---

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# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) FOR 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, 2007

OR

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

OR

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

Commission File Number
0-28986

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

Israel
(Jurisdiction of incorporation or organization)

12 Amal Street, Afek Park
Rosh Ha'ayin 48092, 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



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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:
16,003,155 Ordinary Shares, par value NIS 0.5 per share

2,936,391 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.

o Yes    x No

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

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).

o  Yes                     x  No

2

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# TABLE OF CONTENTS

|       |          |                                                       | Page
|------ | -------- | ----------------------------------------------------- | ----
|
|
|
|
|PART I |          |                                                       |     
|      
|       | 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                            | 19  
|      
|       |          | A. History and Development of the Company             | 19  
|      
|       |          | B. Business Overview                                  | 20  
|      
|       |          | C. Organizational Structure                           | 30  
|      
|       |          | D. Property, Plants and Equipment                     | 30  
|      
|       | Item 4A. | UNRESOLVED STAFF COMMENTS                             | 31  
|      
|       | Item 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 31  
|      
|       |          | A. Operating Results                                  | 31  
|      
|       |          | B. Liquidity and Capital Resources                    | 39  
|      
|       |          | C. Research and Development, Patents and Licenses     | 41  
|      
|       |          | D. Trend Information                                  | 41  
|      
|       |          | E. Off-Balance Sheet Arrangements                     | 42  
|      
|       |          | F. Tabular Disclosure of Contractual Obligations      | 42  
|      
|       | Item 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 43  
|      
|       |          | A. Directors and Senior Management                    | 43  
|      
|       |          | B. Compensation                                       | 45  
|      
|       |          | C. Board Practices                                    | 45  
|      
|       |          | D. Employees                                          | 49  
|      
|       |          | E. Share Ownership                                    | 50  

3

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| | Item 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS          | 51
| | -------- | ---------------------------------------------------------- | --
|
| |          | A. Major Shareholders                                      | 51
|
| |          | B. Related Party Transactions                              | 53
|
| |          | C. Interests of Experts and Counsel                        | 55
|
| | Item 8.  | FINANCIAL INFORMATION                                      | 55
|
| |          | A. Consolidated Statements and Other Financial Information | 55
|
| |          | B. Significant Changes                                     | 56
|
| | Item 9.  | THE OFFER AND LISTING                                      | 56
|
| |          | A. Offer and Listing Details                               | 56
|
| |          | B. Plan of Distribution                                    | 57
|
| |          | 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                                       | 62
|
| |          | E. Taxation                                                | 62
|
| |          | F. Dividends and Paying Agents                             | 70
|
| |          | G. Statement by Experts                                    | 70
|
| |          | H. Documents on Display                                    | 70
|
| |          | I. Subsidiary Information                                  | 70
|
| | Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 70
|
| | Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     | 71

4

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|PART II
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5

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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" is to the United States Securities and Exchange Commission;
| | - | ---------------------------------------------------------------------

| |  | "NASDAQ"
is 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 28,
2008, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel,
was NIS 3.519 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 2005, 2006
and 2007, and the selected consolidated balance sheet data as of December 31, 2006 and
2007, 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, 2003 and 2004
and the selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005,
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)                                 |                                                           
|                                                       |                                                           
|Net income (loss)                                      |                                                           
|Deemed dividend associated with                        |                                                           
|Beneficial Conversion Feature                          |                                                           
|Income attributable to preferred                       |                                                           
|shareholders                                           |                                                           
|                                                       |                                                           
|Net income (loss) attributable to                      |                                                           
|ordinary shareholders                                  |                                                           
|                                                       |                                                           
|Net Basic and diluted income (loss)                    |                                                           
|attributable to ordinary shareholders                  |                                                           
|                                                       |                                                           
|Weighted average number of shares used in              |                                                           
|computing:                                             |                                                           
|Basic net earnings (loss) per share                    |                                                           
|attributed to ordinary shareholders                    |                                                           
|                                                       |                                                           
|Diluted net earnings (loss) per share                  |                                                           
|attributed to ordinary shareholders                    |                                                           

7

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

B. Capitalization and
Indebtedness

Not applicable.

C. Reasons for Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You should carefully consider the
following risks before deciding to purchase, hold or sell our shares. Set forth below are
the most significant risks, as identified by our management, but we may also face risks in
the future that are not presently foreseen. Our business, operating results or financial
condition could be materially and adversely affected by these and other risks. You should
also refer to the other information contained or incorporated by reference in this annual
report, before making any investment decision regarding our company.

# 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.

While we generated net income of $2.9
million in 2007, we incurred net losses in the preceding four years. 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 47% of our total revenues in 2005,
42% of our total revenues in 2006 and 38% of our total revenues in 2007. 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 several years, we
have identified periods of a slow-down in the OSS spending by communication service
providers as well as periods in which such spending rose. Therefore, 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.

In the past few years, the
communications service provider industry has undergone a period of consolidation and
mergers. Consolidation 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
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). Consolidation 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.

8

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In addition, in the past three 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 or
acquisition, whether friendly or not, is also a realistic scenario that could affect our
customers acceptance and our financial performance.

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

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 may also be subject to delay. We cannot control such 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;
| | - | ------------------------------------------

9

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| |  | 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
| | - | ---------------------------------------------------------

| |  | 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 products to support NGN architectures and services. We cannot
assure you that our NGN supporting modules and features will receive market acceptance. If
our NGN supporting 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 products 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 products 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 manufacturers, 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.

10

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---

Our business could be materially
adversely affected as a result of the risks associated with acquisitions and
investments.

As part of our growth strategy, we
have acquired Telesens LLC, a software house headquartered in the Ukraine, in January
2008, and we may continue to make acquisitions and/or invest in new technologies in the
future. The process of integrating an acquired companys business into our operations
and/or of investing in new technologies, may result in unforeseen operating difficulties
and large expenditures and may absorb significant management attention that would
otherwise be available for the ongoing development of our business. Other risks commonly
encountered with acquisitions include the effect of the acquisition on our financial and
strategic position and reputation, the failure of the acquired business to further our
strategies, the inability to successfully integrate or commercialize acquired technologies
or otherwise realize anticipated synergies or economies of scale on a timely basis, and
the potential impairment of acquired assets. Moreover, there can be no assurance that the
anticipated benefits of any acquisition or investment will be realized. Future
acquisitions or investments could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, and amortization expenses
related to intangible assets, any of which could have a material adverse effect on our
operating results and financial condition. There can be no assurance that we will be
successful in making additional acquisitions or effective in integrating such acquisitions
into our existing business.

Due to our new operation in
Ukraine we may be exposed to unknown risks.

Following the acquisition of our
subsidiary in Ukraine, we are engaged in operational, financial and legal activities in
Ukraine and in the CIS market. This environment is not familiar to us and we may not be
able to adjust our operations to this new market. This may expose us to unknown risks.

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 25 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | exchange
ratres fluctuations;
| | - | -----------------------------

| |  | 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.

11

---

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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 actually 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 relating to such services and customized products that were not
reimbursed by our customers up to the date of any termination. 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:

| |  | 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 Hewlett-Packard, Infovista, IBM (Micromuse, Vallent) and
Telecordia Technology;
| | - | ----------------------------------------------------------------------------------------------------------------------

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

| |  | systems
integrators who provide programming services to develop customer-specific applications,
such as LogicaCMG, 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, such as the NIS and the Euro. Since
our financial results are measured in dollars, fluctuations in exchange rates between
these currencies and the U.S. dollar could reduce our revenues and profitability. Our
results could also be adversely affected if we are unable to guard against currency
fluctuations in the future. Accordingly, we may enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in the exchange rate of the
dollar against the NIS, Euro or other currencies. These measures, however, may not
adequately protect us from future currency fluctuations.

12

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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.

Since December 2006, following the
resignation of our former Chief Executive Officer, Meir Lipshes is serving again as our
 Chief Executive Officer. In addition, during 2006 and 2007, 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 and 2007. 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.

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.

13

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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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

14

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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. In December 2007, we
reached a settlement agreement with the plaintiffs, which settlement is still subject to
approval of the court. Based on the settlement agreement, our directors and officers
insurance carrier is supposed to pay the entire settlement amount to the plaintiffs. In
the event of disapproval of the agreement by court, we may be required to pay damages and
other costs in excess of the amounts covered by our insurance, in which case, this action
could have a materially adverse effect on our results of operations and financial
condition.

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

The Sarbanes-Oxley Act of 2002
imposes certain duties on us. Our efforts to comply with the management assessment
requirements of Section 404, which apply to us for the first time for our financial
statements for 2007, have resulted in increased general and administrative expenses and a
devotion of management time and attention to compliance activities, and we expect these
efforts to require the continued commitment of significant resources. If we fail to
maintain the adequacy of our internal controls, we may not be able to ensure that we can
conclude on an ongoing basis that we have effective internal control over financial
reporting. In addition, we may identify material weaknesses or significant deficiencies in
our internal control over financial reporting. Failure to maintain effective internal
control over financial reporting could result in investigation and/or sanctions by
regulatory authorities, and could have a material adverse effect on our business and
operating results, investor confidence in our reported financial information, and the
market price of our ordinary shares.

We incorporate open source technology in our products which may expose us to liability and
have a material impact on our business, results of operations and financial condition.

Some of our products contain software
elements that utilize open source technologies. These technologies are licensed to us on
varying license structures, including the General Public License. This license and others
like it pose a potential risk to products in the event they are inappropriately
integrated. In the event that we have not, or do not in the future, properly integrate
software that is subject to such licenses into our products, we may be required to
disclose the source code of our own propriteray software to the public, which could enable
our competitors to eliminate any technological advantage that our products may have over
theirs. Any such requirement to disclose our source code or other confidential information
related to our products could, therefore, materially adversely affect our competitive
advantage and impact our business, results of operations and financial condition.

Conditions and changes in the
national and global economic and political environments may adversely affect our business,
operating results and financial condition.

Adverse economic conditions in
markets in which we operate can harm our business. If economic growth in the United States
and other countries economies is slowed, many customers may delay or reduce
technology purchases. This could result in reductions in sales of our products, longer
sales cycles, slower adoption of new technologies and increased price competition. This
would increase our credit risk exposure and cause delays in our recognition of revenues on
future sales to these customers. If global economic and market conditions, or economic
conditions in the United States or other key markets deteriorate, we may experience
material impacts on our business, operating results, and financial condition.

We may be required to pay additional taxes due to tax positions that we undertook.

We, as a global company, are exposed
to various tax jurisdictions. We may be exposed to tax payments and related expenses due
to tax positions that we have taken regarding filing of various tax returns or in cases
where we determined not to file tax returns.

In 2008, growth may slow due to
real-estate and financial issues leading to recession fears.

In 2008, growth may slow due to
real-estate and financial issues leading to recession fears. More specifically, IT
expenditure in the US may decrease somewhat on a year-to-year comparison with estimates at
4% growth. Therefore, if global conditions deteriorate, and companies in our target
markets reduce capital expenditures, we may experience a reduction in sales, as well as
downward pressure on the price of our products. In addition, if the market is flat and
customers experience low visibility we may not be able to increase our sales. Each of the
above scenarios would have a material adverse effect on our business, operating results
and financial condition.

15

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# 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 election in 2006 of representatives of the Hamas movement
to a majority of the seats in the Palestinian Legislative Council and its subsequent
seizure of control of the Gaza strip have created additional unrest and
uncertainty in the region. Further, since mid- 2007, Hamas and other Palestinian
movements have been launching, from time to time, missile strikes from
the Gaza strip into southern Israel and there have been 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 countries 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. Similarly, the U.S. dollar cost of our operations in Israel will increase
to the extent increases in the rate of inflation in Israel are not offset by a devaluation
of the NIS in relation to the U.S. dollar.

A substantial amount of our revenues
is denominated in U.S. dollars or is 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.

Similarly, we are exposed to the risk
that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the
U.S. dollar. In that event, the dollar cost of our operations in Israel will increase and
our dollar-measured results of operations will be adversely affected. During 2005, 2006
and 2007, the inflation adjusted NIS appreciated against the U.S. dollar, which raised the
dollar cost of our Israeli operations. We cannot predict whether in the future the NIS
will appreciate against the U.S. dollar or vice versa. Any increase in the rate of
inflation in Israel, unless the increase is offset on a timely basis by a devaluation of
the NIS in relation to the U.S. dollar, will increase labor and other costs, which will
increase the dollar cost of our operations in Israel and harm our results of operations.

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. The tax benefits we
expect to receive will be applicable only when we have taxable income.

16

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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 products
developed with the grants received. Since 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, Tzafrir & 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:

| |  | the
judgement is enforceable in the state in which it was given;
| | - | ----------------------------------------------------------------

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

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

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

17

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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, the United States 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 2007, 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.

18

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

As of March 18, 2008, 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.

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

As of March 18, 2008, 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 18, 2008, 2,936,391 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 12 Amal Street, Afek Park, Rosh
Haayin 48092, 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.

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.

19

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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 at an exercise price of $2.50 per share, subject to adjustments.

During 2007, our capital expenditures
totaled approximately $4.3 million (compared to $1.7 million during 2006 and $1.2 million
during 2005), which was principally used for purchasing computers and peripheral equipment
(including software and development tools) and motor vehicles in 2005 and 2006, and the
improvement of our leased offices due to our relocation to Rosh Haayin of
approximately $2.3 million in 2007. All of the above expenditures were paid from
internally generated funds.

In January 2008, we acquired Telesens
LLC, a software house headquartered in the Ukraine, by way of a stock purchase agreement
between us and the selling shareholders. Telesens, with an annual turnover of over $2
million and with presence in the CIS (Commonwealth of Independent States) market, has
approximately 100 employees and has been developing, implementing and promoting software
solutions and related professional services for the telecommunications market since 1998.  Under the terms of the stock purchase
agreement, the aggregate purchase price is up to $2.7 million, subject to downward
adjustments related to, amongst other, Telesens actual 2007 annual turnover and
certain performance parameters. The purchase price is to be paid by us in cash over a
three-year period as follows: (1) the first payment, of $1.0 million, was paid at closing;
(2) 70.0% of the balance of the purchase price to be paid in February 2009; and (3) the
remainder to be paid in February 2010. We have pledged Telesens shares, representing 24%
of the issued and outstanding Telesens shares, in favor of one of the selling shareholders
to secure the two deferred payments. In addition, as part of the transaction, we entered
into employment and consulting agreements with one of the selling shareholders, pursuant
to which such shareholder will be entitled to, among others, special bonuses upon the
achievement by Telesens of certain performance parameters.

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 16 years of experience delivering our products and solutions to
industry leading companies in more than 25 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.

20

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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.

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 have been 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
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 three 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.

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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 and innovative 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. This includes leveraging our acquisition of Telesens in early 2008 to
penetrate the CIS market and leveraging recent relationships with system integrators to
extend our sales world-wide.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 16 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 with combination of web and .net
clients. 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| |  | Netrac
FaM 10 Cruiser, which was recently released, is a major version of our fault
management solution. It features a next generation fault management solution with a
comprehensive graphical interface that enables efficient network management.  The
product was redesigned to support network management concepts which correspond to recent
service provider needs and business processes, and now provides operators and managers
with greater network-wide visibility, which allows improved decision-making capabilities
in managing increasingly complex consolidated networks.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. NetSync produces discrepancy reports that detail any inconsistencies
between the inventory database and the actual network and allow an automatic
reconciliation of the inventory database.

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.

25

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

| |  | Activate automatically activates services end-to-end across multi-vendor, multi-technology
networks. Activate replaces manual processes with automated activities, thus eliminating
the problems that tend to plague manual activation and reducing service activation times,
and performs rollback in case of an activation failure. 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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, 2007, our
professional services personnel consisted of 158 people operating in Israel, 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;
| | - | -----------------

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| |  | performance
tuning;
| | - | -------------------

| |  | database
administration support;
| | - | --------------------------------

| |  | communications
administration support; and
| | - | ------------------------------------------

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

# 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 25 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. Recently, we have
completed the acquisition of our Ukrain subsidiary, Telesens LLC, through which we intend
to operate in the CIS market. 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 18 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. Recently, our management decided to operate through Regional
Business Units, or RBUs, including Asia & India, Western Europe, Eastern & Central
Europe, Israel and Australia & New Zealand. The main objectives of this strategy is to
impose end-to-end responsibility (sales to delivery) on the RBUs mainly with respect to
sales, marketing and delivery of projects, and to increase the commitment of each of the
RBU managers to achive our targets and goals.

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, 2007, we employed
35 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.

See also Item 5 
Operating and Financial review and prospects  Results of Operations
regarding breakdown of our revenues by geographical area.

27

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# Research and Development

Our research and development efforts
are currently focused on developing our supporting 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, 2007, 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| |  | 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 $9.1 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. Gross research
and development expenses were approximately $9.4 million, or 20.5% of our revenues, for
the year ended December 31, 2007. 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 2007
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 2005, we received a grant of
approximately $537,000 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 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. In 2007, we did not receive any grants
from the Chief Scientist.

We did not receive any grants from
the European Union since 2005 and we are not required to pay any royalties for past grants
received 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) .

As of December 31, 2007, 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.

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# 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 five 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

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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:

| |  | 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, as relocated in December 2007 and in which our corporate
headquarters are located, comprise approximately 48,160 square feet of office space, and
are located in Rosh Haayin, Israel. The lease of such facilities is scheduled to
expire in September 2014, and the annual rent is approximately $825,000.

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, 2009.

30

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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
1,560 square feet in South Africa and approximately 430 square feet in Sweden.

Our leasing expenses for all of our
said facilities were approximately $1.4 million in 2007. We expect to pay total leasing
expenses for our facilities of approximately $1.4 million in 2008.

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.

|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
product revenues. Our usual sale to a new customer ranges from $0.5 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
18 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 3.8% of
our revenues in 2005, approximately 10.1% of our revenues in 2006 and approximately 12.6%
of our revenues in 2007. 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).

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# Our Functional Currency

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. Transactions and balances denominated in dollars are presented at their original
amounts. Accordingly, we remeasure monetary accounts maintained in currencies other than
the U.S. dollar using the foreign exchange rate at the balance sheet date in accordance
with Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation (SFAS No. 52). 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 substantial amount 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 that the recent devaluation of
the dollar against the NIS will result in an increase in the the dollar cost of our
operations in Israel. While we expect to partially mitigate this exposure by monitoring
our expenses, including benefiting from the relatively low labor costs of our new Ukraine
subsidiary that was acquired in 2008, there is no assurance that the dollar cost of our
operations in Israel will not continue to increase.

# 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 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.

The percentage of completion method
requires us to make estimates and assumptions regarding the resources and time required to
fulfill the contracts obligations. We rely on our experience from other projects in
making these estimates, and, in addition, use our internal project management and
financial systems to track and manage the projects.

Employees and project managers
regularly submit updates to these systems, which are then used by executive management to
monitor the projects and revise the estimates, if necessary. Historically, our estimates
have been indicative of our actual results; however, there have been a few cases where we
had to adjust assumptions, primarily regarding work effort.

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, 2005, 2006 and 2007, 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.

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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.

Tax Accounting

We are subject to income taxes in
Israel, the U.S.and numerous foreign jurisdictions. Significant judgment is required in
evaluating our uncertain tax positions and determining our provision for income taxes. We
must make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of tax credits,
benefits, and deductions, and in the calculation of certain tax assets and liabilities,
which arise from differences in the timing of recognition of revenue and expense for tax
and financial statement purposes, as well as the interest and penalties related to these
uncertain tax positions. Significant changes to these estimates may result in an increase
or decrease to our tax provision in a subsequent period.

Effective January 1, 2007, we adopted
Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109"(FIN 48). FIN 48 contains a
two-step approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. The first step is
to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon settlement.

We must assess the likelihood that we
will be able to recover our deferred tax assets. If recovery is not likely, we must
increase our provision for taxes by recording a valuation allowance against the deferred
tax assets that we estimate will not ultimately be recoverable. We believe that full
valuation allowance should be provided against our deferred tax assets recorded on our
consolidated balance sheets. Although we believe we have adequately reserved for our
uncertain tax positions, no assurance can be given that the final tax outcome of these
matters will not be different. We will adjust these reserves in light of changing facts
and circumstances, such as the closing of a tax audit or the refinement of an estimate. To
the extent that the final tax outcome of these matters is different than the amounts
recorded, such differences will impact the provision for income taxes in the period in
which such determination is made.

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 (APB 25). 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(SFAS 123(R)), 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.

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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, 2007, 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.

Impact of recently issued
accounting standards

In December 2007, the FASB issued
SFAS 141(R), Business Combinations (SFAS No. 141(R)). This Statement replaces
SFAS 141, Business Combinations (SFAS No. 141), and requires an acquirer to
recognize the assets acquired, the liabilities assumed, including those arising from
contractual contingencies, any contingent consideration, and any noncontrolling interest
in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer
in a business combination achieved in stages (sometimes referred to as a step acquisition)
to recognize the identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values (or other amounts
determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)s requirement to
measure the noncontrolling interest in the acquiree at fair value will result in
recognizing the goodwill attributable to the noncontrolling interest in addition to that
attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109), to require the acquirer to recognize changes in the amount of
its deferred tax benefits that are recognizable because of a business combination either
in income from continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances.

It also amends SFAS 142, Goodwill and
Other Intangible Assets (SFAS No. 142), to, among other things, provide
guidance on the impairment testing of acquired research and development intangible assets
and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The Company does
not expect that the adoption of SFAS 141R will have any impact on its consolidated
financial statements.

In December 2007, the FASB issued
SFAS 160 (SFAS No. 160), Noncontrolling Interests in Consolidated Financial
Statements. SFAS 160 amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest.
SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parent
owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 will
have significant impact on its consolidated financial statement.

In September 2006, the FASB issued
Statement No. 157, Fair value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS 157
applies under other accounting pronouncements that require or permit fair value
measurements. The provisions of SFAS 157 are effective for the Company beginning January
1, 2008. The FASB issued a FASB Staff position to defer the effective date of SFAS 157 for
one year for all nonfinancial assets and nonfinancial liabilities, except for those items
that are recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company does not except the adoption will have material impact on its
consolidated financial statements.

In February 2007, the FASB issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 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. The provisions of SFAS 159 are effective for the Company
beginning January 1, 2008. The Company does not expect the adoption of SFAS 159 will have
an impact on its consolidated financial statements.

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On December 21, 2007 the SEC staff
issued Staff Accounting Bulletin No. 110 (SAB 110), which, effective January 1, 2008,
amends and replaces SAB 107, Share-Based Payment.  SAB 110 expresses the views of the
SEC staff regarding the use of a simplified method in developing an estimate
of expected term of plain vanilla share options in accordance with FASB
Statement No. 123(R), Share-Based Payment.  Under the simplified method,
the expected term is calculated as the midpoint between the vesting date and the end of
the contractual term of the option.

The use of the simplified
method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to
expire on December 31, 2007.  SAB 110 extends the use of the simplified
method for plain vanilla awards in certain situations.  The SEC staff
does not expect the simplified method to be used when sufficient information
regarding exercise behavior, such as historical exercise data or exercise information from
external sources, becomes available.  We are currently assessing the potential impact
that the adoption of SAB 110 could have on our financial statements.

# 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:

|                                                      | 2005 | 2006 | 2007
|----------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|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 income (loss)                               |      |      |     
|Other Income                                          |      |      |     
|Financial income, net                                 |      |      |     
|                                                      |      |      |     
|Income (Loss) before income taxes                     |      |      |     
|Income taxes (benefit)                                |      |      |     
|                                                      |      |      |     
|Net Income (Loss)                                     |      |      |     
|                                                      |      |      |     
|Deemed dividend associated with BCF                   |      |      |     
|                                                      |      |      |     
|Net Income (Loss) attributable to common shareholders |      |      |     

35

---

---

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                     |                         
|North America              |                         
|Europe                     |                         
|Australia                  |                         
|South America              |                         
|Far East                   |                         
|South Africa               |                         
|Total                      |                         
|                           |                         

# Comparison of 2005, 2006
and 2007

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 decrease in our product revenues
resulted mainly from the weakness in the amount of new orders received from our customers
in the second half of 2006, which decreased our product revenues in the first two quarters
of 2007. We believe such weakeness is primarily attributed to the consolidation trend of
our customers. Service revenues increase sequentially in 2006 and 2007 primarily due to
additional maintenance contracts signed with certain customers following successful
deployment of our systems in previous years and expiration of the contractual warranty
period (the stabilization period).

The increase in our product revenues
and in our revenues from services in 2006 compared to revenues in 2005 was primarily
attributable to increased expenditures by communication service providers which resulted
in additional orders for our products in 2005.

Cost of Revenues

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

Cost of product sales 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 previous years.

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 2005 in
connection with the impairment of capitalized software development costs of our Netrac 2
and ServiceView 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).

36

---

---

The total cost of revenues decreased
to $21.0 million in 2007 from $24.4 million in 2006, resulting from our implementation of
a cost reduction plan, which included the termination of employees and measures designed
to improve the efficiency of our project deleivery process. This cost reduction was
reflected mainly in cost of product sales in 2007. See also the discussion in Gross
Profit below.

The total cost of revenues increased
from $22.4 million in 2005 to $24.4 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.

Gross Profit

|                                               | Year 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 |                         

Total gross profit increased to $24.9
million in 2007 from $21.8 million in 2006, or from 47.2% to 54.2%. The increase in gross
profit resulted from our implementation of a cost reduction plan, including the
improvement of project delivery efficiency, and a mixture of projects and services in 2007
that were more profitable compared to those provided during 2006.

Total gross profit increased to $21.8
million in 2006 from $20.8 million (excluding impairment 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

|                              | 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.

37

---

---

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

Gross research and development
expenditures decreased 3.0% to $9.4 million in 2007, from $9.7 million in 2006. The
decrease in 2007 was primarily due to implementation of a cost reduction plan and more
focused research and development plans.

Gross research and development
expenditures increased 5.4% 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, offerings and infrastructures. For further information, see below under the
heading Research 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 $7.9 million or 17.1% of total
revenues in 2007, $10.2 million or 22.1% of total revenues in 2006 and $12 million or
27.8% of total revenues in 2005. The continuing decrease in selling and marketing expenses
in 2007 and 2006 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 increased 6.3% 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. General and administrative
expenses increased 4.5% to $7.0 million or 15.1% of our total revenues in 2007, from $6.7
million, or 14.5% of total revenues in 2006. The slight increase in the past three years
is associated with our decision to maintain the critical mass necessary to manage and
support our global business, which entailed, among others, an increase in legal expenses
associated primarily with litigation as described under the heading Item 8A
 Legal Proceedings.

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
$2.2 million in 2007 from $0.7 million in 2006 primarily due to (1) the sale of marketable
securities we held during the third quarter of 2006, that were subject to impairment and
therefore offseted our financial income and (2) the devaluation of the US dollar againt
the Euro and the NIS. Our financial income increased to $0.7 million in 2006 from $0.2
million in 2005 due to impairment of marketable securities and the devaluation of the Euro
and British Pound against the US Dollar accrued in 2005.

# Research and Development

We conduct our research and
development operations mainly 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, or the Chief Scientist, the BIRD
Foundation and the European Union. We did not apply for such funds in 2006 and 2007.The
Chief Scientist provided grants of approximately $537,000 for the year ended December 31,
2005 and approximately $54,000 for the year ended December 31, 2006. We did not obtain any
grants during 2007. Of our total research and development expenses, these grants accounted
for 5.9% in 2005 and 0.6% in 2006. These grants were 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. 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 $9,000 for the year ended December 31, 2005,
approximately $2,000 for the year ended December 31, 2006, and approximately $560 for the
year ended December 31, 2007. We have not received grants from the BIRD Foundation since
1996.

38

---

---

# Corporate Tax Rate

Israeli companies are generally
subject to Corporate Tax on their taxable income at the rate of 29% for the 2007 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: 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 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.

In 2005, 2006 and 2007, we provided
for a full valuation allowance against our deferred tax assets in the amount of $7.1
million, $4.7 million and $4.5 million, respectively, because we did not believe that it
is more likely than not that such deferred tax assets will be realized.

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

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, 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 has not had a material
effect on our results of operations.

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

B. Liquidity and Capital
Resources

We had cash and cash equivalents,
marketable securities and bank deposits of $36.6 million at December 31, 2005, $32.5
million at December 31, 2006 and $33.5 million at December 31, 2007.

Our operating activities provided
(used) cash of $4.7 million for the year ended December 31, 2005, $(2.6) million
for the year ended December 31, 2006 and $3.7 million for the year ended December 31,
2007.

39

---

---

Our capital expenditures were
approximately, $1.1 million in 2005, $1.7 million in 2006 and $4.3 million in 2007. Our
capital investments for improvements of leased premises were $0.60 million in 2005, $0.02
million in 2006 and $2.11 million in 2007.

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. We invest our cash and cash
equivalents 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 2008 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
Market Risk.

# 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 may have retroactive effect, 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 a
notification to the Office of the Chief Scientist a portion of up to 10% of the
manufacturing volume may be performed outside of Israel. Upon the approval of the Chief
Scientist, a greater portion of the manufacturing volume may be performed outside of
Israel, 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 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. The increased royalty rate and repayment amount
will be required in such cases.

40

---

---

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 special 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 123 full-time
employees in research and development. 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. Gross research and development
expenses were approximately $9.4 million, or 20.5% of our revenues, for the year ended
December 31, 2007. 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.

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 several years, we have identified periods of a slow-down in
the OSS spending by communication service providers as well as periods in which such
spending rose. Therefore, 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.

41

---

---

The communications service provider
industry is 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 three 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 or
acquisition, whether friendly or not, is also a realistic scenario that could affect our
customers acceptance and our financial performance.

In the past few years, we also
identified a continued requirement in the OSS market for service management solutions.
This trend, along with customers requirements have led us to integrate service and
customer oriented features capabilities and information into our product portfolio. By
adding those features we are now able to provide better business oriented customer and
service centric solutions to our customers.

During 2007, we have seen increased
interest from customers and potential customers in performance solution and the use of
performance solutions to manage network and service level availability. This trend, which
we believe is associated with the nature of next generation networks and their complexity,
has increased the relative portion of our performance systems solutions within our current
and potential business.

In 2008, growth may slow due to
real-estate and financial issues leading to recession fears. More specifically, IT
expenditure in the US may decrease somewhat on a year-to-year comparison with estimates at
4% growth. Therefore, if global conditions deteriorate, and companies in our target
markets reduce capital expenditures, we may experience a reduction in sales, as well as
downward pressure on the price of our products. In addition, if the market is flat and
customers experience low visibility we may not be able to increase our sales. Each of the
above scenarios would have a material adverse effect on our business, operating results
and financial condition.

E. Off-Balance Sheet
Arrangements

We are not a party to any material
off-balance sheet arrangements. In addition, we have no unconsolidated special purpose
financing or partnership entities that are likely to create material contingent
obligations.

F. Tabular Disclosure of
Contractual Obligations

The following table sets forth, as of
December 31, 2007, our known contractual obligations by type of obligation and for the
periods indicated:

|                                                      | Payment due by period (in thousands US$)
|----------------------------------------------------- | ----------------------------------------
|
|
|
|
|Long-Term Debt                                        |                                         
|Operating Lease Obligations (facilities and vehicles) |                                         
|Uncertain Income Tax Positions                        |                                         
|Accured Serverance Pay                                |                                         
|                                                      |                                         
|Total                                                 |                                         

In addition, we obtained performance
guarantees in favor of certain customers from several banks in Israel amounting to $1.8
million and $3.1 million for the years ended December 31, 2006 and 2007, respectively. We
obtained other guarantees in favor of facility and car leasers from banks in Israel
amounting to $0.06 million and $0.4 million for the years ended December 31, 2006 and
2007, respectively.

42

---

---

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.

|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           | 62  |  | Chairman of the Board, and Chief Executive Officer   
|Meir Dvir* (1)(2)      | 77  |  | Director                                             
|Julie Kunstler*+(1)(2) | 52  |  | Director                                             
|Doron Zinger*+(1)(2)   | 55  |  | Director                                             
|Ilan Toker             | 39  |  | Director                                             
|Israel Ofer            | 53  |  | Chief Operational Officer and Chief Financial Officer
|Shahar Ebel            | 38  |  | Chief Technology Officer                             
|Duby Yoely             | 47  |  | Vice President Marketing and Solution Engineering    
|Asaf Shirazi           | 39  |  | Vice President Reaserch and Development              
|Shuki Rozanski         | 42  |  | Vice President Business Development                  

* 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

Meir
Lipshes has served as our 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 & Finance 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 was also a venture partner
(Telecommunications) with Giza Venture Capital Fund, and 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.

43

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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.

Israel
Ofer, Chief Financial Officer from 1996, and Chief Operational Officer from 2008,
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.

Shachar
Ebel, Chief Technology Officer, joined us in March 2004, leveraging over 14 years of
experience in the network management and OSS arena. Mr. Ebel is in charge of our product
management, including the product and solutions roadmap, company strategy and directions
of future technologies. Prior to joining us, Mr. Ebel held various positions in the OSS
industry, including as Chief System Engineer at Ofek, a NGN telecom professional services
group, and System Engineering Department Manager for OSS solutions at Telrad Networks. Mr.
Ebel received an MBA and a B.Sc in Electronics Engineering 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 he is 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 Communications Company
Ltd., 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.

Asaf
Shirazi, Vice President, Research and Development from 2006, joined us in 2003,
serving in several management roles in our company. Prior to joining us, Mr. Shirazi held
senior R&D management positions at Verint, a leading provider of analytic
software-based solutions for the security and business intelligence markets, and at Ofek,
the Israeli Air Force software development unit which designs military software. Mr.
Shirazi holds a BSc (double major) and MSc degree in Computer Science from The
Technion-Israel Institute of Technology.

Joshua
(Shuki) Rozanski rejoined us in January 2008 as Vice President, Business Development,
after a brief one-year hiatus. Mr. Rozanski brings over 15 years of expertise in sales,
marketing and business development within the telecommunication and hitech industries. In
the past, Mr. Rozanski served as our AVP Sales, managing the company sales team in EMEA,
and as our Director of Sales Western Europe. Before joining us in 2000, Mr. Rozanski
served in senior marketing and sales positions at ECI Telecom in Israel from 1996 to 2000,
including as Director of Marketing & Sales, West Europe. Mr. Rozanski also served as
Senior Investment Analyst at Genesis Management and Investments and Supervisor of
large-scale electronic projects for the Israeli Air Force. Mr. Rozanski holds a B.Sc in
Electronics Engineering from the Jerusalem College of Technology and MBA from Bar Ilan
University.

Additional Information

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 Chief Executive
Officer. In addition, during 2006 and 2007, 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 and 2007. In February 2008, Lior Bergman, who served as our director
since December 2004, has stepped down from our board of directors.

44

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

B. Compensation

Compensation to Directors:

In 2007, our directors, other than
Meir Lipshes, received annual compensation of approximately $18,750 each and approximately
$500 (approximately $250 per telephone meetings) per board meeting or per board committee
meeting in which they participate, all linked to the Israeli Consumer Price Index, or CPI.
We paid our directors, other than Meir Lipshes, an aggregate amount of approximately
$94,000 in 2007, out of which $12,000 was paid in respect of their services in 2006. Our
directors, other than Meir Lipshes, will continue to receive the aforesaid compensation in
2008.

The total compensation paid to Meir
Lipshes during 2007 was $415,084 compared to $200,279 in 2006. The total amount of
compensation paid to Meir Lipshes during 2006 and 2007 includes pension, retirement and
similar benefits. We pay Meir Lipshes a monthly management fee of approximately NIS
100,000 (approximately $26,000 according to the exchange rate prevailing on December 31,
2007) linked to the CPI, plus applicable social benefits.

In November 2004, our board of
directors authorized the grant of options to Meir Lipshes to purchase up to an additional
75,000 ordinary shares, at an exercise price of $3 per share. The option grant to Meir
Lipshes was approved by our shareholders in December 2004. All of the options granted to
Meir Lipshes have vested. These 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. The
grant was approved by our shareholders in December 2006. However, one of our directors,
Ilan Toker, decided to waive his right to these options. The options granted to the
directors in 2006, in an aggregate amount of 60,000, vest over a period of 3 years and
shall expire in November 2011.

Compensation to executive
officers:

Total compensation during 2007 to the
members of senior management (consisting of 10 persons) amounted to approximately $1.7
million. This amount includes approximately $0.4 million set aside by us to provide
special bonuses, pension, retirement and similar benefits. These figures for compensation
include approximately $0.9 million paid in 2007 to members of senior management whom we no
longer employ or which no longer serve as executive officers.

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.

For details about grant of stock
options to our directors and executive officers, see also Item 6E  Share
Ownership below.

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 the Company to borrow or secure the payment of any
sum or sums of money for the purposes of the Company, at such times and upon such terms
and conditions in all respects as it thinks fit, and, in particular, by way of 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.

45

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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.

46

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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.

47

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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
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 and Julie Kunstler.

# Directors Service
Contracts

Except for Mr. Lipshes, as described
in Item 6B.  Directors, Senior Management and Employees 
Compensation, there are no arrangements or understandings between us and any of
our current directors or executive officers for benefits upon termination of service.

# 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 10B 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.

48

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# Related-Party
Transactions

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

| |  | the
office holders 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 ofemployees by category ofactivity | Research&Development&projects | Sales and marketing | Finance andadministration | Total
|------------------------------------------------------ | ----------------------------- | ------------------- | ------------------------- | -----
|2007                                                   | 274                           | 35                  | 43                        | 352  
|2006                                                   | 277                           | 42                  | 42                        | 361  
|2005                                                   | 287                           | 41                  | 46                        | 374  

|Approximate numbers ofemployees by geographiclocation | Israel | North America | Europe | Asia | Africa | Australia | Total
|----------------------------------------------------- | ------ | ------------- | ------ | ---- | ------ | --------- | -----
|2007                                                  | 241    | 77            | 11     | 12   | 7      | 4         | 352  
|2006                                                  | 247    | 87            | 11     | 5    | 6      | 5         | 361  
|2005                                                  | 254    | 91            | 13     | 6    | 6      | 4         | 374  

* The numbers shown in this table do
not reflect approximately 111 employees that were added to our workforce as a result of
the acquisition of Telesens in January 2008.

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.

49

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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, social contributions and other conditions of employment. We generally provide our
employees with benefits and working conditions above the required minimums.

Israeli labor laws and regulations
are applicable to all of our employees in Israel. The laws principally concern matters
such as paid annual vacation, paid sick days, the length of the workday, pay for overtime,
insurance for work-related accidents, severance pay and other conditions of employment.
Israeli law generally requires severance pay, which may be funded by managers
insurance described below, upon the retirement or death of an employee or termination of
employment without cause as defined in the law. 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 17.7% of wages up to a specified
amount, of which the employee contributes approximately 67.9% and the employer contributes
approximately 32.1%.

We regularly contribute to a
managers insurance fund on behalf of our Israeli 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 18, 2008,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
| | --------------------------------------------------------------------- | ---------------------- | -----------------------------
|
|
|
|
| | Meir Lipshes (1) (2)                                                  |                        |                              
| | All other directors and executive officers, as a group (consisting of |                        |                              
| | 11 persons, other than Meir Lipshes) (3)                              |                        |                              

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

|(1) | Includes
options exercisable into 75,000 ordinary shares, at an exercise price
                    of $3 per share, which expire on October 15, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As
of March 18, 2008, 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 17, 2008, Meir Lipshes, the
Chairman of our board of                     directors and our acting Chief Executive
Officer, owned approximately 6.4% of                     Team Computers shares. Mr.
Lipshes disclaims any beneficial interest in                     the ordinary shares
owned by Team Software or Team Computers in us.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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# 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 18, 2008, all the granted options, 108,000 options to
purchase ordinary shares at exercise prices ranging from $6.0 to $8.0 per share (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), are fully vested under the Old Plans.

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.

2007 Grants

In March 2007, we granted options
exercisable into 18,000 ordinary shares at exercise prices of $3.0 per share. We did not
grant any options to our directors in 2007.

Total Outstanding Options

The following table sets forth, as of
March 30, 2008, 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
|----------------- | ----------------------- | ---------------
|
|
|
|
|                  | 94,000                  |                
|                  | 75,000                  |                
|                  | 180,000                 |                
|                  | 242,000                 |                
|                  | 29,000                  |                
|                  | 20,000                  |                
|                  | 50,000                  |                
|                  | 18,000                  |                
|                  | 25,000                  |                
|                  |                         |                
|                  | Total: 733,000          | **             

|* | 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 505,670 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 18, 2008:

51

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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) |                                |                                                 |                                 | 4,379,142                                         |                                     |                                                
|                           |                                |                                                
|Neuberger & Berman (4)(5)  |                                |                                                 |                                 | 1,180,332                                         |                                     |                                                
|                           |                                |                                                
|Rima Management, LLC and   |                                |                                                
|Richard Mashaal (6)        |                                |                                                 |                                 | 1,104,705                                         |                                     |                                                
|                           |                                |                                                
|S Squared Technology (7)   |                                |                                                 |                                 | 363,637                                           |                                     |                                                

* Based on an aggregate of 16,003,155
ordinary shares outstanding as of March 18, 2008.** Based on an aggregate of 2,936,391 preferred
shares outstanding as of March 18, 2008.*** 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
18,939,546 ordinary and preferred shares outstanding as of March 18, 2008.

|(1) | Shlomo
Eisenberg holds 744,836 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
13.3% 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 47.6% 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 17, 2008, Meir Lipshes, the Chairman of our board of                     directors
and CEO, owned approximately 6.4% of Team Computers shares. Mr.
                    Lipshes disclaims any beneficial ownership. As of March 18, 2008,
Meir Lipshes                     owned approximately 2.5% 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, 2007, based on a Schedule 13G filed by Rima Management, LLC
                    and Richard Mashaal with the SEC on February 13, 2008. The Schedule
13G                     indicates that Rima Management, LLC and Richard Mashaal share
voting and                     dispositive power as to the 1,332,005 ordinary shares
(comprised of 227,300                     Series A Preferred Shares and 90,920 warrants
to purchase ordinary shares which                     are exercisable within 60 days,
with an exercise price of $2.5 per share) .
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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|(7) | As
of December 31, 2007, based on a Schedule 13G/A filed by S Squared
                    Technology, LLC with the SEC on January 17, 2008. 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.

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 13, 2008, approximately 56% of all Series A Preferred Shares issued have been
converted into ordinary shares.

# Record Holders

As of March 13, 2008, there were
approximately 38 record holders of our ordinary shares, of which 19 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 75% of our outstanding ordinary shares as of said date).

As of March 13, 2008, 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 $93,000 in 2005 and $502,000 in 2007. We
have not recorded any commissions in 2006.

53

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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 $169,000 in 2005, $160,000 in 2006 and $164,000 in 2007. 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 $398,000 in 2005, $352,000 in 2006 and $437,000 in 2007. 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 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 effective until
May 2007.

# 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 2005, $1.2 million during 2006 and $1.4 million during 2007. We extended
the lease until December 20, 2007, when we relocated to new facilities of approximately
48,160 square feet of office space in Rosh Aaayin, Israel, which are leased from an
unaffiliated party.

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 but continued to lease it, and as such, we
were 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.

54

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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

In November 2002, we received a
letter from a major customer notifying us of the termination of its agreement with us 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. As we
believed that this customer terminated the agreement unlawfully, and in violation of the
termination provisions set out in the agreement, we commenced legal proceedings against
this customer. In July 2007, we and the customer entered into a settlement and release
agreement under which we received from the customer £1.7 million (equates to
approximately $3.45 million) (without admission of liability by either party) and both
parties released their claims against each other.

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 which motion was denied with respect to us by
order dated May, 2007. In December 2007, we reached a settlement agreement with the
plaintiffs, which settlement is still subject to approval of the court. Based on the
settlement agreement, our directors and officers insurance carrier is supposed to pay the
entire settlement amount to the plaintiffs. In the event of disapproval of the agreement
by court , we may be required to pay damages and other costs in excess of the amounts
covered by our insurance, in which case, this action could have a materially adverse
effect on our results of operations and financial condition.

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
trial took place in September 2007 and we are now in a process of submitting written
summations.

55

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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. In April 2007, we reached a settlement and release
agreement under which we paid Embarcadero $90,000 (without admission of liability) and
both parties released their claims against each other.

# 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, 2007, 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
|----------------------------------- | ---- | ---
|
|
|
|
|2003:                               |      |    
|Full Year                           |      |    
|2004:                               |      |    
|Full Year                           |      |    
|2005:                               |      |    
|Full Year                           |      |    
|2006:                               |      |    
|Full Year                           |      |    
|                                    |      |    
|First Quarter                       |      |    
|Second Quarter                      |      |    
|Third Quarter                       |      |    
|Fourth Quarter                      |      |    
|                                    |      |    
|2007:                               |      |    
|Full Year                           |      |    
|                                    |      |    
|First Quarter                       |      |    
|Second Quarter                      |      |    
|Third Quarter                       |      |    
|Fourth Quarter                      |      |    
|                                    |      |    
|Most Recent Six Months              |      |    
|September 2007                      |      |    
|October 2007                        |      |    
|November 2007                       |      |    
|December 2007                       |      |    
|January 2008                        |      |    
|February 2008                       |      |    
|March 2008 (through March 28, 2008) |      |    

56

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On March 28, 2008, the last reported
closing sale price of our ordinary shares on the NASDAQ National Market was $1.93 per
share.

B. Plan of Distribution

Not applicable.

C. Markets

Our ordinary shares are quoted on the
NASDAQ National Market under the symbol TTIL.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

|Item 10. | ADDITIONAL INFORMATION
|-------- | ----------------------

A. Share Capital

Not applicable.

B. Memorandum and
Articles of Association

Our Memorandum of Association and
Articles of Association were amended in October 2000, and on December 29, 2004 and our
Articles of Association were further amended on December 27, 2005 and on August 10, 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.

57

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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.

# 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.

# Share Capital

Our authorized share capital is NIS
18,318,195.50 divided into 30,000,000 Ordinary Shares, of a nominal value of NIS 0.50
each, and 6,636,391 Series A Convertible Preferred Shares, of a nominal value of NIS 0.50
each.

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.

# 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

58

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| |  | 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.

# 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.

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# Duties of Shareholders

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

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

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

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

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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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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.

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

None.

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.

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.

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# 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.

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.

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

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
2007and will not be a PFIC in 2008, 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.

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# Non-U.S. holders of
Ordinary Shares

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

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

In general, non-U.S. holders will not
be subject to the 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 29% for the 2007 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: 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.

65

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# Tax Benefits and Grants
for Research and Development

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

# Law for the
Encouragement of Capital Investments, 1959

Our facilities currently enjoy
approved enterprise status under the Investments Law. 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, 2007 the benefit periods of the first and the second programs expired. The
benefit periods of the third and forth programs will expire in 2009 and 2011,
respectively. The benefit period of the fifth program has not yet commenced and will end
in 2013. For the years which entitled to a reduced tax rate, 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.

66

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

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

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

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 (which is referred to as a
Benefited Enterprise following such amendment) 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 a Benefited Enterprise under the alternative package
of benefits. 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

67

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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.

The amendment applies to Benefited
Enterprise programs in which the year of commencement of benefits under the Investments
Law is 2004 or later, unless such programs received Approved Enterprise
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 are 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 26 2008 the Israeli
parliament approved an amendment to the Inflationary Adjustments Law which limits the
applicability of such law so that it will cease to apply after the 2007 tax year.

# Israeli Transfer Pricing
Regulations

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

# 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.

68

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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.

# 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, generally, 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 our shares acquired
by individuals prior to January 1, 2003 generally 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 Israeli residents (i) have a controlling interest of 25%
or more in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether directly
or indirectly.

In some instances where our
shareholders may be 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.

69

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# Tax on Dividends

Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. 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 or Benefited 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 or
Benefited Enterprise are taxed at the rate of 15%.

F. Dividends and Paying
Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign
private issuers and fulfill the obligations with respect to such requirements by filing
reports with the Securities and Exchange Commission. You may read and copy any document we
file with the Securities and Exchange Commission without charge at the Securities and
Exchange Commissions public reference room at 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.

Notwithstanding the foregoing, we
furnish reports with the SEC on Form 6-K containing unaudited financial information for
the first three quarters of each fiscal year and we solicit proxies and furnish proxy
statements for all meetings of shareholders pursuant to NASDAQ Marketplace Rule 4350(g), a
copy of which proxy statement is furnished promptly thereafter with the SEC under the
cover of a Current Report on Form 6-K. However, in accordance with NASDAQ Marketplace Rule
4350(a)(1), we have elected not to comply with the NASDAQ requirement to distribute an
annual report to our shareholders prior to our annual meeting of shareholders. The basis
for the exemption is that the generally accepted business practice in Israel, where we are
incorporated, is not to distribute an annual report to shareholders. We post our Annual
Report on Form 20-F on our web site (www.tti-telecom.com) as soon as practicable
following the filing of the Annual Report on Form 20-F with the SEC.

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.

70

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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.

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

# 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, 2007. 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.

# Managements report
on internal control over financial reporting

Our management including our chief
executive officer and our principal financial officer is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:

71

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| |  | pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

Our management including our chief
executive officer and our principal financial officer assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007. In conducting its
assessment of internal control over financial reporting, management based its evaluation
on the framework in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management
including our chief executive officer and our principal financial officer has concluded
based on its assessment, that our internal control over financial reporting was effective
as of December 31, 2007 based on these criteria.

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

There were no changes in our internal
control over financial reporting that occurred during the year ended December 31,
2007 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, a copy of which is filed as Exhibit 11 to this
annual report.

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

Fees Paid to Independent
Public Accountants

In
the annual meeting held on December 20, 2007 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.

72

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| |                   | Year Ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Audit (1)         |                        
| | Audit-related (2) |                        
| | Tax (3)           |                        
| | Other (4)         |                        
| | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 and 2007,
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.
|--- | -----------------------------------------------------------------------------------------------------------------

|(4) | Other
fees relate to the Teleses transaction.
|--- | ---------------------------------------------

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 31 day of March, 2008.

| |  | 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 (2)
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2 | Memorandum
of Association of Registrant, as amended through December 29, 2004. (3)
|--- | ----------------------------------------------------------------------------------

|4.6 | The
Registrant's Share Option Plan, dated November 15, 1996. (4)
|--- | ----------------------------------------------------------------

|4.8 | 2004
Employee Share Option Plan, adopted December 29, 2004. (3)
|--- | ---------------------------------------------------------------

|4.9 | Agreement,
dated October 9, 1996, between the Registrant and Team. (5)
|--- | ----------------------------------------------------------------------

|4.10 | Registration
Rights Agreement, dated October 22, 1996, between the Registrant and TSIL. (5)
|---- | -------------------------------------------------------------------------------------------

|4.12 | Lease,
dated February 1, 1998, between the Registrant and Team. (6)
|---- | -------------------------------------------------------------------

|4.13 | Amendment
to Lease Agreement dated September 2, 2002. (7)
|---- | ---------------------------------------------------------

|4.14 | Second
Amendment to Lease Agreement dated July 14, 2005. (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, 2006, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------

|(3) | Previously
filed on TTI's Form 20-F for the year ended December 31, 2004, and incorporated herein by
reference.
|--- | ---------------------------------------------------------------------------------------------------------------

|(4) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Previously
filed as an exhibit to TTI's Registration Statement on Form F-1 (Registration No.
333-5902), and       incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

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

|(7) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Previously
filed on TTI's Form 20-F for the year ended December 31, 2005, 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.
|--- | ---------------------------------------------------------------------------------------------------------------

75

---

---

TTI TEAM
TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2007

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-37

- - - - - - - - - - - -

---

---



|                    
|--------------------
|(ERNST & YOUNG LOGO)

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and 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, 2006
and 2007 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, 2007. 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) and in accordance with generally
accepted auditing standards in Israel, including those prescribed by the
Auditors Regulations (Auditors Mode of Performance), 1973. 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, 2006 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles which differ in certain aspects from
Israel generally accepted accounting principles, as described in Note 13 to the
consolidated financial statements.

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 31,
  2008   | 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, |       
|                                                                                                      |  |              |       
|                                                                                                      |  | 2006         |        | 2007 |  
|                                                                                                      |  |              |        |      |  
|                                                                                                      |  |              |        |      |   |        | 
|ASSETS                                                                                                |  |              |        |      |   |        | 
|                                                                                                      |  |              |        |      |   |        | 
|CURRENT ASSETS:                                                                                       |  |              |        |      |   |        | 
|Cash and cash equivalents                                                                             |  | $            | 31,410 |      | $ | 33,408 | 
|Short-term bank deposits                                                                              |  |              | 984    |      |   | 98     | 
|Trade receivables (net of allowance for
  doubtful accounts - $6,865 in 2006 and 0 in 2007) (Note 1b) |  |              | 4,664  |      |   | 8,185  | 
|Unbilled receivables                                                                                  |  |              | 2,834  |      |   | 3,155  | 
|Related parties (Note 10)                                                                             |  |              | 373    |      |   | 409    | 
|Other accounts receivable
  and prepaid expenses (Note 3)                                             |  |              | 2,265  |      |   | 3,192  | 
|                                                                                                      |  |              |        |      |   |        | 
|                                                                                                      |  |              |        |      |   |        | 
|Total current assets                                                                                  |  |              | 42,530 |      |   | 48,447 | 
|                                                                                                      |  |              |        |      |   |        | 
|                                                                                                      |  |              |        |      |   |        | 
|LONG-TERM INVESTMENTS AND
  RECEIVABLES:                                                              |  |              |        |      |   |        | 
|Long-term bank deposits                                                                               |  |              | 97     |      |   | -      | 
|Investment in a company                                                                               |  |              | 165    |      |   | 165    | 
|Severance pay fund                                                                                    |  |              | 3,627  |      |   | 3,937  | 
|Long-term trade and
  unbilled receivables (Note 1b)                                                  |  |              | 3,324  |      |   | -      | 
|                                                                                                      |  |              |        |      |   |        | 
|                                                                                                      |  |              |        |      |   |        | 
|Total long-term investments and receivables                                                           |  |              | 7,213  |      |   | 4,102  | 
|                                                                                                      |  |              |        |      |   |        | 
|                                                                                                      |  |              |        |      |   |        | 
|PROPERTY AND EQUIPMENT, NET
  (Note 4)                                                                |  |              | 3,842  |      |   | 6,045  | 
|                                                                                                      |  |              |        |      |   |        | 
|                                                                                                      |  |              |        |      |   |        | 
|Total assets                                                                                          |  | $            | 53,585 |      | $ | 58,594 | 
|                                                                                                      |  |              |        |      |   |        | 

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, |        
|                                                                                                                                                                                                  |  | 2006         |         | 2007 |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|LIABILITIES AND
  SHAREHOLDERS EQUITY                                                                                                                                                            |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                                              |  |              |         |      |   |         |  
|Trade payables                                                                                                                                                                                    |  | $            | 2,508   |      | $ | 2,364   |  
|Deferred revenues                                                                                                                                                                                 |  |              | 8,333   |      |   | 4,666   |  
|Related party (Note 10)                                                                                                                                                                           |  |              | 40      |      |   | 3,932   |  
|Other accounts payable and
  accrued expenses (Note 5)                                                                                                                                            |  |              | 7,187   |      |   | 6,966   |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|Total current liabilities                                                                                                                                                                         |  |              | 18,068  |      |   | 17,928  |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|ACCRUED SEVERANCE PAY                                                                                                                                                                             |  |              | 5,022   |      |   | 5,651   |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|LONG TERM LIABILITIES (Note
  6a)                                                                                                                                                                 |  |              | -       |      |   | 1,579   |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|COMMITMENTS AND CONTINGENT
  LIABILITIES (Note 6)                                                                                                                                                 |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|SHAREHOLDERS EQUITY (Note
  8):                                                                                                                                                                  |  |              |         |      |   |         |  
|Share capital:                                                                                                                                                                                    |  |              |         |      |   |         |  
|Ordinary shares of NIS 0.5
  par value -                                                                                                                                                          |  |              |         |      |   |         |  
|Authorized: 30,000,000
  shares at December 31, 2006 and 2007; Issued and outstanding: 16,000,431 and
  16,003,158 shares at December 31, 2006 and 2007, respectively                             |  |              | 2,260   |      |   | 2,261   |  
|Preferred A shares of NIS
  0.5 par value                                                                                                                                                        |  |              |         |      |   |         |  
|Authorized: 6,636,391 at December 31, 2006 and 2007; Issued
  and outstanding: 2,936,391 shares at December 31, 2006 and 2007: Aggregate
  liquidation preference of $ 6,460 at December 31, 2007 |  |              | 334     |      |   | 334     |  
|Additional paid-in capital                                                                                                                                                                        |  |              | 74,919  |      |   | 75,038  |  
|Accumulated deficit                                                                                                                                                                               |  |              | (47,018 | )    |   | (44,197 | )
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|Total shareholders equity                                                                                                                                                                        |  |              | 30,495  |      |   | 33,436  |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                        |  | $            | 53,585  |      | $ | 58,594  |  
|                                                                                                                                                                                                  |  |              |         |      |   |         |  

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, |           
|                                                                                                                                 |  |                         |           
|                                                                                                                                 |  | 2005                    |            | 2006 |   | 2007       |  
|                                                                                                                                 |  |                         |            |      |   |            |  
|                                                                                                                                
|Revenues (Note 11):                                                                                                              |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                         |  | $                       | 25,317     |      | $ | 27,554     |   | $ | 25,722     |  
|Services                                                                                                                         |  |                         | 17,909     |      |   | 18,560     |   |   | 20,195     |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Total revenues                                                                                                                   |  |                         | 43,226     |      |   | 46,114     |   |   | 45,917     |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Cost of revenues:                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                         |  |                         | 13,015     |      |   | 14,783     |   |   | 12,504     |  
|Services                                                                                                                         |  |                         | 9,203      |      |   | 9,571      |   |   | 8,545      |  
|Impairment of capitalized software
  development costs                                                                           |  |                         | 177        |      |   | -          |   |   | -          |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Total cost of revenues                                                                                                           |  |                         | 22,395     |      |   | 24,354     |   |   | 21,049     |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Gross profit                                                                                                                     |  |                         | 20,831     |      |   | 21,760     |   |   | 24,868     |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Operating expenses:                                                                                                              |  |                         |            |      |   |            |   |   |            |  
|Research and development,
  net (Note 12a)                                                                                       |  |                         | 9,136      |      |   | 9,578      |   |   | 9,433      |  
|Selling and marketing                                                                                                            |  |                         | 11,977     |      |   | 10,214     |   |   | 7,857      |  
|General and administrative                                                                                                       |  |                         | 6,325      |      |   | 6,679      |   |   | 6,952      |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Total operating expenses                                                                                                         |  |                         | 27,438     |      |   | 26,471     |   |   | 24,242     |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Operating income (loss)                                                                                                          |  |                         | (6,607     | )    |   | (4,711     | ) |   | 626        |  
|Other income (Note 12c)                                                                                                          |  |                         | -          |      |   | 150        |   |   | 33         |  
|Financial income, net (Note
  12b)                                                                                               |  |                         | 153        |      |   | 662        |   |   | 2,150      |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Income (loss) before income
  taxes                                                                                              |  |                         | (6,454     | )    |   | (3,899     | ) |   | 2,809      |  
|Income taxes (Note 7)                                                                                                            |  |                         | 624        |      |   | (96        | ) |   | (87        | )
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Net income (loss)                                                                                                                |  |                         | (7,078     | )    |   | (3,803     | ) |   | 2,896      |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Deemed dividend associated
  with beneficial conversion feature  of
  Preferred shares                                           |  |                         | (1,981     | )    |   | -          |   |   | -          |  
|Loss attributable to
  preferred shareholders                                                                                    |  |                         | -          |      |   | -          |   |   | (449       | )
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Net income (loss)
  attributable to Ordinary shares                                                                              |  | $                       | (9,059     | )    | $ | (3,803     | ) | $ | 2,447      |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Income (loss) per share
  (Note 9):                                                                                              |  |                         |            |      |   |            |   |   |            |  
|Basic net income (loss) per
  share attributed to Ordinary shareholders                                                          |  | $                       | (0.72      | )    | $ | (0.20      | ) | $ | 0.15       |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Diluted net income (loss)
  per share attributed to Ordinary shareholders                                                        |  | $                       | (0.72      | )    | $ | (0.20      | ) | $ | 0.15       |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of
  shares used for computing basic net income (loss) per share attributed to
  Ordinary shareholders   |  |                         | 12,577,392 |      |   | 15,075,881 |   |   | 16,001,148 |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of
  shares used for computing diluted net income (loss) per share attributed to
  Ordinary shareholders |  |                         | 12,577,392 |      |   | 15,075,881 |   |   | 16,121,989 |  
|                                                                                                                                 |  |                         |            |      |   |            |   |   |            |  

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              

|                                                                                                                 |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |   |   |         |   |   |        |   |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | --------------- |  | ------------------ |  | --------------- | ---- | -------------- | - | ------------- |  | ------------------ | ------ | --------------------------- | - | -------------------- | - | - | ------- | - | - | ------ | - | - | ------ | -
|                                                                                                                 |  | Number of          |            | Share capital   |  |                    |  |                 |      |                |   |               |  |                    |       
|                                                                                                                 |  |                    |            |                 |  | Additional         |  | Accumulated     |      |                |   | Total         |  | Total              |       
|                                                                                                                 |  | Preferred A shares |            | Ordinary shares |  | Preferred A shares |  | Ordinary shares |      | paid-incapital |   | other loss *) |  | Accumulateddeficit |        | comprehensive income (loss) |   | shareholders equity |  
|                                                                                                                 |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |  
|                                                                                                                 |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |   |   |         |   |   |        |   |   |        |  
|Balance as of January 1, 2005                                                                                    |  |                    | -          |                 |  | 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 *) |  |                    | -          |                 |  | -                  |  |                 | -    |                |   | -             |  |                    | -      |                             |   | (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 gain
  on available-for-sale marketable securities, net of impairment *)     |  |                    | -          |                 |  | -                  |  |                 | -    |                |   | -             |  |                    | -      |                             |   | 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 |  
|Exercise of warrants                                                                                             |  |                    | -          |                 |  | 2,727              |  |                 | -    |                |   | 1             |  |                    | 6      |                             |   | -                    |   |   | -       |   |   | -      |   |   | 7      |  
|Share-based compensation                                                                                         |  |                    | -          |                 |  | -                  |  |                 | -    |                |   | -             |  |                    | 113    |                             |   | -                    |   |   | -       |   |   | -      |   |   | 113    |  
|Cumulative effect of FIN48 adoption                                                                              |  |                    | -          |                 |  | -                  |  |                 | -    |                |   | -             |  |                    | -      |                             |   | -                    |   |   | (75     | ) |   | -      |   |   | (75    | )
|Net income                                                                                                       |  |                    | -          |                 |  | -                  |  |                 | -    |                |   | -             |  |                    | -      |                             |   | -                    |   |   | 2,896   |   | $ | 2,896  |   |   | 2,896  |  
|                                                                                                                 |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |   |   |         |   |   |        |   |   |        |  
|Total comprehensive income                                                                                       |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |   |   |         |   | $ | 2,896  |   |   |        |  
|                                                                                                                 |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |   |   |         |   |   |        |   |   |        |  
|Balance as of December 31, 2007                                                                                  |  |                    | 2,936,391  |                 |  | 16,003,158         |  | $               | 334  |                | $ | 2,261         |  | $                  | 75,038 |                             |   | -                    |   | $ | (44,197 | ) |   |        |   | $ | 33,436 |  
|                                                                                                                 |  |                    |            |                 |  |                    |  |                 |      |                |   |               |  |                    |        |                             |   |                      |   |   |         |   |   |        |   |   |        |  

*)     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, |        
|                                                                                                              |  |                         |        
|                                                                                                              |  | 2005                    |         | 2006 |   | 2007   |  
|                                                                                                              |  |                         |         |      |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Cash flows from operating activities:                                                                         |  |                         |         |      |   |        |   |   |        |  
|Net income (loss)                                                                                             |  | $                       | (7,078  | )    | $ | (3,803 | ) | $ | 2,896  |  
|Adjustments required to reconcile net
  income (loss) to net cash provided by (used in) operating activities: |  |                         |         |      |   |        |   |   |        |  
|Depreciation and amortization                                                                                 |  |                         | 2,258   |      |   | 2,589  |   |   | 1,964  |  
|Impairment of capitalized software
  development costs                                                        |  |                         | 177     |      |   | -      |   |   | -      |  
|Gain from sale of property and equipment                                                                      |  |                         | (157    | )    |   | (73    | ) |   | (221   | )
|Amortization of premium and accretion of
  accrued interest on available-for-sale marketable debt securities  |  |                         | 411     |      |   | 1,305  |   |   | -      |  
|Accrued interest on short-term bank
  deposits                                                                |  |                         | 27      |      |   | (23    | ) |   | (4     | )
|Accrued severance pay, net                                                                                    |  |                         | (142    | )    |   | 513    |   |   | 319    |  
|Share-based compensation                                                                                      |  |                         | -       |      |   | 451    |   |   | 113    |  
|Decrease (increase) in trade
  receivables, net                                                               |  |                         | 2,855   |      |   | (764   | ) |   | (3,521 | )
|Decrease (increase) in unbilled
  receivables                                                                 |  |                         | 527     |      |   | (1,870 | ) |   | (321   | )
|Increase (decrease) in balance with
  related parties                                                         |  |                         | (217    | )    |   | 34     |   |   | 3,856  |  
|Decrease (increase) in other accounts
  receivable and prepaid expenses                                       |  |                         | 1,047   |      |   | (47    | ) |   | (927   | )
|Decrease (increase) in long-term trade
  and unbilled receivables                                             |  |                         | (669    | )    |   | 613    |   |   | 3,324  |  
|Increase (decrease) in trade payables                                                                         |  |                         | (1,678  | )    |   | 641    |   |   | (144   | )
|Increase (decrease) in deferred revenues                                                                      |  |                         | 5,584   |      |   | (1,893 | ) |   | (3,667 | )
|Increase (decrease) in other accounts
  payable and accrued expenses                                          |  |                         | 1,792   |      |   | (276   | ) |   | (502   | )
|Landlord lease incentive                                                                                      |  |                         | -       |      |   | -      |   |   | 499    |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Net cash provided by (used in) operating
  activities                                                         |  |                         | 4,737   |      |   | (2,603 | ) |   | 3,664  |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Cash flows from investing activities:                                                                         |  |                         |         |      |   |        |   |   |        |  
|Investment in short-term and long-term
  bank deposits                                                        |  |                         | (2,487  | )    |   | (188   | ) |   | (2,000 | )
|Proceeds from short-term bank deposits                                                                        |  |                         | 2,901   |      |   | 1,984  |   |   | 2,987  |  
|Investment in available-for-sale
  marketable securities                                                      |  |                         | (19,148 | )    |   | -      |   |   | -      |  
|Proceeds from sale of available-for-sale
  marketable securities                                              |  |                         | 15,540  |      |   | 14,744 |   |   | -      |  
|Purchase of property and equipment                                                                            |  |                         | (1,145  | )    |   | (1,746 | ) |   | (4,318 | )
|Proceeds from sale of property and
  equipment                                                                |  |                         | 293     |      |   | 117    |   |   | 372    |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Net cash provided by (used in) investing
  activities                                                         |  |                         | (4,046  | )    |   | 14,911 |   |   | (2,959 | )
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Cash flows from financing activities:                                                                         |  |                         |         |      |   |        |   |   |        |  
|Long-term debt from landlord                                                                                  |  |                         | -       |      |   | -      |   |   | 1,286  |  
|Short-term bank credit                                                                                        |  |                         | (967    | )    |   | -      |   |   | -      |  
|Proceeds from issuance of Convertible
  Preferred A shares and warrants, net                                  |  |                         | 12,838  |      |   | -      |   |   | -      |  
|Exercise of warrants                                                                                          |  |                         | -       |      |   | 1,068  |   |   | 7      |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Net cash provided by financing
  activities                                                                   |  |                         | 11,871  |      |   | 1,068  |   |   | 1,293  |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Increase in cash and cash equivalents                                                                         |  |                         | 12,562  |      |   | 13,376 |   |   | 1,998  |  
|Cash and cash equivalents at the
  beginning of the year                                                      |  |                         | 5,472   |      |   | 18,034 |   |   | 31,410 |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of
  the year                                                            |  | $                       | 18,034  |      | $ | 31,410 |   | $ | 33,408 |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Supplemental disclosure of cash flows
  information:                                                          |  |                         |         |      |   |        |   |   |        |  
|Cash paid during the year for:                                                                                |  |                         |         |      |   |        |   |   |        |  
|Taxes                                                                                                         |  | $                       | 171     |      | $ | 1,707  |   | $ | 187    |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |        |  
|Non-cash activities:                                                                                          |  |                         |         |      |   |        |   |   |        |  
|Reclassification of receivables on
  account of Convertible Preferred A shares                                |  | $                       | 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, South Africa, Australia and Hong-Kong.                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | As to
  principal markets and customers, see Note 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | b. | 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
  believed that this customer terminated the agreement unlawfully, and in
  violation of the termination provisions set out in the agreement. Over the
  last couple of years the parties filed claim and counter claim against each
  other about the termination of this agreement.                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | In July
  2007, the parties signed a settlement and release agreement under which the
  Company received from the customer £ 1.7 million ($3.45 million)
  (without admission of liability) and both parties released their claims
  against each other.                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | No gain or
  loss has been recorded during 2007 as a result of the settlement agreement
  since the company maintained the above amount in previous years on its
  financial statements as long term receivable.                                                                                                                                                                                                                                                                                                          

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 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 4.01% and 4.10% for 2006 and 2007, respectively. The
  short-term deposits are presented at their cost, including accrued interest.                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Long-term
  bank deposits are deposits with maturities of more than one year, are
  included in long-term investments and presented at their cost. The deposits
  are in U.S. dollars and bear interest at an average rate of 4.10% for 2006.
  As of December 31, 2007 there was no long-term bank deposit.                                                                                                            

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.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2007, 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 - 15                                    | 
|Motor
  vehicles                     |  |  | 15                                        | 
|Leasehold   improvements             |  |  | Over the shorter of the term of the lease | 
|                                     |  |  | or useful life                            | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2006 and 2007, 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, 2007, a
full valuation allowance was provided by the Company. See Note 7j for the impact of
adoption of FIN 48, Accounting for uncertainty in Income Taxes.

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.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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, 2006 and 2007, 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, 2006 and 2007, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2005, 2006 and 2007.                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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 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 bank deposits and trade and unbilled receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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s and its subsidiaries cash and cash equivalents and short-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 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 earning (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 income (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Basic net
  income (loss) per share is computed based on the weighted average number of
  shares of Ordinary Shares outstanding during each year. Diluted net income
  (loss) 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, 2005 and 2006 all outstanding options and warrants
  were excluded from the calculations of diluted net income (loss) per share,
  since they would have an anti-diluted effect. For the year ended December 31,
  2007, all outstanding options have been excluded from the calculation of the
  diluted earning per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 in the year ended December 31, 2005, as all options granted in
  that period had an exercise price equal or higher then the market value of
  the underlying ordinary share on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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, 2007 and
  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 vest 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The fair
  value for options granted in 2005, 2006 and 2007 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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.)

|                               |  |                         |   |      |     |      |  |     |   |  |  | 
|------------------------------ |  | ----------------------- | - | ---- | --- | ---- |  | --- | - |  |  | 
|                               |  | Year ended December 31, |  
|                               |  |                         |  
|Employee stock options         |  | 2005                    |   | 2006 |     | 2007 | 
|                               |  |                         |   |      |     |      | 
|                               |  |                         |   |      |     |      |  |     |   | 
|Expected volatility            |  | 57                      | % |      | 45  | %    |  | 45  | % | 
|Risk-free interest             |  | 4.5                     | % |      | 5   | %    |  | 5   | % | 
|Dividend yield                 |  | 0                       | % |      | 0   | %    |  | 0   | % | 
|Expected life of up to (years) |  | 2.6                     |   |      | 3.4 |      |  | 3.5 |   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  computation of expected volatility is based on realized historical stock
  price volatility of the Company. The Company used the simplified method to
  establish the expected term of the awards as allowed under SAB 107. 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 for only those
  shares expected to vest on accelerated attribution basis over the requisite
  service period of the award, which is generally the option vesting term of
  one to three 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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 endedDecember 31,   2005 |       
|                                                                              |  |                               |       
|                                                                              |  |                               |        |  
|Net loss, as
  reported                                                       |  | $                             | (9,059 | )
|Add: Stock-based employee compensation intrinsic value                        |  |                               | -      |  
|Deduct:
  Stock-based compensation expense determined under fair value method |  |                               | (81    | )
|                                                                              |  |                               |        |  
|                                                                              |  |                               |        |  
|Pro forma
  net loss                                                          |  | $                             | (9,140 | )
|                                                                              |  |                               |        |  
|                                                                              |  |                               |        |  
|Basic and
  diluted net loss per share, as reported                           |  | $                             | (0.72  | )
|                                                                              |  |                               |        |  
|                                                                              |  |                               |        |  
|Basic and
  diluted net loss per share, pro forma                             |  | $                             | (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, trade receivables, unbilled receivables, trade
  payables and related parties approximates their fair value due to the
  short-term maturities of such instruments.

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.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  Companys liability for severance pay is calculated pursuant to Israels
  Severance Pay Law based on the most recent salary of the employees multiplied
  by the number of years of employment, as of the balance sheet date. Employees
  are entitled to one months salary for each year of employment or a portion
  thereof. The Companys liability for all of its employees is fully provided
  by monthly deposits with insurance policies and by an accrual.                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  deposited funds include profits accumulated up to the balance sheet date. The
  deposited funds may be withdrawn only upon the fulfillment of the obligation
  pursuant to Israels Severance Pay Law or labor agreements. The value of the
  deposited funds is based on the cash surrendered value of these policies, and
  includes immaterial profits.                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Severance
  pay expenses for the years ended December 31, 2005, 2006 and 2007 were $961,
  $1,236 and $964, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Advertising
  expenses are charged to the statements of operations as incurred. Advertising
  expenses for the years ended December 31, 2005, 2006 and 2007 were $64, $110
  and $140, 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.

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.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Impact of recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In December
  2007, the FASB issued SFAS 141(R), Business Combinations (SFAS No. 141(R)).
  This Statement replaces SFAS 141, Business Combinations (SFAS No. 141), and
  requires an acquirer to recognize the assets acquired, the liabilities
  assumed, including those arising from contractual contingencies, any
  contingent consideration, and any noncontrolling interest in the acquiree at
  the acquisition date, measured at their fair values as of that date, with
  limited exceptions specified in the statement. SFAS 141(R) also requires the
  acquirer in a business combination achieved in stages (sometimes referred to
  as a step acquisition) to recognize the identifiable assets and liabilities,
  as well as the noncontrolling interest in the acquiree, at the full amounts
  of their fair values (or other amounts determined in accordance with SFAS
  141(R)). In addition, SFAS 141(R)s requirement to measure the noncontrolling
  interest in the acquiree at fair value will result in recognizing the
  goodwill attributable to the noncontrolling interest in addition to that
  attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for
  Income Taxes (SFAS No. 109), to require the acquirer to recognize changes
  in the amount of its deferred tax benefits that are recognizable because of a
  business combination either in income from continuing operations in the
  period of the combination or directly in contributed capital, depending on
  the circumstances.                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | It also
  amends SFAS 142, Goodwill and Other Intangible Assets (SFAS No. 142), to,
  among other things, provide guidance on the impairment testing of acquired
  research and development intangible assets and assets that the acquirer
  intends not to use. SFAS 141(R) applies prospectively to business
  combinations for which the acquisition date is on or after the beginning of
  the first annual reporting period beginning on or after December 15, 2008.
  The Company does not expect that the adoption of SFAS 141R will have any
  impact on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In December
  2007, the FASB issued SFAS 160 (SFAS No. 160), Noncontrolling Interests in
  Consolidated Financial Statements. SFAS 160 amends Accounting Research
  Bulletin 51, Consolidated Financial Statements, to establish accounting and
  reporting standards for the noncontrolling interest in a subsidiary and for
  the deconsolidation of a subsidiary. It also clarifies that a noncontrolling
  interest in a subsidiary is an ownership interest in the consolidated entity
  that should be reported as equity in the consolidated financial statements.
  SFAS 160 also changes the way the consolidated income statement is presented
  by requiring consolidated net income to be reported at amounts that include
  the amounts attributable to both the parent and the noncontrolling interest.
  It also requires disclosure, on the face of the consolidated statement of
  income, of the amounts of consolidated net income attributable to the parent
  and to the noncontrolling interest. SFAS 160 requires that a parent recognize
  a gain or loss in net income when a subsidiary is deconsolidated and requires
  expanded disclosures in the consolidated financial statements that clearly
  identify and distinguish between the interests of the parent owners and the
  interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
  for fiscal periods, and interim periods within those fiscal years, beginning
  on or after December 15, 2008. The Company does not expect the adoption of
  SFAS No. 160 will have significant impact on its consolidated financial
  statement.

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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | In September
  2006, the FASB issued Statement No. 157, Fair value Measurements (SFAS
  157). SFAS 157 defines fair value, establishes a framework for measuring
  fair value in generally accepted accounting principles, and expands
  disclosures about fair value measurements. SFAS 157 applies under other
  accounting pronouncements that require or permit fair value measurements. The
  provisions of SFAS 157 are effective for the Company beginning January 1,
  2008. The FASB issued a FASB Staff position to defer the effective date of
  SFAS 157 for one year for all nonfinancial assets and nonfinancial
  liabilities, except for those items that are recognized or disclosed at fair
  value in the financial statements on a recurring basis. The Company does not
  except the adoption will have material impact on its consolidated financial
  statements.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | In February
  2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
  Assets and Financial Liabilities (SFAS 159). SFAS 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. The
  provisions of SFAS 159 are effective for the Company beginning January 1,
  2008. The Company does not expect the adoption of SFAS 159 will have an
  impact on its consolidated financial statements.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE 3:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID
  EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                       |  |              |       |      |   |       | 
|---------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                       |  | December 31, |      
|                       |  |              |      
|                       |  | 2006         |       | 2007 |  
|                       |  |              |       |      |  
|                       |  |              |       |      |   |       | 
|Landlord (1)           |  | $            | -     |      | $ | 1,339 | 
|Prepaid expenses       |  |              | 1,059 |      |   | 1,083 | 
|employees              |  |              | 313   |      |   | 300   | 
|Government authorities |  |              | 376   |      |   | -     | 
|Others                 |  |              | 517   |      |   | 470   | 
|                       |  |              |       |      |   |       | 
|                       |  |              |       |      |   |       | 
|                       |  | $            | 2,265 |      | $ | 3,192 | 
|                       |  |              |       |      |   |       | 

| |     |                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Receivable
  with respect to investments in the new leased office in Israel that according
  to the agreement should be reimbursed by the landlord. See also Note 6a.

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 4:- | PROPERTY AND EQUIPMENT, NET

|                                     |  |              |        |      |   |        | 
|------------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
|                                     |  | December 31, |       
|                                     |  |              |       
|                                     |  | 2006         |        | 2007 |  
|                                     |  |              |        |      |  
|                                     |  |              |        |      |   |        | 
|Cost:                                |  |              |        |      |   |        | 
|Computers and peripheral
  equipment |  | $            | 14,224 |      | $ | 15,070 | 
|Office furniture and
  equipment     |  |              | 1,439  |      |   | 1,721  | 
|Motor vehicles                       |  |              | 4,422  |      |   | 4,237  | 
|Leasehold improvements               |  |              | 3,527  |      |   | 5,638  | 
|                                     |  |              |        |      |   |        | 
|                                     |  |              |        |      |   |        | 
|                                     |  |              | 23,612 |      |   | 26,666 | 
|                                     |  |              |        |      |   |        | 
|Accumulated depreciation:            |  |              |        |      |   |        | 
|Computers and peripheral
  equipment |  |              | 12,886 |      |   | 13,818 | 
|Office furniture and
  equipment     |  |              | 945    |      |   | 1,055  | 
|Motor vehicles                       |  |              | 2,815  |      |   | 2,268  | 
|Leasehold improvements               |  |              | 3,124  |      |   | 3,480  | 
|                                     |  |              |        |      |   |        | 
|                                     |  |              |        |      |   |        | 
|                                     |  |              | 19,770 |      |   | 20,621 | 
|                                     |  |              |        |      |   |        | 
|                                     |  |              |        |      |   |        | 
|Depreciated cost                     |  | $            | 3,842  |      | $ | 6,045  | 
|                                     |  |              |        |      |   |        | 

| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Depreciation expenses for the years ended
  December 31, 2005, 2006 and 2007 were $2,154, $2,589 and $1,964,
  respectively.

|         |                                            
|-------- | -------------------------------------------
|NOTE 5:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

|                               |  |              |       |      |   |       | 
|------------------------------ |  | ------------ | ----- | ---- | - | ----- | 
|                               |  | December 31, |      
|                               |  |              |      
|                               |  | 2006         |       | 2007 |  
|                               |  |              |       |      |  
|                               |  |              |       |      |   |       | 
|Employees and payroll accruals |  | $            | 4,621 |      | $ | 4,467 | 
|Accrued expenses               |  |              | 1,721 |      |   | 1,701 | 
|Government authorities         |  |              | 567   |      |   | 494   | 
|Others                         |  |              | 278   |      |   | 304   | 
|                               |  |              |       |      |   |       | 
|                               |  |              |       |      |   |       | 
|                               |  | $            | 7,187 |      | $ | 6,966 | 
|                               |  |              |       |      |   |       | 

|         |                                       
|-------- | --------------------------------------
|NOTE 6:- | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Lease
  commitments:                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                 
| |    | 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 2014.                                                                                        
| |    |                                                                                                                                                                                                                                                                                 
| |    | In March
  2007, the Company signed a new lease agreement in Israel. Under this
  agreement the Company leases, starting December 2007 a new facility for its
  principal office. The lease is scheduled to expire in December 2014 and the
  annual rent is approximately $825.

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 6:- | COMMITMENTS AND CONTINGENT LIABILITIES
  (Cont.)

| |  |                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------
| |  | Aggregate
  minimum rental commitments under non-cancelable leases at December 31, 2007
  are as follows:

|                        |  |            |       |               |   |       |  |   |       | 
|----------------------- |  | ---------- | ----- | ------------- | - | ----- |  | - | ----- | 
|Year ended December 31, |  | Facilities |       | Motorvehicles |   | Total | 
|                        |  |            |       |               |   |       | 
|                        |  |            |       |               |   |       |  |   |       | 
|2008                    |  |            | 1,363 |               |   | 48    |  |   | 1,411 | 
|2009                    |  |            | 1,191 |               |   | 26    |  |   | 1,217 | 
|2010                    |  |            | 1,177 |               |   | 8     |  |   | 1,185 | 
|2011                    |  |            | 1,082 |               |   | -     |  |   | 1,082 | 
|2012                    |  |            | 825   |               |   | -     |  |   | 825   | 
|                        |  |            |       |               |   |       |  |   |       | 
|                        |  |            |       |               |   |       |  |   |       | 
|                        |  | $          | 5,638 |               | $ | 82    |  | $ | 5,720 | 
|                        |  |            |       |               |   |       |  |   |       | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Facility
  lease expenses for the years ended December 31, 2005, 2006 and 2007 were
  $1,657, $1,432 and $1,409, respectively.                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Motor
  vehicle lease expenses for the years ended December 31, 2005, 2006 and 2007
  were approximately $122, $106 and $102, respectively.                                                                                                                                                                                                                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | In December
  2007, the Company relocated its offices in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The new lease
  term will be 7 years and the Company will have the option to extend the lease
  period for additional 3 years. The monthly payments will be between $32 to
  $36. According to the agreement the Company made leasehold improvements that
  were funded partly by a loan from the landlord and partly by landlord
  incentives. The leasehold improvements were recorded as leasehold improvement
  assets and they are being amortized over the shorter of their economic lives
  or the lease term.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The
  incentives from the landlord were recorded as deferred rent and amortized as
  reductions to lease expense over the lease term in accordance with SFAS 13
  and the response to Question 2 of FASB Technical Bulletin 88-1 (FTB 88-1),
  Issues Relating to Accounting for Leases.                                                                                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The loan from the landlord was
recorded at its estimated fair value using discounted cash flow method. The loan bears no
interest.                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | As of
  December 31, 2007, the Companys leasehold improvements assets are in an
  amount of $2,093 of which $498 were funded by landlord incentives and $1,286
  as landlord loan.                                                                                                                                                                                                                                                                                                                                  

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 6:- | COMMITMENTS AND CONTINGENT LIABILITIES
  (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |    | The loan
  from the landlord was recorded at its estimated fair value using discounted
  cash flow method Present Value in accounting measurements. As a result, the
  loan bears no interest. If that information is not available without undue
  cost and effort, an entity may use its own estimates of fair value. In this
  case the company took interest of 9.58% which represents the company market
  condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |    | As of
  December 31, 2007, the Companys leasehold improvements are in an amount of
  $2,093 thousand of which $498 were funded by landlord incentives and $1,286
  as loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The Company has paid or
  accrued royalties relating to the repayment of such grants in the amount of $
  10, $ 2 and $0.6 for the years ended December 31, 2005, 2006 and 2007,
  respectively. The amounts were recorded in the cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | As of
  December 31, 2007, the Company has an outstanding contingent obligation to
  pay royalties in the amount of approximately $ 2,743 in respect of these
  grants. Management believes that none of its product sales is currently
  subject to OCS and BIRD-F royalties payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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 6:- | COMMITMENTS AND CONTINGENT LIABILITIES
  (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Company
  has obtained performance guarantees in favor of certain customers from
  several banks in Israel amounting to $1,809 and $3,109 for the years ended
  December 31, 2006 and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Company
  has obtained other guarantees in favor of facility and car leases from bank
  in Israel amounting to $62 and $409 for the years ended December 31, 2006 and
  2007, 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 in November 9, 2006. The Company filed a motion to
  dismiss the second amended and consolidated complaint in January 10, 2007,
  which motion was denied with respect to the Company by order dated May 2007.
  The Company filed an answer to the second amended and consolidated complaint
  which denied its material allegations. A mediation to explore the possibility
  of resolving this matter was held in November 2007. An agreement in principle
  was reached and memorandum of understanding outlining such agreement was
  executed in December 2007. The Company is now in the process of preparing the
  documents and seeking approval of the court necessary to finalize the settlement,
  which is being paid by the Companys directors and officers insurance
  carrier.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 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. In April 2007, the parties signed a settlement
  and release agreement under which the Company paid Embarcadero $90 (without
  admission of liability) and both parties releases their claims against each
  other.                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | f. | Dispute with
  respect to balance with related party shareholder, See Note 10b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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 7:- | INCOME TAXES

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Measurement
  of taxable income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Under the
  Income Tax (Inflationary Adjustments) Law, 1985 (the Israeli
  law), results for tax purposes in Israel are measured in real terms,
  in accordance with the changes in the Israeli Consumer Price Index (Israeli
  CPI). Accordingly, until 2006, results for tax purposes were measured in
  terms of earnings in NIS after certain adjustments for increases in the
  Israeli CPI. Commencing in taxable year 2007, the Company has elected to
  measure its taxable income and file its tax return under the Israeli Income
  Tax Regulations (Principles Regarding the Management of Books of Account of
  Foreign Invested Companies and Certain Partnerships and the Determination of
  Their Taxable Income), 1986.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | b. | Corporate
  tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Taxable
  income of Israeli companies is subject to tax at the rate of 29% in 2007, 27%
  in 2008, 26% in 2009 and 25% in 2010 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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 five 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, 2007 the benefit periods of the first and the second programs
  were expired. The benefit periods of the third and forth programs will expire
  in 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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 7:- | INCOME TAXES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The
  entitlement to the above benefits is conditional upon the Companys
  fulfilling the conditions stipulated by the above law, regulations published
  hereunder and the instruments of approval for the specific investments in the
  approved 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, 2007, 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | 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. | Tax loss
  carryforwards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Net operating loss carryforwards as
of December 31, 2007 are standing In Israel, the U.S. and the U.K amount to $ 34,140, $
11,348 and $ 11,508, respectively. Other jurisdiction in which the Company operates has
immaterial effect.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Net
  operating losses in Israel, and the UK may be carried forward indefinitely.
  Net operating losses in the U.S. may be carried forward through periods which
  will expire in the years 2023-2027.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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 7:- | INCOME TAXES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Utilization
  of U.S. net operating losses may be subject to substantial annual limitation
  due to the change in ownership provisions of the Internal Revenue Code of
  1986 and similar state provisions. The annual limitation may result in the
  expiration of net operating losses before utilization.       
| |    |                                                                                                                                                                                                                                                                                                                      
| | e. | 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, |       
|                                                       |  |                |       
|                                                       |  | 2006           |        | 2007 |  
|                                                       |  |                |        |      |  
|                                                       |  |                |        |      |   |        | 
|Reserves and
  allowances                              |  | $              | 6,178  |      | $ | 5,733  | 
|Net operating
  loss carryforward - foreign            |  |                | 8,357  |      |   | 7,791  | 
|Net operating
  loss carryforward - domestic           |  |                | 7,541  |      |   | 8,535  | 
|                                                       |  |                |        |      |   |        | 
|                                                       |  |                |        |      |   |        | 
|Total
  deferred tax assets before valuation allowance |  |                | 22,076 |      |   | 22,059 | 
|Valuation
  allowance                                  |  |                | 22,076 |      |   | 22,059 | 
|                                                       |  |                |        |      |   |        | 
|                                                       |  |                |        |      |   |        | 
|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. | 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:                                                                                     

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 7:- | INCOME TAXES (Cont.)

|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                       |  | Year ended December 31, |       
|                                                                                       |  |                         |       
|                                                                                       |  | 2005                    |        | 2006 |   | 2007   |  
|                                                                                       |  |                         |        |      |   |        |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|Income (loss) before taxes,
  as reported in the consolidated statements of operations |  | $                       | (6,454 | )    | $ | (3,899 | ) | $ | 2,809  |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|Statutory tax rate                                                                     |  |                         | 34     | %    |   | 31     | % |   | 29     | %
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|Theoretical tax benefit on
  the above amount at the Israeli statutory tax rate:       |  | $                       | (2,194 | )    | $ | (1,209 | ) | $ | 815    |  
|Tax adjustment in respect
  of foreign subsidiaries different tax rates                |  |                         | 123    |      |   | (84    | ) |   | 69     |  
|Deferred taxes on losses
  for which a valuation allowance was provided                |  |                         | 1,855  |      |   | 1,066  |   |   | 598    |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|Temporary Differences                                                                  |  |                         | -      |      |   | 590    |   |   | (1,573 | )
|Taxes in respect of prior
  years                                                      |  |                         | 448    |      |   | (333   | ) |   | -      |  
|Tax withholdings and credits                                                           |  |                         | 176    |      |   | 18     |   |   | (274   | )
|Other                                                                                  |  |                         | 216    |      |   | (144   | ) |   | 278    |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|                                                                                       |  |                         |        |      |   |        |   |   |        |  
|Income taxes (tax benefit),
  as reported in the statements of operations              |  | $                       | 624    |      | $ | (96    | ) | $ | (87    | )
|                                                                                       |  |                         |        |      |   |        |   |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | g. | 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.
| | h. | Taxes on
  income are comprised as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                |  |                         |      |      |   |      |   |   |      |  
|------------------------------- |  | ----------------------- | ---- | ---- | - | ---- | - | - | ---- | -
|                                |  | Year ended December 31, |     
|                                |  |                         |     
|                                |  | 2005                    |      | 2006 |   | 2007 |  
|                                |  |                         |      |      |   |      |  
|                                |  |                         |      |      |   |      |   |   |      |  
|Current taxes                   |  | $                       | -    |      | $ | 219  |   | $ | (87  | )
|Taxes in respect of prior years |  |                         | 624  |      |   | (315 | ) |   | -    |  
|                                |  |                         |      |      |   |      |   |   |      |  
|                                |  |                         |      |      |   |      |   |   |      |  
|                                |  | $                       | 624  |      | $ | (96  | ) | $ | (87  | )
|                                |  |                         |      |      |   |      |   |   |      |  
|                                |  |                         |      |      |   |      |   |   |      |  
|Domestic                        |  | $                       | 754  |      | $ | (248 | ) | $ | (274 | )
|Foreign                         |  |                         | (130 | )    |   | 152  |   |   | 187  |  
|                                |  |                         |      |      |   |      |   |   |      |  
|                                |  |                         |      |      |   |      |   |   |      |  
|                                |  | $                       | 624  |      | $ | (96  | ) | $ | (87  | )
|                                |  |                         |      |      |   |      |   |   |      |  

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 7:- | INCOME TAXES (Cont.)

| |    |                                                      
| | -- | -----------------------------------------------------
| | i. | Income
  (loss) before taxes is comprised as follows:

|         |  |                         |        |      |   |        |   |   |        |  
|-------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|         |  | Year ended December 31, |       
|         |  |                         |       
|         |  | 2005                    |        | 2006 |   | 2007   |  
|         |  |                         |        |      |   |        |  
|         |  |                         |        |      |   |        |   |   |        |  
|Domestic |  | $                       | (6,914 | )    | $ | (1,319 | ) | $ | 4,877  |  
|Foreign  |  |                         | 460    |      |   | (2,580 | ) |   | (2,068 | )
|         |  |                         |        |      |   |        |   |   |        |  
|         |  |                         |        |      |   |        |   |   |        |  
|         |  | $                       | (6,454 | )    | $ | (3,899 | ) | $ | 2,809  |  
|         |  |                         |        |      |   |        |   |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | In
  July 2006, the FASB issued FASB Interpretation 48, Accounting for
  Uncertainty in Income Taxes (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 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
  adopted the provisions of FIN 48 as of January 1, 2007. The impact of
  adopting FIN 48 was insignificant impact on the Companys consolidated
  financial statements in the total estimated amount of $75. The effect of the
  adoption after January 1, 2007 has increased the income tax expense in the
  total estimated amount of $17.                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Interest
  associated with uncertain income tax positions and penalties expense are
  classified as income tax expenses. The Company has not recorded any material
  interest or penalties during any of the years presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | A
  reconciliation of the beginning and ending balances of the total amounts of
  gross unrecognized tax benefits is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                       |  |   |    | 
|------------------------------------------------------ |  | - | -- | 
|Gross unrecognized tax benefits
  at January 1, 2007   |  | $ | 75 | 
|Increases in tax positions for
  current year          |  |   | 17 | 
|                                                       |  |   |    | 
|                                                       |  |   |    | 
|Gross unrecognized tax benefits
  at December 31, 2007 |  | $ | 92 | 
|                                                       |  |   |    | 

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 8:- | 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Standard
  anti dilution provisions;                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                        
| |    | 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. Through December 31, 2007 430,217
  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, 2007, none of these warrants were converted into the Companys Ordinary
  shares.                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 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.                                                                                                                                                          

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 8:- | SHAREHOLDERS EQUITY (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | During the
  year ended December 31, 2006, an amount of 1,700,000 Preferred shares were
  converted into the same number of the Companys Ordinary shares. As of
  December 31, 2007 none of the Preferred shares were converted into the
  Companys Ordinary shares and none of the Warrants had been exercised into
  Ordinary shares, and also Subsequent to balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 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, 2007 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, 2007, an aggregate of 867,333 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-29

---

---



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

|         |                             
|-------- | ----------------------------
|NOTE 8:- | SHAREHOLDERS EQUITY (Cont.)

| |  |                                                                                 
| |  | --------------------------------------------------------------------------------
| |  | A summary of
  the stock option activities in 2005, 2006 and 2007 is as follows:

|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 
|---------------------------------- |  | ---------------------------- | -------- | -------------------------------- | - | ---------------------------- |  | ------------------------------------- | --------- | --------------------- | - | ----------------------------------- |  | ------------------------------------------------- | --------- | ------------------------- | - | ---- |  |  | ---- |  | - | - | 
|                                   |  | Year ended December 31, 2005 |          | Year  ended December
  31, 2006  |   | Year ended December 31, 2007 | 
|                                   |  |                              |          |                                  |   |                              | 
|                                   |  | Amount
  of options          |          | Weightedaverage
  exercise price |   | Amount
  Of options          |  | Weighted
  average
  exercise
  price |           | Amount
  of
  options |   | Weighted average
  exercise
  price |  | Weighted
  average
  remaining contractual
  term |           | Aggregate intrinsic value |  
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |  
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 
|Outstanding at beginning of year   |  |                              | 374,133  |                                  | $ | 10.13                        |  |                                       | 390,333   |                       | $ | 4.55                                |  |                                                   | 1,049,000 |                           | $ | 3.97 |  |  |      |  | $ | - | 
|Granted                            |  |                              | 200,000  |                                  | $ | 3.50                         |  |                                       | 755,500   |                       | $ | 3.78                                |  |                                                   | 18,000    |                           | $ | 3.00 |  |  |      |  | $ | - | 
|Exercised                          |  |                              | -        |                                  | $ | -                            |  |                                       | -         |                       | $ | -                                   |  |                                                   | -         |                           | $ | -    |  |  |      |  | $ | - | 
|Forfeited                          |  |                              | (82,000  | )                                | $ | 7.00                         |  |                                       | (93,500   | )                     | $ | 4.23                                |  |                                                   | (185,004  | )                         | $ | 3.71 |  |  |      |  | $ | - | 
|Expired                            |  |                              | (101,800 | )                                | $ | 21.02                        |  |                                       | (3,333    | )                     | $ | 20                                  |  |                                                   | (141,329  | )                         | $ | 3.63 |  |  |      |  | $ | - | 
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 
|Outstanding at end of year         |  |                              | 390,333  |                                  | $ | 4.55                         |  |                                       | 1,049,000 |                       | $ | 3.97                                |  |                                                   | 740,667   |                           | $ | 4.03 |  |  | 2.76 |  | $ | - | 
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 
|Options exercisable at end of year |  |                              | 113,499  |                                  | $ | 5.05                         |  |                                       | 266,330   |                       | $ | 4.78                                |  |                                                   | 375,336   |                           | $ | 4.51 |  |  | 2.23 |  | $ | - | 
|                                   |  |                              |          |                                  |   |                              |  |                                       |           |                       |   |                                     |  |                                                   |           |                           |   |      |  |  |      |  |   |   | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  aggregate intrinsic value in the tables above represents the total intrinsic
  value (the difference between the Companys closing stock price on the last
  trading day of December 2007 and the exercise price, multiplied by the number
  of in-the-money options) that would have been received by the option holders
  had all option holders exercised their options on December 31, 2007. This
  amount change based on the fair market value of the Companys stock. The share
  price as of December 31, 2007 is lower than the exercise price of all the
  changes during the year and therefore aggregate intrinsic value was not
  calculated.

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 8:- | SHAREHOLDERS EQUITY (Cont.)

| |  |                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  weighted-average grant-date fair value of options granted during the years
  2005, 2006 and 2007 was $0, $1.45 and $1.13.                                                                          
| |  |                                                                                                                                                                                                          
| |  | Compensation expenses (income) related to
  options granted to employees were recorded to research and development
  expenses, sales and marketing and general and administrative expenses, as
  follows:

|                                      |  |                           |      |  |   |      | 
|------------------------------------- |  | ------------------------- | ---- |  | - | ---- | 
|                                      |  | Year ended
  December 31, |     
|                                      |  |                           |     
|                                      |  |                           | 2006 |  |   | 2007 | 
|                                      |  |                           |      |  |   |      | 
|                                      |  |                           |      |  |   |      | 
|Cost
  of sales                       |  | $                         | 229  |  | $ | 54   | 
|Research
  and development expenses   |  |                           | 102  |  |   | 29   | 
|Sales
  and marketing                 |  |                           | 84   |  |   | 17   | 
|General
  and administrative expenses |  |                           | 36   |  |   | 13   | 
|                                      |  |                           |      |  |   |      | 
|                                      |  |                           |      |  |   |      | 
|                                      |  | $                         | 451  |  | $ | 113  | 
|                                      |  |                           |      |  |   |      | 

| |  |                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of
  December 31, 2007, there was $146 of total unrecognized compensation cost
  related to non-vested share-based compensation arrangements granted to employees
  under the Companys stock option plans. That cost is expected to be
  recognized over a weighted-average period of 1.16 years.
| |  |                                                                                                                                                                                                                                                                                                      
| |  | The options
  outstanding as of December 31, 2007 have been separated into exercise prices,
  as follows:                                                                                                                                                                                            

|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    |  |         |  |   |      | 
|---------------- |  | ----------------------------------------------------- | ------- | ------------------------------------------------------ | ----- | -------------------------------------- |  | ----------------------------------------------------- | ---- | ------------------------------------------------------------------ |  | ------- |  | - | ---- | 
|Exercise
  price |  | Options 
  outstanding
  as of
  December 31, 
  2007 |         | Weighted
  average 
  remaining 
  contractual 
  life |       | Weighted 
  average
  exercise
  price |  | Options 
  exercisable
  as of
  December 31, 
  2007 |      | Weighted
  average
  exercise 
  price of 
  exercisable
  options | 
|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    | 
|                 |  |                                                       |         |                                                        | years |                                        |  |                                                       |      |                                                                    |  |         |  |   |     
|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    |  |         |  |   |     
|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    |  |         |  |   |      | 
|$     3.0        |  |                                                       | 115,000 |                                                        |       | 1.92                                   |  | $                                                     | 3.0  |                                                                    |  | 83,666  |  |   |      | 
|$     3.5        |  |                                                       | 240,000 |                                                        |       | 3.22                                   |  | $                                                     | 3.5  |                                                                    |  | 86,666  |  |   |      | 
|$     3.9        |  |                                                       | 248,667 |                                                        |       | 3.12                                   |  | $                                                     | 3.9  |                                                                    |  | 87,336  |  |   |      | 
|$     4.3        |  |                                                       | 29,000  |                                                        |       | 3.25                                   |  | $                                                     | 4.3  |                                                                    |  | 9,668   |  |   |      | 
|$     6.0-8.0    |  |                                                       | 108,000 |                                                        |       | 1.5                                    |  | $                                                     | 7.0  |                                                                    |  | 108,000 |  |   |      | 
|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    |  |         |  |   |      | 
|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    |  |         |  |   |      | 
|                 |  |                                                       | 740,667 |                                                        |       | 2.76                                   |  | $                                                     | 4.03 |                                                                    |  | 375,336 |  | $ | 4.51 | 
|                 |  |                                                       |         |                                                        |       |                                        |  |                                                       |      |                                                                    |  |         |  |   |      | 

| |    |                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                          
| |    |                                                                                                                                                                                                                                           
| | e. | Subsequent
  to the balance sheet date, the Companys Board of Directors granted
  additional 25,000 options to employees. The exercise price of the options is
  the shares par value. The options expire 5 years from the date of grant.

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 9:- | EARNINGS PER SHARE

| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The
  following table sets forth the computation of basic and diluted earnings per
  share:

|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | 
|                                                                                                                               |  | Years
  ended December 31, |           
|                                                                                                                               |  |                            |           
|                                                                                                                               |  | 2005                       |            | 2006 |   | 2007       |  
|                                                                                                                               |  |                            |            |      |   |            |  
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|Net income (loss) attributable to Ordinary
  shares                                                                            |  | $                          | (9,059     | )    | $ | (3,803     | ) | $ | 2,447      | 
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|Weighted average number of shares used for
  computing basic net income (loss) per share attributed to Ordinary shareholders   |  |                            | 12,577,392 |      |   | 15,075,881 |   |   | 16,001,148 | 
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|Dilutive affect:                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|Employee stock options                                                                                                         |  |                            | *)-        |      |   | *)-        |   |   | 120,841    | 
|Preferred shares as converted                                                                                                  |  |                            | *)-        |      |   | *)-        |   |   | *)-        | 
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 
|Weighted average number of shares used for
  computing diluted net income (loss) per share attributed to Ordinary shareholders |  |                            | 12,577,392 |      |   | 15,075,881 |   |   | 16,121,989 | 
|                                                                                                                               |  |                            |            |      |   |            |   |   |            | 

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

|          |                                          
|--------- | -----------------------------------------
|NOTE 10:- | RELATED PARTIES TRANSACTIONS AND BALANCES
|          |                                          
|          | Composition:                             

|                                                       |  |              |     |      |   |        |  
|------------------------------------------------------ |  | ------------ | --- | ---- | - | ------ | -
|                                                       |  | December 31, |    
|                                                       |  |              |    
|                                                       |  | 2006         |     | 2007 |  
|                                                       |  |              |     |      |  
|                                                       |  |              |     |      |   |        |  
|Balances between Team and the Company (see
  a below)  |  | $            | (40 | )    | $ | (3,932 | )
|                                                       |  |              |     |      |   |        |  
|                                                       |  |              |     |      |   |        |  
|Balance with related party
  shareholder (see b below) |  | $            | 373 |      | $ | 409    |  
|                                                       |  |              |     |      |   |        |  

| |    |                                                                
| | -- | ---------------------------------------------------------------
| | a. | Transactions
  and with Team:                                  
| |    |                                                                
| |    | Transactions
  between Team and its affiliates and the Company:

|                                                        |  |                         |       |      |   |       |  |   |       | 
|------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                        |  | Year ended December 31, |      
|                                                        |  |                         |      
|                                                        |  | 2005                    |       | 2006 |   | 2007  | 
|                                                        |  |                         |       |      |   |       | 
|                                                       
|Revenues:                                               |  |                         |       |      |   |       |  |   |       | 
|Commissions on product sales and
  payment for services |  | $                       | 93    |      | $ | -     |  | $ | 502   | 
|                                                        |  |                         |       |      |   |       |  |   |       | 
|                                                        |  |                         |       |      |   |       |  |   |       | 
|General and administrative expenses:                    |  |                         |       |      |   |       |  |   |       | 
|Rent and maintenance                                    |  | $                       | 1,379 |      | $ | 1,160 |  | $ | 1,402 | 
|                                                        |  |                         |       |      |   |       |  |   |       | 
|                                                        |  |                         |       |      |   |       |  |   |       | 
|Administrative and management services                  |  | $                       | 169   |      | $ | 160   |  | $ | 164   | 
|                                                        |  |                         |       |      |   |       |  |   |       | 
|                                                        |  |                         |       |      |   |       |  |   |       | 
|Purchase of equipment                                   |  | $                       | 398   |      | $ | 352   |  | $ | 437   | 
|                                                        |  |                         |       |      |   |       |  |   |       | 

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 10:- | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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, 2007, Team holds 0.79% of the Companys outstanding share
  capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | 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.                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Since 1992,
  the Company has also purchased property and equipment, such as computer
  hardware, from Team and Omnitek-Eichut Ltd. (Omnitek-Eichut), a subsidiary
  of Team. The Company pays Team and Omnitek-Eichut prices for these assets
  that are no less favorable to the Company than those it could obtain from
  unrelated third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In addition,
  Team supplies the Company with hardware, related software and support
  services for such hardware for the Companys projects, in accordance with the
  agreement referred to above. Under the agreement between the Company and
  Team, the Company is required to pay for such hardware, related software and
  support services when it receives payment from its customers.                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 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 ($390 as of December 31, 2007) 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.

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 10:- | RELATED PARTIES TRANSACTIONS AND BALANCES
  (Cont.)

|          |                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--------- | ------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                     | The Company
  filed a NIS 1.6 million ($416 as of December 31, 2007) 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. The trial took place in September 2007 and the
  Company is now in a process of submitting written summations.
|          |                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|NOTE 11:- | 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, 2005, 2006 and 2007:                                                                                                                                                                                                                                                                                                                                                                                 

|              |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
|------------- |  | ----------------------- | ------ | ------------------- | - | ---------------- |  | ------------------- | ------ | ---------------- | - | ------------------- |  | - | ------ |  | - | ----- | 
|              |  | Year ended December 31, |       
|              |  |                         |       
|              |  | 2005                    |        | 2006                |   | 2007             | 
|              |  |                         |        |                     |   |                  | 
|              |  | Total
  revenues        |        | Long-lived
  assets |   | Total
  revenues |  | Long-lived
  assets |        | Total
  revenues |   | Long-lived
  assets | 
|              |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     | 
|              |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
|Israel        |  | $                       | 3,065  |                     | $ | 4,249            |  | $                   | 3,199  |                  | $ | 3,217               |  | $ | 3,516  |  | $ | 5,596 | 
|North America |  |                         | 17,004 |                     |   | 453              |  |                     | 18,929 |                  |   | 600                 |  |   | 16,118 |  |   | 397   | 
|Europe        |  |                         | 11,536 |                     |   | 4                |  |                     | 12,331 |                  |   | 4                   |  |   | 16,320 |  |   | 2     | 
|Australia     |  |                         | 2,466  |                     |   | 23               |  |                     | 3,724  |                  |   | 20                  |  |   | 2,598  |  |   | 35    | 
|South America |  |                         | 3,551  |                     |   | -                |  |                     | 3,085  |                  |   | -                   |  |   | 2,251  |  |   | 14    | 
|Far East      |  |                         | 1,999  |                     |   | -                |  |                     | 1,626  |                  |   | 1                   |  |   | 3,217  |  |   | 1     | 
|South Africa  |  |                         | 3,605  |                     |   | -                |  |                     | 3,220  |                  |   | -                   |  |   | 1,897  |  |   | -     | 
|              |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
|              |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 
|              |  | $                       | 43,226 |                     | $ | 4,729            |  | $                   | 46,114 |                  | $ | 3,842               |  | $ | 45,917 |  | $ | 6,045 | 
|              |  |                         |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |       | 

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

|           |  |                         |   |      |    |      |  |    |   | 
|---------- |  | ----------------------- | - | ---- | -- | ---- |  | -- | - | 
|           |  | Year ended December 31, |  
|           |  |                         |  
|           |  | 2005                    |   | 2006 |    | 2007 | 
|           |  |                         |   |      |    |      | 
|           |  |                         |   |      |    |      |  |    |   | 
|Customer A |  | 14                      | % |      | 13 | %    |  | 15 | % | 
|Customer B |  | 2                       | % |      | 5  | %    |  | 7  | % | 
|Customer C |  | 0                       | % |      | 1  | %    |  | 6  | % | 
|Customer D |  | 4                       | % |      | 5  | %    |  | 6  | % | 

F-34

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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 12:- | SELECTED STATEMENTS OF OPERATIONS DATA
|          |                                        |                                 
|          | a.                                     | Research and
  development, net:

|                                 |  |                         |       |      |   |       |  |   |       | 
|-------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                 |  | Year ended December 31, |      
|                                 |  |                         |      
|                                 |  | 2005                    |       | 2006 |   | 2007  | 
|                                 |  |                         |       |      |   |       | 
|                                 |  |                         |       |      |   |       |  |   |       | 
|Total cost                       |  | $                       | 9,166 |      | $ | 9,632 |  | $ | 9,433 | 
|Less - grants and participations |  |                         | 30    |      |   | 54    |  |   | -     | 
|                                 |  |                         |       |      |   |       |  |   |       | 
|                                 |  |                         |       |      |   |       |  |   |       | 
|Research and development, net    |  | $                       | 9,136 |      | $ | 9,578 |  | $ | 9,433 | 
|                                 |  |                         |       |      |   |       |  |   |       | 

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

|                                                                      |  |                         |       |      |   |       |   |   |       | 
|--------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | 
|                                                                      |  | Year ended December 31, |      
|                                                                      |  |                         |      
|                                                                      |  | 2005                    |       | 2006 |   | 2007  |  
|                                                                      |  |                         |       |      |   |       |  
|                                                                      |  |                         |       |      |   |       |   |   |       | 
|Financial
  income, net                                               |  |                         |       |      |   |       |   |   |       | 
|Foreign currency translation adjustments                              |  | $                       | (646  | )    | $ | 41    |   | $ | 985   | 
|Loss from sale of marketable securities                               |  |                         | -     |      |   | (838  | ) |   | -     | 
|Other than temporary decline in fair value
  of marketable securities |  |                         | (301  | )    |   | (329  | ) |   | -     | 
|Interest and other                                                    |  |                         | 1,100 |      |   | 1,788 |   |   | 1,165 | 
|                                                                      |  |                         |       |      |   |       |   |   |       | 
|                                                                      |  |                         |       |      |   |       |   |   |       | 
|Financial
  income, net                                               |  | $                       | 153   |      | $ | 662   |   | $ | 2,150 | 
|                                                                      |  |                         |       |      |   |       |   |   |       | 

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

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 13:- | 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, 2007 |      
|                                                        |  |                                |      
|                                                        |  | As
  reported                  |       | Adjustments |   | As per
  Israeli GAAP *) |  
|                                                        |  |                                |       |             |   |                          |  
|                                                        |  |                                |       |             |   |                          |   |   |        |  
|Net income (loss)                                       |  | $                              | 2,896 |             | $ | (5,774                   | ) | $ | (2,878 | )
|                                                        |  |                                |       |             |   |                          |   |   |        |  
|                                                        |  |                                |       |             |   |                          |   |   |        |  
|Basic and diluted net loss attributed to
  shareholders |  | $                              | 0.15  |             | $ | (0.30                    | ) | $ | (0.15  | )
|                                                        |  |                                |       |             |   |                          |   |   |        |  

| |    |                                |                                                                                                                                                                                     
| | -- | ------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | *)                             | 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.
| |   
| | b. | Effect on
  the balance sheet:

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

|             |  |                                |        |             |   |                          |  |   |        | 
|------------ |  | ------------------------------ | ------ | ----------- | - | ------------------------ |  | - | ------ | 
|             |  | Year ended
  December 31, 2007 |       
|             |  |                                |       
|             |  | As
  reported                  |        | Adjustments |   | As per
  Israeli GAAP *) | 
|             |  |                                |        |             |   |                          | 
|             |  |                                |        |             |   |                          |  |   |        | 
|Total equity |  | $                              | 33,436 |             | $ | 699                      |  | $ | 34,135 | 
|             |  |                                |        |             |   |                          |  |   |        | 

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

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 13:- | RECONCILIATION TO ISRAELI GAAP (Cont.)

|          |                   |                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------- | ----------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | c.                | Material
  adjustments:                                                                                                                                                                                                                                                                                                                           
|          |                   |                                                                                                                                                                                                                                                                                                                                                   
|          |                   | The
  abovementioned adjustments result primarily from the differences between U.S.
  GAAP and Israeli GAAP, as follows:                                                                                                                                                                                                                          
|          |                   |                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                   | 1.                                                                                                                                                                                                                                                                                                                                                 | According to
  US GAAP, the net income used to compute the net income per share is the net
  income attributed to Ordinary shareholders after deducting the deemed
  dividend associated with the beneficial conversion feature of the Preferred
  shares. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                   |                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                   | 2.                                                                                                                                                                                                                                                                                                                                                 | 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.
|          |                   |                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 14:- | SUBSEQUENT EVENTS
|          |                   |                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                   | In 2007 the
  Company signed a definitive agreement to acquire Telesens LLC, a software
  house headquartered in Ukraine. Telesens has been developing, implementing
  and promoting software solutions and related professional services for the
  telecommunications market since 1998. The agreement closed in the beginning
  of January 2008.
|          |                   |                                                                                                                                                                                                                                                                                                                                                   
|          |                   | Under the
  terms of the agreement, the aggregate purchase price will be up to $2.7
  million, subject to downward adjustments related to amongst other, actual
  2007 annual turnover and certain other performance parameters based on 2008
  and 2009 operations. The consideration will be paid in cash over a three-year
  period.           

------------

F-37

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---