations and
  performance artificially inflated the Companys stock price, causing damages
  to investors. The Company filed a motion to dismiss the complaint which
  motion was granted by an opinion dated October 6, 2006. The opinion dismissed
  the amended and consolidated complaint but granted plaintiff the right to
  file a second amended and consolidated complaint. The second amended and
  consolidated complaint was filed on November 9, 2006. The Company filed a
  motion to dismiss the second amended and consolidated complaint on January
  10, 2007.
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | However,
  this class action is at an early stage, and the Companys management cannot
  predict the outcome of this claim. As of December 31, 2006, no provision has
  been provided with respect to this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F  21

---

---



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

|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8:    | COMMITMENTS AND CONTINGENT LIABILITIES
  (Cont.)
|            |                                                 
|            | e.                                               | In April
  2006, in connection with the Companys cancellation of a purchase order from
  Embarcadero Technologies Inc (Embarco)., Embarcadero filed a lawsuit against
  the Company in the San Francisco Superior Court, alleging among other things,
  breach of contract and intentional misrepresentation. The Companys
  management believes that the cancellation of the purchase order and the
  return of Embarcaderos software by the Company were made in accordance with
  applicable law and regulations. The Company answered and counterclaimed for
  negligent and intentional misrepresentation based on false representation
  made by Embarcaderos salesperson. Mediation of this case during January 2007
  did not resolve the dispute. No trial has been set as of yet. Since this
  claim is at its early stages, the Company cannot predict the outcome of this
  dispute. In the event of an unfavorable resolution, the Company may be
  required to pay damages and other related costs of approximately $100. A
  provision of such amount is included in the financial statements for 2006.
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | f.                                               | Termination
  of agreement with major customer, See Note 1c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | g.                                               | Dispute with
  respect of balance with related party shareholder, See Note 11(b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | h.                                               | Tax exposure
  with regard to relocation expenses of certain of the Companys subsidiaries
  employees and former employees, see note 9f.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 9:    | INCOME TAXES                                    
|            |                                                 
|            | a.                                               | Measurement
  of results for tax purposes under the Income Tax (Inflationary Adjustments
  Law), 1985.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                  | Results for
  tax purposes in Israel are measured in terms of earnings in NIS after certain
  adjustments for changes 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 recorded
  deferred taxes on the difference between the reporting currency and the tax
  bases of assets and liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | b.                                               | Corporate
  tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                  | Taxable
  income of Israeli companies is subject to tax at the rate of 31% in 2006, 29%
  in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F  22

---

---



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

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:    | INCOME TAXES (Cont.)
|            |                     
|            | c.                   | Tax benefits
  under the Law for the Encouragement of Capital Investments, 1959 (the law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                      | Most of the
  Companys production facilities in Israel 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                      | 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 up to 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
  investments under the Companys five approved investments programs were
  incurred since 1992.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                      | As of December
  31, 2006 the benefit periods of the first program was expired. The benefit
  periods of the second, third and forth programs will expire in 2007, 2009 and
  2011 respectively. The benefit period of the fifth program has not yet
  commenced and will end in 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                      | 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
  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 enterprise. 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, 2006, management believes that the Company is meeting all
  of the aforementioned conditions.                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                      | Income
  from sources other than the approved enterprise will be subject to the
  statutory Israeli corporate tax rate. If the retained tax-exempt income were
  distributed, it would be taxed at the corporate tax rate applicable to such
  profits as if the Company had not chosen the alternative tax benefits (rate
  of 10% - 25% based on the percentage of foreign ownership in the Companys
  shares) on the gross amount distributed. In addition, these dividends will be
  subject to a 15% withholding tax. The Companys Board of Directors has
  determined that such tax-exempted income will not be distributed as
  dividends. Accordingly, no deferred income taxes have been provided on income
  attributable to the Companys Approved Enterprise programs as the undistributed
  tax exempt income is essentially permanent in duration. The Company intends
  to reinvest its tax exempt income and not to distribute such income as a
  dividend.

F  23

---

---



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

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:    | INCOME TAXES (Cont.)
|            |                     
|            |                      | On April 1,
  2005, an amendment to the Investment Law came into effect (the Amendment)
  and has significantly changed the provisions of the Investment Law. The
  Amendment limits the scope of enterprises which may be approved by the law by setting criteria for the approval of a
  facility as a beneficiary enterprise, such as provisions generally requiring
  that at least 25% of the beneficiary enterprises income will be derived from
  export. Additionally, the Amendment enacted major changes in the manner in
  which tax benefits are awarded under the Investment Law so that companies no
  longer require Investment Center approval in order to qualify for tax benefits.
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                      | However, the Investment Law provides that terms and benefits included
  in any certificate of approval already granted will remain subject to the
  provisions of the law as they were on the date of such approval. Therefore,
  the Companys existing approved enterprise will generally not be subject to
  the provisions of the Amendment. As a result of the Amendment, tax-exempt
  income generated under the provisions of the new law, will subject the
  Company to taxes upon distribution or liquidation and the Company may be
  required to record deferred tax liability with respect to such tax-exempt
  income.                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | d.                   | Deferred tax
  assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                      | Deferred tax
  assets 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, |        
|                                                       |  |                |        
|                                                       |  | 2005           |         | 2006 |  
|                                                       |  |                |         |      |  
|                                                       |  |                |         |      |   |         |  
|Reserves and allowances                                |  | $              | 2,675   |      | $ | 3,719   |  
|Net operating loss carryforward - foreign              |  |                | 7,239   |      |   | 8,357   |  
|Net operating loss carryforward - domestic             |  |                | 9,773   |      |   | 7,541   |  
|                                                       |  |                |         |      |   |         |  
|                                                       |  |                |         |      |   |         |  
|Total deferred tax assets before valuation
  allowance |  |                | 19,687  |      |   | 19,617  |  
|Valuation allowance                                    |  |                | (19,687 | )    |   | (19,617 | )
|                                                       |  |                |         |      |   |         |  
|                                                       |  |                |         |      |   |         |  
|Deferred tax asset                                     |  | $              | -       |      | $ | -       |  
|                                                       |  |                |         |      |   |         |  

| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  and its subsidiaries have provided valuation allowance in respect of deferred
  tax assets resulting from the tax loss carry forward. Management currently
  believes that it is more likely than not that the deferred tax regarding
  these tax loss carryforward and other temporary differences will not be
  realized.

F  24

---

---



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

|            |                      |                                                                                                                                                                                                                                                     
|----------- | -------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9:    | INCOME TAXES (Cont.)
|            |                      |                                                                                                                                                                                                                                                     
|            | e.                   | 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, |        
|                                                                                 |  |                         |        
|                                                                                 |  | 2004                    |         | 2005 |   | 2006   |  
|                                                                                 |  |                         |         |      |   |        |  
|                                                                                 |  |                         |         |      |   |        |  
|Loss before taxes, as
  reported in the consolidated statements of operations    |  | $                       | (27,387 | )    | $ | (6,454 | ) | $ | (3,899 | )
|                                                                                 |  |                         |         |      |   |        |   |   |        |  
|                                                                                 |  |                         |         |      |   |        |   |   |        |  
|Statutory tax rate                                                               |  |                         | 35      | %    |   | 34     | % |   | 31     | %
|                                                                                 |  |                         |         |      |   |        |   |   |        |  
|                                                                                 |  |                         |         |      |   |        |   |   |        |  
|Theoretical tax benefit on
  the above amount at the Israeli statutory tax rate: |  | $                       | (9,585  | )    | $ | (2,194 | ) | $ | (1,209 | )
|Tax adjustment in respect
  of foreign subsidiaries different tax rates          |  |                         | 489     |      |   | 123    |   |   | (84    | )
|Valuation allowance                                                              |  |                         | 1,647   |      |   | -      |   |   | -      |  
|Deferred taxes on losses
  for which a valuation allowance was provided          |  |                         | 8,090   |      |   | 1,855  |   |   | 1,066  |  
|Taxes in respect of prior
  years                                                |  |                         | 460     |      |   | 624    |   |   | (315   | )
|Other                                                                            |  |                         | 1,006   |      |   | 216    |   |   | 446    |  
|                                                                                 |  |                         |         |      |   |        |   |   |        |  
|                                                                                 |  |                         |         |      |   |        |   |   |        |  
|Income taxes (tax benefit),
  as reported in the statements of operations        |  | $                       | 2,107   |      | $ | 624    |   | $ | (96    | )
|                                                                                 |  |                         |         |      |   |        |   |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | f. | In October
  2006, the Company has signed a settlement agreement with the Israeli Tax
  Authority (ITA) under which the company will pay to the ITA an amount $ 780
  with regard to the corporate tax assessment for the years 2000  2002. This
  agreement is final and concluded the ITA tax assessments for these years. The
  Company paid an amount of $ 780 during December 2006. The remaining tax
  accrual previously recorded was reversed against income from taxes.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company
  has assessed that a tax exposure contingency may exist with regard to
  relocation expenses of certain of its subsidiaries employees and former
  employees. The Companys management cannot reasonably estimate the relating
  amount of the loss, if any, for the tax contingency. Accordingly, and based
  on its legal counsel opinion, the Company has not recorded an accrual for the
  said tax contingency.                                                 

F  25

---

---



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

|            |                      |                                            
|----------- | -------------------- | -------------------------------------------
|NOTE 9:    | INCOME TAXES (Cont.)
|            |                      |                                            
|            | g.                   | Taxes on
  income are comprised as follows:

|                                |  |                         |       |      |   |      |   |   |      |  
|------------------------------- |  | ----------------------- | ----- | ---- | - | ---- | - | - | ---- | -
|                                |  | Year ended December 31, |      
|                                |  |                         |      
|                                |  | 2004                    |       | 2005 |   | 2006 |  
|                                |  |                         |       |      |   |      |  
|                                |  |                         |       |      |   |      |  
|Current taxes                   |  | $                       | -     |      | $ | -    |   | $ | 219  |  
|Taxes in respect of prior years |  |                         | 460   |      |   | 624  |   |   | (315 | )
|Deferred income taxes           |  |                         | 1,647 |      |   | -    |   |   | -    |  
|                                |  |                         |       |      |   |      |   |   |      |  
|                                |  |                         |       |      |   |      |   |   |      |  
|                                |  | $                       | 2,107 |      | $ | 624  |   | $ | (96  | )
|                                |  |                         |       |      |   |      |   |   |      |  
|                                |  |                         |       |      |   |      |   |   |      |  
|Domestic                        |  | $                       | 2,107 |      | $ | 754  |   | $ | (248 | )
|Foreign                         |  |                         | -     |      |   | (130 | ) |   | 152  |  
|                                |  |                         |       |      |   |      |   |   |      |  
|                                |  |                         |       |      |   |      |   |   |      |  
|                                |  | $                       | 2,107 |      | $ | 624  |   | $ | (96  | )
|                                |  |                         |       |      |   |      |   |   |      |  

| |    |                                             
| | -- | --------------------------------------------
| | h. | Loss before
  taxes is comprised as follows:

|         |  |                         |         |      |   |        |   |   |        |  
|-------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|         |  | Year ended December 31, |        
|         |  |                         |        
|         |  | 2004                    |         | 2005 |   | 2006   |  
|         |  |                         |         |      |   |        |  
|         |  |                         |         |      |   |        |  
|Domestic |  | $                       | (20,456 | )    | $ | (6,914 | ) | $ | (1,319 | )
|Foreign  |  |                         | (6,931  | )    |   | 460    |   |   | (2,580 | )
|         |  |                         |         |      |   |        |   |   |        |  
|         |  |                         |         |      |   |        |   |   |        |  
|         |  | $                       | (27,387 | )    | $ | (6,454 | ) | $ | (3,899 | )
|         |  |                         |         |      |   |        |   |   |        |  

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | -------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | SHAREHOLDERS EQUITY
|            |                     
|            | a.                   | 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, under
  the symbol TTIL.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | b.                   | On November
  29, 2004, the Company entered into definitive agreements (the Agreements)
  to obtain $ 14,600 in equity financing, through the sale of 6,636,391 of
  Series A Convertible Preferred shares in a private placement to institutional
  investors (the Preferred shares). The Preferred shares are convertible into
  6,636,391 Ordinary shares. In addition, holders of the Preferred shares were
  granted one warrant to purchase 0.4 Ordinary shares at an exercise price of
  $ 2.50 per share for each Preferred share owned at any time until January 2011
  (the Warrants). The closing of the investment took place on January 3,
  2005.

F  26

---

---



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

|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
|----------- | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------
|NOTE 10:   | SHAREHOLDERS EQUITY (Cont.)
|            |                             
|            |                              | The rights
  of the holders of the Preferred shares include, among other things, the
  following rights that are subject to certain limitations as described in the
  TTIs articles:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                              | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Weighted-average
  anti-dilution protection;                           
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
|            |                              | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Preference
  in the event of liquidation of the Company;               
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
|            |                              | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Veto rights
  over certain material actions by the Company;            
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
|            |                              | 4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The right to
  nominate one member of the Companys Board of Directors.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
|            |                              | As part of
  the agreement the Company issued warrants to purchase up to 2,654,556 of its
  ordinary shares. The warrants are exercisable for a period of six years, at
  an exercise price of $ 2.5 per share. As of December 31, 2006 427,490 warrants
  were converted into the same number of the Companys ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                              | In addition,
  as part of the Agreement, the placement agent of the investment was granted warrants
  exercisable for the purchase of up to 371,678 of the Companys Ordinary
  shares. The placement agents warrants are exercisable at a price per
  Ordinary share of $ 2.64, at any time until January 2009. As of December 31,
  2006, none of these warrants were converted into the Companys Ordinary
  shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                              | In the event
  that the closing bid price of the Companys Ordinary shares (as defined in
  the warrant certificate) equals or exceeds two times the exercise price then
  in effect for twenty consecutive trading days (as defined in the warrant
  certificate) (the Trading Period) and the average trading volume of the
  Ordinary shares is at least 100,000 shares during the Trading Period, the
  Company, upon thirty days prior written notice (the Notice Period) given to
  the warrant holder within one business day immediately following the end of
  such Trading Period, may call the Warrants, at a redemption price equal to
  $ 0.01 per Ordinary share then purchasable. Notwithstanding any such notice by
  the Company, the warrant holder shall have the right to exercise the Warrants
  prior to the end of the Notice Period.                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                              | In
  connection with the issuance of the Preferred shares and the Warrants, the
  Company has applied EITF 00-27, Application of Issue No. 98-5 to Certain
  Convertible Instruments, (EITF 00-27) which resulted in the recognition of
  $ 1,981 related to the beneficial conversion feature on the Preferred shares.
  The Company accounted for the beneficial conversion feature as a deemed
  dividend to the preferred shareholders of $1,981 and was credited to
  additional paid-in capital.                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                              | According to
  the Agreements, the
  investors have the right to receive payment for liquidated damages if a
  registration statement on Form F-3 is not declared effective within 90 days
  (or 120 days in the event the U.S. Securities and Exchange Commission conducts a review) following the closing of
  the private placement transaction. The Company obtained effectiveness of the
  registration statement on May 24, 2005. Therefore, since May 4, 2005, the
  Company has been accruing liquidated damages at a rate equal to 2% of each
  investors investment in the Company for each 30 day period, or pro rata for
  any portion thereof, during the period for which the registration statement
  was not declared effective. The Company paid liquidated damages at a total
  amount of $194, which were recorded in the second quarter of 2005 as general
  and administrative expenses.

F  27

---

---



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

|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | SHAREHOLDERS EQUITY (Cont.)
|            |                             
|            |                              | During the years ended December 31, 2005 and 2006, an amount of
  2,000,000 and 1,700,000, respectively, Preferred shares were converted into
  the same number of the Companys Ordinary shares. Subsequent to balance sheet
  date, none of the Preferred shares were converted into the Companys Ordinary
  shares and none of the Warrants had been exercised into Ordinary shares.                                                                                                                                                                                                                                                    
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | c.                           | Share options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                              | Employee
  Share Option Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                              | In 1996, the
  Board of Directors of the Company adopted share option plans (as amended the
  Old Plans). As of December 31, 2006 108,000 options are outstanding and
  exercisable under the Old Plan. At the Companys annual general shareholders
  meeting in December 2004, it was decided that there was no intention to grant
  any more options from the Old Plan and it was resolved to approve the 2004
  share option plan (the New Plan), pursuant to which 1,000,000 Ordinary
  shares were reserved for issuance. In August 2006, an additional amount of
  500,000 shares were reserved for issuance under the New Plan.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                              | 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 New Plan, as of December 31, 2006, an aggregate of 563,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                       

F  28

---

---



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

|            |                              |                                                                                 
|----------- | ---------------------------- | --------------------------------------------------------------------------------
|NOTE 10:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                 
|            |                              | A summary of
  the stock option activities in 2004, 2005 and 2006 is as follows:

|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                  |      |  |      |  |   |  
|---------------------------------------- |  | ---------------------------- | - | ---------------------------- | ----- | ----------------------------- | - | --------------- |  | ------------------------------- | - | ----------------------------- | ----- | --------------- | - | ------------------------------- |  | ------------------------------------------ | - | -------------------------------- | ---- |  | ---- |  | - | -
|                                         |  | Year ended December 31, 2004 |   | Year ended December 31, 2005 |       | Year ended December 31, 2006 
|                                         |  |                              |   |                              |       |                              
|                                         |  | Amountof
  options           |   | Weightedaverageexerciseprice |       | Aggregate
  intrinsic
  value |   | Amountofoptions |  | Weighted
  averageexerciseprice |   | Aggregate
  intrinsic
  value |       | Amountofoptions |   | Weighted
  averageexerciseprice |  | Weightedaverageremaining
  contractualterm |   | Aggregate   
  intrinsic
  value
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                 
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                 
|Outstanding at the beginning of the year |  | 470,178                      |   | $                            | 18.72 |                               | $ | -               |  | 374,133                         |   | $                             | 10.13 |                 | $ | -                               |  | 390,333                                    |   | $                                | 4.55 |  |      |  | $ | -
|Granted                                  |  | 321,000                      |   | $                            | 6.07  |                               | $ | -               |  | 200,000                         |   | $                             | 3.50  |                 | $ | -                               |  | 755,500                                    |   | $                                | 3.78 |  |      |  | $ | -
|Exercised                                |  | (889                         | ) | $                            | 11.69 |                               | $ | -               |  | -                               |   | $                             | -     |                 | $ | -                               |  | -                                          |   | $                                | -    |  |      |  | $ | -
|Forfeited                                |  | (167,311                     | ) | $                            | 10.69 |                               | $ | -               |  | (82,000                         | ) | $                             | 7.00  |                 | $ | -                               |  | (97,500                                    | ) | $                                | 4.23 |  |      |  | $ | -
|Expired                                  |  | (248,845                     | ) | $                            | 9.77  |                               | $ | -               |  | (101,800                        | ) | $                             | 21.02 |                 | $ | -                               |  | (3,333                                     | ) | $                                | 20   |  |      |  | $ | -
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                  |      |  |      |  |   |  
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                  |      |  |      |  |   |  
|Outstanding at the end of the year       |  | 374,133                      |   | $                            | 10.13 |                               | $ | -               |  | 390,333                         |   | $                             | 4.55  |                 | $ | -                               |  | 1,045,000                                  |   | $                                | 3.97 |  | 3.82 |  | $ | -
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                  |      |  |      |  |   |  
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                  |      |  |      |  |   |  
|Options exercisable at the end of year   |  | 123,883                      |   | $                            | 18.27 |                               | $ | -               |  | 113,499                         |   | $                             | 5.05  |                 | $ | -                               |  | 266,330                                    |   | $                                | 4.78 |  | 2.77 |  | $ | -
|                                         |  |                              |   |                              |       |                               |   |                 |  |                                 |   |                               |       |                 |   |                                 |  |                                            |   |                                  |      |  |      |  |   |  

F  29

---

---



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

|            |                              |                                                                                                                                 
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:   | SHAREHOLDERS EQUITY (Cont.)
|            |                             
|            |                              | The
  weighted-average grant-date fair value of options granted during the years
  2004, 2005 and 2006 was $ 0, $ 0, and $ 1.45.
|            |                              |                                                                                                                                 
|            |                              | The options
  outstanding as of December 31, 2006 have been separated into exercise prices,
  as follows:                       

|              |             |                                               |           |                                                     |       |                                 |   |                                               |  |                                                                |  |   |      | 
|------------- | ----------- | --------------------------------------------- | --------- | --------------------------------------------------- | ----- | ------------------------------- | - | --------------------------------------------- |  | -------------------------------------------------------------- |  | - | ---- | 
|Exerciseprice |             | Options
  outstandingas ofDecember 31,
  2006 |           | Weighted
  average
  remaining
  contractual
  life |       | Weighted
  averageexerciseprice |   | Options
  exercisableas ofDecember 31,
  2006 |  | Weighted
  average exercise
  price of
  exercisable
  options | 
|              |             |                                               |           |                                                     |       |                                 |   |                                               |  |                                                                | 
|              |             |                                               |           |                                                     | years |                                 |   |                                               |  |                                                                |  |  
|              |             |                                               |           |                                                     |       |                                 |   |                                               |  |                                                                |  |  
|              |             |                                               |           |                                                     |       |                                 |   |                                               |  |                                                                |  |  
|$             | 3.0         |                                               | 101,000   |                                                     | 2.59  |                                 | $ | 3                                             |  | 75,000                                                         |  | $ | 3    | 
|$             | 3.5         |                                               | 490,000   |                                                     | 4.14  |                                 | $ | 3.5                                           |  | 83,330                                                         |  | $ | 3.5  | 
|$             | 3.9         |                                               | 299,000   |                                                     | 4.12  |                                 | $ | 3.9                                           |  |                                                               |  | $ | 3.9  | 
|$             | 4.3         |                                               | 29,000    |                                                     | 4.24  |                                 | $ | 4.3                                           |  |                                                               |  | $ | 4.3  | 
|$             | 4.9         |                                               | 18,000    |                                                     | 4.37  |                                 | $ | 4.9                                           |  |                                                               |  | $ | 4.9  | 
|$             | 6.0
  - 8.0 |                                               | 108,000   |                                                     | 2.5   |                                 | $ | 7                                             |  | 108,000                                                        |  | $ | 7    | 
|              |             |                                               |           |                                                     |       |                                 |   |                                               |  |                                                                |  |   |      | 
|             
|              |             |                                               | 1,045,000 |                                                     | 3.82  |                                 | $ | 3.99                                          |  | 266,330                                                        |  | $ | 4.78 | 
|              |             |                                               |           |                                                     |       |                                 |   |                                               |  |                                                                |  |   |      | 

|            |                                           |                                                                                                                                                                 
|----------- | ----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | d.                                        | 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.
|            |                                           |                                                                                                                                                                 
|NOTE 11:   | RELATED PARTIES TRANSACTIONS AND BALANCES
|            |                                          
|            | Composition:                             

|                                                       |  |                |     |      |   |     |  
|------------------------------------------------------ |  | -------------- | --- | ---- | - | --- | -
|                                                       |  | December
  31, |    
|                                                       |  |                |    
|                                                       |  | 2005           |     | 2006 |  
|                                                       |  |                |     |      |  
|                                                       |  |                |     |      |   |     |  
|Balances
  between Team and the Company (see a below)  |  | $              | 29  |      | $ | (40 | )
|                                                       |  |                |     |      |   |     |  
|                                                       |  |                |     |      |   |     |  
|Balance with
  related party shareholder (see b below) |  | $              | 338 |      | $ | 373 |  
|                                                       |  |                |     |      |   |     |  

F  30

---

---



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

|            |                                                   |                                                                
|----------- | ------------------------------------------------- | ---------------------------------------------------------------
|NOTE 11:   | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)
|            |                                                   |                                                                
|            | a.                                                | Transactions
  and with Team:                                  
|            |                                                   |                                                                
|            |                                                   | Transactions
  between Team and its affiliates and the Company:

|                                                        |  |                           |       |      |   |       |  |   |       | 
|------------------------------------------------------- |  | ------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                        |  | Year ended
  December 31, |      
|                                                        |  |                           |      
|                                                        |  | 2004                      |       | 2005 |   | 2006  | 
|                                                        |  |                           |       |      |   |       | 
|Revenues:                                               |  |                           |       |      |   |       |  |   |       | 
|Commissions on product sales and payment
  for services |  | $                         | 249   |      | $ | 93    |  | $ | 65    | 
|                                                        |  |                           |       |      |   |       |  |   |       | 
|                                                        |  |                           |       |      |   |       |  |   |       | 
|General and administrative expenses:                    |  |                           |       |      |   |       |  |   |       | 
|Rent and maintenance                                    |  | $                         | 1,421 |      | $ | 1,379 |  | $ | 1,160 | 
|                                                        |  |                           |       |      |   |       |  |   |       | 
|                                                        |  |                           |       |      |   |       |  |   |       | 
|Administrative and management services                  |  | $                         | 207   |      | $ | 169   |  | $ | 160   | 
|                                                        |  |                           |       |      |   |       |  |   |       | 
|                                                        |  |                           |       |      |   |       |  |   |       | 
|Purchase of equipment                                   |  | $                         | 555   |      | $ | 398   |  | $ | 352   | 
|                                                        |  |                           |       |      |   |       |  |   |       | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 the Company with 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 8a.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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.                                                                                                                                                                                                                                                                                                                                                                                              

F  31

---

---



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

|            |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:   | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)
|            |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                   | 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. Once the Company
  receives additional payments for these projects, it will be 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 Team for all of
  these projects is $ 563.
|            |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | b.                                                | Balance with
  related party shareholder:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                   | During the
  years 1998 to 2000, the Company granted Mr. Shlomo Eisenberg (Mr.
  Eisenberg), the former chairman of the board of directors and a major
  shareholder of the Company, an aggregate of 105,000 options to purchase
  ordinary shares of the Company. In the years 2001 and 2002, Mr. Eisenberg
  exercised a portion of his options (the Options) and the Company withheld
  Israeli income tax from income realized by Mr. Eisenberg upon the exercise of
  the Options, as required under law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                   | At the end
  of 2005, the Company underwent a tax deductions audit by the Israeli Tax
  Authority (ITA). As a result of such audit, the ITA assessed an additional
  NIS 1.5 million ($ 355 as of December 31, 2006) in withholding taxes with
  respect to income derived by Mr. Eisenberg from the exercise of the Options.
  Following consultation with the Companys tax advisors, the Company paid the
  additional withholding tax amount assessed in the audit. The Company was
  informed that it is required to collect such additional tax from Mr. Eisenberg
  otherwise such additional amount will be viewed as a benefit received by Mr.
  Eisenberg from the Company, resulting in additional withholding tax being
  charged to the Company as a result of the grant of such benefit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                   | The Company
  filed a NIS 1.6 million lawsuit and demanded reimbursement for the additional
  withholding tax from Mr. Eisenberg. Based on an advice from Israeli council,
  the Company believes that it is entitled to such reimbursement. However, the
  Company cannot assure that the court will accept such view if this matter
  were brought before it. A trial with respect to this matter is expected to
  take place in September 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F  32

---

---



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

|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ----------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 12:   | GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | a.                                                                | Summary
  information about geographic areas:                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                   | The Company
  operates in one reportable segment (see Note 1 for a brief description of the
  Companys business). The following data is presented in accordance with
  Statement of Financial Accounting Standard No. 131, Disclosures about
  Segments of an Enterprise and Related Information (SFAS No. 131). The total
  revenues are attributed to geographic areas based on the location of the end
  customer.
|            |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                   | The
  following presents total revenues and long-lived assets as of and for the
  years ended December 31, 2004, 2005 and 2006:                                                                                                                                                                                                                                                                                           

| |               |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
| | ------------- |  | ----------------------- | ------ | ------------------- | - | ---------------- |  | ------------------- | ------ | ---------------- | - | ------------------- |  | - | ------ |  | - | ----- | 
| |               |  | Year ended December 31, |       
| |               |  |                         |       
| |               |  | 2004                    |        | 2005                |   | 2006             | 
| |               |  |                         |        |                     |   |                  | 
| |               |  | Total
  revenues        |        | Long-lived
  assets |   | Total
  revenues |  | Long-lived
  assets |        | Total
  revenues |   | Long-lived
  assets | 
| |               |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     | 
| |               |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
| | Israel        |  | $                       | 4,200  |                     | $ | 5,578            |  | $                   | 3,065  |                  | $ | 4,249               |  | $ | 3,199  |  | $ | 3,217 | 
| | United States |  |                         | 14,112 |                     |   | 533              |  |                     | 17,004 |                  |   | 453                 |  |   | 18,929 |  |   | 600   | 
| | Europe        |  |                         | 11,541 |                     |   | 8                |  |                     | 11,536 |                  |   | 4                   |  |   | 12,331 |  |   | 4     | 
| | Australia     |  |                         | 3,310  |                     |   | 34               |  |                     | 2,466  |                  |   | 23                  |  |   | 3,724  |  |   | 20    | 
| | South America |  |                         | 2,712  |                     |   | -                |  |                     | 3,551  |                  |   | -                   |  |   | 3,085  |  |   | -     | 
| | Far East      |  |                         | 722    |                     |   | 2                |  |                     | 1,999  |                  |   | -                   |  |   | 1,626  |  |   | 1     | 
| | South Africa  |  |                         | 1,201  |                     |   | -                |  |                     | 3,605  |                  |   | -                   |  |   | 3,220  |  |   | -     | 
| |               |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
| |               |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
| |               |  | $                       | 37,798 |                     | $ | 6,155            |  | $                   | 43,226 |                  | $ | 4,729               |  | $ | 46,114 |  | $ | 3,842 | 
| |               |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 

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

| |                 |  |                           |   |      |    |      |  |    |   | 
| | --------------- |  | ------------------------- | - | ---- | -- | ---- |  | -- | - | 
| |                 |  | Year ended
  December 31, |  
| |                 |  |                           |  
| |                 |  | 2004                      |   | 2005 |    | 2006 | 
| |                 |  |                           |   |      |    |      | 
| |                 |  |                           |   |      |    |      |  |    |   | 
| | Customer A      |  | 16                        | % |      | 14 | %    |  | 13 | % | 
| | Customer B      |  | 7                         | % |      | 13 | %    |  | 11 | % | 
| | Customer C      |  | 3                         | % |      | 8  | %    |  | 7  | % | 
| | Customer D
  *) |  | 5                         | % |      | 5  | %    |  | 6  | % | 

F  33

---

---



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

|            |                                        |                                 
|----------- | -------------------------------------- | --------------------------------
|NOTE 13:   | SELECTED STATEMENTS OF OPERATIONS DATA
|            |                                        |                                 
|            | a.                                     | Research and
  development, net:

| |                                    |  |                           |        |      |   |       |  |   |       | 
| | ---------------------------------- |  | ------------------------- | ------ | ---- | - | ----- |  | - | ----- | 
| |                                    |  | Year ended
  December 31, |       
| |                                    |  |                           |       
| |                                    |  | 2004                      |        | 2005 |   | 2006  | 
| |                                    |  |                           |        |      |   |       | 
| |                                    |  |                           |        |      |   |       |  |   |       | 
| | Total cost                         |  | $                         | 11,324 |      | $ | 9,166 |  | $ | 9,632 | 
| | Less -
  grants and participations |  |                           | 580    |      |   | 30    |  |   | 54    | 
| |                                    |  |                           |        |      |   |       |  |   |       | 
| |                                    |  |                           |        |      |   |       |  |   |       | 
| | Research and
  development, net    |  | $                         | 10,744 |      | $ | 9,136 |  | $ | 9,578 | 
| |                                    |  |                           |        |      |   |       |  |   |       | 

| |    |                               
| | -- | ------------------------------
| | b. | Financial
  income (expenses):

| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| | --------------------------------------------------------------------- |  | ------------------------- | ----- | ---- | - | ------ | - | - | ------ | -
| |                                                                       |  | Year ended
  December 31, |      
| |                                                                       |  |                           |      
| |                                                                       |  | 2004                      |       | 2005 |   | 2006   |  
| |                                                                       |  |                           |       |      |   |        |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| | Financial
  expenses:                                                 |  |                           |       |      |   |        |   |   |        |  
| | Foreign currency translation adjustments                              |  | $                         | (568  | )    | $ | (1,480 | ) | $ | (1,009 | )
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| | Financial
  income:                                                   |  |                           |       |      |   |        |   |   |        |  
| | Foreign currency translation adjustments                              |  |                           | 857   |      |   | 834    |   |   | 1,050  |  
| | Gain (loss) from sale of marketable
  securities                      |  |                           | 271   |      |   | -      |   |   | (838   | )
| | Other than temporary decline in fair value
  of marketable securities |  |                           | -     |      |   | (301   | ) |   | (329   | )
| | Interest and other                                                    |  |                           | 766   |      |   | 1,100  |   |   | 1,788  |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| |                                                                       |  |                           | 1,894 |      |   | 1,633  |   |   | 1,671  |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  
| | Financial
  income, net                                               |  | $                         | 1,326 |      | $ | 153    |   | $ | 662    |  
| |                                                                       |  |                           |       |      |   |        |   |   |        |  

F  34

---

---



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

|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|            | c.                                                                                                                                                                                                                                                                         | Other
  income:                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                            | The Company
  filed a claim against Ness Technologies Ltd. (Ness) regarding a Purchase
  Order from the ministry of defense for IDF. The Company claimed that it has a
  valid agreement with Ness to perform this project jointly and that Ness
  unlawfully decided to perform the said project without the Company. The
  Company did not record a provision for this claim.
|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                            | In November
  2006, the Company has signed a settlement agreement with Ness according to
  which Ness will pay the Company a sum of $ 150 in 3 equal installments, to be
  received up until December 31, 2007 as a full and final settlement including
  the dismissal of the claim filed by Ness.                                                                              
|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|            | The
  consolidated financial statements of the Company have been prepared in
  accordance with U.S. GAAP. Had the consolidated financial statements been
  prepared in accordance with Israeli GAAP, the effects on the financial
  statements would have been as follows:
|            |                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|            | a.                                                                                                                                                                                                                                                                         | Effect on
  the statement of operations:                                                                                                                                                                                                                                                                                                                                         

| |                                                         |  |                                |        |             |   |                           |   |   |        |  
| | ------------------------------------------------------- |  | ------------------------------ | ------ | ----------- | - | ------------------------- | - | - | ------ | -
| |                                                         |  | Year ended
  December 31, 2006 |       
| |                                                         |  |                                |       
| |                                                         |  | As
  reported                  |        | Adjustments |   | As per
  Israeli 
  GAAP* |  
| |                                                         |  |                                |        |             |   |                           |  
| |                                                         |  |                                |        |             |   |                           |   |   |        |  
| | Net loss                                                |  | $                              | (3,803 | )           | $ | (2,204                    | ) | $ | (6,007 | )
| |                                                         |  |                                |        |             |   |                           |   |   |        |  
| |                                                         |  |                                |        |             |   |                           |   |   |        |  
| | Basic and
  diluted net loss attributed to shareholders |  | $                              | (0.20  | )           | $ | (0.18                     | ) | $ | (0.38  | )
| |                                                         |  |                                |        |             |   |                           |   |   |        |  

| |                                                         |  |                                |        |             |   |                            |  |   |        |  
| | ------------------------------------------------------- |  | ------------------------------ | ------ | ----------- | - | -------------------------- |  | - | ------ | -
| |                                                         |  | Year ended
  December 31, 2005 |       
| |                                                         |  |                                |       
| |                                                         |  | As
  reported                  |        | Adjustments |   | As per
  Israeli 
  GAAP*) | 
| |                                                         |  |                                |        |             |   |                            | 
| |                                                         |  |                                |        |             |   |                            |  |   |        |  
| | Net loss                                                |  | $                              | (7,078 | )           | $ | 1,672                      |  | $ | (5,406 | )
| |                                                         |  |                                |        |             |   |                            |  |   |        |  
| |                                                         |  |                                |        |             |   |                            |  |   |        |  
| | Basic and
  diluted net loss attributed to shareholders |  | $                              | (0.72  | )           | $ | 0.43                       |  | $ | (0.29  | )
| |                                                         |  |                                |        |             |   |                            |  |   |        |  

| |    |                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *) | Amounts in
  NIS presented in accordance with Israeli GAAP for all periods were translated
  into U.S. dollars according to the average exchange rate in the corresponding
  period.

F  35

---

---



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

|            |                                          |                               
|----------- | ---------------------------------------- | ------------------------------
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP
  (Cont.)
|            |                                          |                               
|            | b.                                       | Effect on
  the balance sheet:

| |              |  |                   |        |             |   |                        |  |   |        | 
| | ------------ |  | ----------------- | ------ | ----------- | - | ---------------------- |  | - | ------ | 
| |              |  | December 31, 2006 |       
| |              |  |                   |       
| |              |  | As reported       |        | Adjustments |   | As per Israeli
  GAAP* | 
| |              |  |                   |        |             |   |                        | 
| |              |  |                   |        |             |   |                        |  |   |        | 
| | Total equity |  | $                 | 30,495 |             | $ | 272                    |  | $ | 30,767 | 
| |              |  |                   |        |             |   |                        |  |   |        | 

| |              |  |                   |        |             |   |                         |   |   |        | 
| | ------------ |  | ----------------- | ------ | ----------- | - | ----------------------- | - | - | ------ | 
| |              |  | December 31, 2005 |       
| |              |  |                   |       
| |              |  | As reported       |        | Adjustments |   | As per Israeli
  GAAP*) |  
| |              |  |                   |        |             |   |                         |  
| |              |  |                   |        |             |   |                         |   |   |        | 
| | Total equity |  | $                 | 32,443 |             | $ | (59                     | ) | $ | 32,384 | 
| |              |  |                   |        |             |   |                         |   |   |        | 

| |    |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | *)                                                                                                                       | Amounts in
  NIS presented in accordance with Israeli GAAP were translated into U.S.
  dollars according to the exchange rate at the end of the corresponding period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | c. | Material
  adjustments:                                                                                                 
| |    |                                                                                                                         
| |    | The
  abovementioned adjustments result primarily from the differences between U.S.
  GAAP and Israeli GAAP, as follows:
| |   
| |    | 1.                                                                                                                       | Pursuant to
  SFAS 115, marketable securities which are available-for-sale are presented on
  the basis of their market value and changes in such value are charged (or
  credited) to other comprehensive income. According to Israeli GAAP,
  non-current investments in marketable securities are presented at cost, while
  current investments in marketable securities are presented at fair value,
  with changes in fair value charged (or credited) to the statement of
  operations. The effect on net loss for the year ended December 31, 2006,
  amounted to a decrease in loss of approximately $ 336.                                                                  
| |    |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 2.                                                                                                                       | According to
  US GAAP, the net loss used to compute the net loss per share is the net loss
  attributed to Ordinary shareholders after deducting the deemed dividend
  associated with the beneficial conversion feature of the Preferred shares. In
  addition, the Preferred shares are not included in the computation of the
  basic net loss per share since the Preferred shares have no contractual
  obligation to participate in the Companys losses. According to Israeli GAAP,
  the net loss used to compute the net loss per share is not affected by the
  deemed dividend and the Preferred shares are included in the computation of
  the basic net loss per share.

F  36

---

---



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

|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                            
|----------- | ---------------------------------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP
  (Cont.)
|            |                                         
|            |                                          | 3. | According to
  U.S. GAAP, the 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. All transaction gains and losses of the
  remeasured monetary balance sheet items are reflected in the statement of
  operations as financial income or expenses, as appropriate. In Israel, no
  directives were determined for reporting based on functional currency. Since
  the Company does not comply with Section 29a to Opinion 36 of the Institute
  of Certified Public Accountants in Israel, the Company reports according to
  Standard 12 and 13 of the Israel Accounting Standards Board in reported NIS.
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                          | 4. | Disclosure
  of the effects of new Accounting Standards prior to their adoption:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                          |    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Accounting
  Standard No. 29 - Adoption of International Financial Reporting Standards
  (IFRS):                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | In July
  2006, the Israel Accounting Standards Board published Accounting Standard No.
  29, Adoption of International Financial Reporting Standards (IFRS) (the
  Standard).                                                                                                                                                                                                                                                                                                                                                                          
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | International
  Financial Reporting Standards comprise standards and interpretations adopted
  by the International Accounting Standards Board, and include:                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | International
  Financial Reporting Standards (IFRS)                                                                                                                       
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                            
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | International
  Accounting Standards (IAS)                                                                                                                                 
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                            
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Interpretations
  issued by the International Financial Reporting Interpretations Committee
  (IFRIC) and by its predecessor, the Standing Interpretations Committee (SIC).
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                            
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Pursuant to
  the Standard, companies that are subject to the provisions of the Securities
  Law, 1968, and that are required to report according to the regulations
  published thereunder, will be required to prepare their financial statements
  in accordance with IFRS starting from the period commencing on January 1,
  2008. These companies, as well as other companies, may adopt IFRS early and
  prepare their financial statements in accordance with IFRS starting with
  financial statements that are issued subsequent to July 31, 2006.
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                          |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | For
  transition purposes, companies that prepare their financial statements in accordance
  with IFRS will be required to adopt the provisions of IFRS 1, First-time
  Adoption of IFRS.                                                                                                                                                                                                                                                                                                                                                                 

F  37

---

---



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

|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                    
|----------- | ---------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP
  (Cont.)
|           
|            |                                          |  |  | A company
  that adopts IFRS commencing from January 1, 2008, and that has elected to
  include comparative data for only one year (2007) will be required to prepare
  an opening balance sheet as of January 1, 2007 (Opening IFRS Balance
  Sheet). The Opening IFRS Balance Sheet will require the following:                                                                                                                                                                                                                             
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                          |  |  | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Recognition
  of all assets and liabilities whose recognition is required by IFRS. 
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                    
|            |                                          |  |  | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | De-recognition
  of assets and liabilities if IFRS do not permit such recognition. 
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                    
|            |                                          |  |  | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Classification
  of assets, liabilities and components of equity according to IFRS.
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                    
|            |                                          |  |  | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Application
  of IFRS in the measurement of all recognized assets and liabilities. 
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                    
|            |                                          |  |  | In order to
  ease first-time adoption, a number of exemptions from IFRS have been granted
  in respect of the Opening IFRS Balance Sheet, which exemptions may be
  elected, in whole or in part. Exceptions have also been established which
  prohibit retrospective application of certain aspects of IFRS.                                                                                                                                                                                                                                 
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                          |  |  | According to
  the Standard, the Company is required to include in a note to the annual
  financial statements as of December 31, 2007, a balance sheet as of December
  31, 2007, and a statement of income for the year then ended, that have been
  prepared based on the recognition, measurement and presentation criteria of
  IFRS.                                                                                                                                                                                                      
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                          |  |  | There are
  differences between IFRS and generally accepted accounting principles in
  Israel in the recognition and measurement of assets and liabilities and in
  reporting and disclosure requirements. These differences could have a
  material impact on the Companys financial position and results of
  operations. The first-time adoption of IFRS will require the Company to
  identify such differences, a process that will entail a significant amount of
  time and resources.                                                  
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                          |  |  | The Company
  is evaluating the effect of the new Standard on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                          |  |  | Following
  are examples of the possible effects of the adoption of International
  Financial Reporting Standards that are to be included in the Report of
  Directors:                                                                                                                                                                                                                                                                                                                                                                         
|            |                                          |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                          |  |  | As a result
  of the initial adoption of IAS 19, Employee Benefits, the Company
  anticipates an increase/a decrease in accrued severance pay with a corresponding
  increase/decrease in retained earnings resulting from the measurement of
  severance pay using an actuarial valuation model in contrast to accounting
  principles presently applied in Israel according to which severance pay is
  measured based on the latest salary under the assumption that all employees
  are terminated and are entitled to full severance pay.

F  38

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

|            |                                         
|----------- | ----------------------------------------
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP
  (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | As a result
  of the initial adoption of IAS 40, Investment Property, the Company
  anticipates an increase in the carrying value of investment properties and a
  corresponding increase in retained earnings resulting from the adoption of
  the fair value model as set forth in this standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | As a result
  of the initial adoption of IAS 17, Leases, the Company anticipates a
  decrease in the carrying value of fixed assets in respect of land leased from
  the Israel Lands Administration that had been previously included as part of
  fixed assets. According to IFRS, these lease rights will be classified
  separately as a long-term prepaid expense and amortized over the lease
  term/the lease term including the option period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | b) | Accounting
  Standard No. 27 - Fixed Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In September
  2006, the Israel Accounting Standards Board published Accounting Standard No.
  27, Fixed Assets (the Standard). The Standard is applicable to financial
  statements for periods commencing on January 1, 2007 (the effective date)
  or thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The initial
  recognition of fixed assets will be based on the cost of purchase. After
  initial recognition, the Standard permits an entity to choose between the
  cost model or the revaluation model as its accounting policy and to apply it
  consistently to a class of fixed assets of a similar nature and use.
  According to the revaluation model, fixed assets are to be presented at a
  revalued amount, being the fair value at the date of revaluation less any
  subsequent accumulated depreciation and subsequent accumulated impairment
  losses. The revaluation of fixed assets is recorded directly to a capital
  reserve in shareholders equity, net of income taxes. This capital reserve
  may be transferred directly to retained earnings once the asset has been
  disposed of or during the period of use of the asset (according to the rate
  of depreciation). Revalued assets will be depreciated based on the revalued
  amount.                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | According to
  the Standard, each component of a fixed asset with a different useful life
  and that has a cost that is significant in relation to the total cost of the
  fixed asset is to be depreciated separately. The asset is to be depreciated
  based on its useful life as determined by the Company, which will be reviewed
  at each year-end. Depreciation will be discontinued at the earlier of the
  date of the assets classification as held for sale or the date of the
  assets disposal. An asset held for sale is an asset which is available for
  immediate sale in its present condition, as to which the Company has a
  commitment to sell and in respect of which the sale is expected to be
  completed within a year from the date of classification. Furthermore, upon
  the adoption of the Standard, a change in the method of depreciation will be
  accounted for as a change in accounting estimate, that is prospectively,
  rather than by recording the cumulative effect of retrospective application,
  as was customary prior to the effective date.

F  39

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

|            |                                         
|----------- | ----------------------------------------
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP
  (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The cost of
  a fixed asset received in an exchange for another fixed asset will be
  measured at fair value unless the transaction lacks commercial substance or
  if the fair value of the fixed asset received or given up cannot be reliably
  measured. The Standard replaces the similar assets exception to fair value
  measurement with an exception based on a lack of commercial substance. An
  exchange transaction has commercial substance if it results in a change in
  the amount, timing and risk of future cash flows from the asset.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The cost of
  a fixed asset will also include an initial estimate of the costs of
  dismantling and removing the asset and restoring the site on which the asset
  is located, for which the Company has incurred an obligation. The estimated
  amount will be recorded at its present value using a discount rate reflecting
  the Companys risk.                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The
  transitional provisions of the Standard require retrospective application
  with restatement of comparative data, except in the following cases:                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | A company
  that on the effective date chooses the revaluation model for a class of fixed
  assets - the difference between the revalued amount and the carrying amount
  on the effective date will be recorded in a capital reserve in shareholders
  equity at that date. The company will not be required to restate comparative
  data.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                              
| | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | A company
  that has not included in the cost of fixed assets an initial estimate of the
  costs of dismantling and removing the asset and restoring the site on which
  the asset is located will be required to:                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | a)                                                                                                                                                                                                                                                                                                                                            | Measure the
  liability at the effective date, in accordance with generally accepted
  accounting principles;                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | b)                                                                                                                                                                                                                                                                                                                                            | Calculate
  the amount that would have been included in the cost of the relevant asset at
  the date on which the obligation was first incurred by discounting the
  aforementioned liability to the date of its initial incurrence using the
  companys best estimate of the historical discount rates adjusted for the
  risk relevant to that liability during the elapsed period;
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | c)                                                                                                                                                                                                                                                                                                                                            | Calculate
  the accumulated depreciation in respect of the amount of the discounted
  liability up to the effective date based on the assets useful life at that
  time;                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | d)                                                                                                                                                                                                                                                                                                                                            | The
  difference between the amount recorded in respect of the asset, pursuant to
  2) and 3) above, and the amount of the liability, pursuant to 1) above,
  should be recorded directly to retained earnings.                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                       
| | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | A company
  may elect to adopt the exemptions allowed by IFRS 1 in respect of fixed
  assets (including deemed cost exemption) as of the effective date.                                                                                                                                                                                     

F  40

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

|            |                                         
|----------- | ----------------------------------------
|NOTE 14:   | RECONCILIATION TO ISRAELI GAAP
  (Cont.)

| |                                                                                                                                                 |                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d)                                                                                                                                              | Companies
  that are not required and do not intend to adopt IFRS in respect of their
  financial statements are to adopt prospectively the Standards provisions
  regarding exchange of assets and depreciation of components.
| |                                                                                                                                                 |                                                                                                                                                                                                                                 
| | The Company
  believes that the adoption of the Standard will have no effect on its
  financial position, results of operations and cash flows.

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F  41

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