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SECURITIES AND EXCHANGE
COMMISSION  WASHINGTON, 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, 2008
|                                             |                                                                                                  
|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

(TELECOM LOGO)

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)

Tali Cohen-Tueg, Acting CFO
12 Amal Street, Afek Park
Rosh Haayin 48092, Israel 
972-3-926-9723
tali@tti-telecom.com(Name, Telephone,
E-mail and/or Facsimile number and Address of Company Contact Person)

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

|                                              |  |                                          
|--------------------------------------------- |  | -----------------------------------------
|Title of Each Class                           |  | Name of Each Exchange On Which Registered
|                                              |  |                                          
|Ordinary Shares, NIS 0.5 par
 value per share |  | NASDAQ Global Market                     

---

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

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

Indicate the number of
outstanding shares of each of the issuers classes of capital or common stock as
of the close of the period covered by the annual report:

16,003,158Ordinary 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 basis of accounting the registrant has used to prepare the
financial statements included in this filing:

|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
|x | U.S.
 GAAP                                                                                             
|  |                                                                                                        
|o | International
 Financial Reporting Standards as issued by the International Accounting
 Standards Board
|  |                                                                                                        
|o | Other                                                                                                  

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

o Item
17     o Item 18

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

o Yes     x No

2

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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                            |  | 20  
|       |          |                                                        |  |     
|       |          | A. History and Development of the Company              |  | 20  
|       |          |                                                        |  |     
|       |          | B. Business Overview                                   |  | 20  
|       |          |                                                        |  |     
|       |          | C. Organizational Structure                            |  | 31  
|       |          |                                                        |  |     
|       |          | D. Property, Plants and Equipment                      |  | 31  
|       |          |                                                        |  |     
|       | Item 4A. | UNRESOLVED STAFF COMMENTS                              |  | 31  
|       |          |                                                        |  |     
|       | Item 5.  | OPERATING
 AND FINANCIAL REVIEW AND PROSPECTS          |  | 31  
|       |          |                                                        |  |     
|       |          | A. Operating Results                                   |  | 31  
|       |          |                                                        |  |     
|       |          | B. Liquidity and Capital Resources                     |  | 42  
|       |          |                                                        |  |     
|       |          | C. Research and Development, Patents and Licenses      |  | 43  
|       |          |                                                        |  |     
|       |          | D. Trend Information                                   |  | 44  
|       |          |                                                        |  |     
|       |          | E. Off-Balance Sheet Arrangements                      |  | 44  
|       |          |                                                        |  |     
|       |          | F. Tabular Disclosure of Contractual Obligations       |  | 44  
|       |          |                                                        |  |     
|       | Item 6.  | DIRECTORS,
 SENIOR MANAGEMENT AND EMPLOYEES            |  | 45  
|       |          |                                                        |  |     
|       |          | A. Directors and Senior Management                     |  | 45  
|       |          |                                                        |  |     
|       |          | B. Compensation                                        |  | 47  
|       |          |                                                        |  |     
|       |          | C. Board Practices                                     |  | 47  
|       |          |                                                        |  |     
|       |          | D. Employees                                           |  | 51  
|       |          |                                                        |  |     
|       |          | E. Share Ownership                                     |  | 52  

3

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|        |          |                                                             |  |   
|------- | -------- | ----------------------------------------------------------- |  | --
|        | Item 7.  | MAJOR
 SHAREHOLDERS AND RELATED PARTY TRANSACTIONS          |  | 54
|        |          |                                                             |  |   
|        |          | A. Major Shareholders                                       |  | 54
|        |          |                                                             |  |   
|        |          | B. Related Party Transactions                               |  | 55
|        |          |                                                             |  |   
|        |          | C. Interests of Experts and Counsel                         |  | 56
|        |          |                                                             |  |   
|        | Item 8.  | FINANCIAL
 INFORMATION                                      |  | 56
|        |          |                                                             |  |   
|        |          | A. Consolidated Statements and Other Financial
 Information |  | 56
|        |          |                                                             |  |   
|        |          | B. Significant Changes                                      |  | 59
|        |          |                                                             |  |   
|        | Item 9.  | THE OFFER
 AND LISTING                                      |  | 59
|        |          |                                                             |  |   
|        |          | A. Offer and Listing Details                                |  | 59
|        |          |                                                             |  |   
|        |          | B. Plan of Distribution                                     |  | 59
|        |          |                                                             |  |   
|        |          | C. Markets                                                  |  | 59
|        |          |                                                             |  |   
|        |          | D. Selling Shareholders                                     |  | 59
|        |          |                                                             |  |   
|        |          | E. Dilution                                                 |  | 59
|        |          |                                                             |  |   
|        |          | F. Expenses of the Issue                                    |  | 59
|        |          |                                                             |  |   
|        | Item 10. | ADDITIONAL
 INFORMATION                                     |  | 59
|        |          |                                                             |  |   
|        |          | A. Share Capital                                            |  | 59
|        |          |                                                             |  |   
|        |          | B. Memorandum and Articles of Association                   |  | 59
|        |          |                                                             |  |   
|        |          | C. Material Contracts                                       |  | 64
|        |          |                                                             |  |   
|        |          | D. Exchange Controls                                        |  | 65
|        |          |                                                             |  |   
|        |          | E. Taxation                                                 |  | 65
|        |          |                                                             |  |   
|        |          | F. Dividends and Paying Agents                              |  | 72
|        |          |                                                             |  |   
|        |          | G. Statement by Experts                                     |  | 72
|        |          |                                                             |  |   
|        |          | H. Documents on Display                                     |  | 72
|        |          |                                                             |  |   
|        |          | I. Subsidiary Information                                   |  | 73
|        |          |                                                             |  |   
|        | Item 11. | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |  | 73
|        |          |                                                             |  |   
|        | Item 12. | DESCRIPTION
 OF SECURITIES OTHER THAN EQUITY SECURITIES     |  | 73
|        |          |                                                             |  |   
|PART II |          |                                                             |  |   
|        |          |                                                             |  |   
|        | Item 13. | DEFAULTS,
 DIVIDEND ARREARAGES AND DELINQUENCIES            |  | 73

4

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| |           |                                                                               |  |   
| | --------- | ----------------------------------------------------------------------------- |  | --
| | Item 14   | MATERIAL
 MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  | 73
| |           |                                                                               |  |   
| | Item 15.  | CONTROLS
 AND PROCEDURES                                                      |  | 74
| |           |                                                                               |  |   
| | Item 16.  | Reserved                                                                      |  | 75
| |           |                                                                               |  |   
| | Item 16A. | AUDIT
 COMMITTEE FINANCIAL EXPERT                                             |  | 75
| |           |                                                                               |  |   
| | Item 16B. | CODE OF
 ETHICS                                                               |  | 75
| |           |                                                                               |  |   
| | Item 16C. | PRINCIPAL
 ACCOUNTANT FEES AND SERVICES                                       |  | 75
| |           |                                                                               |  |   
| | Item 16D. | EXEMPTIONS
 FROM LISTING STANDARDS FOR AUDIT COMMITTEES                       |  | 75
| |           |                                                                               |  |   
| | Item 16E. | PURCHASES
 OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |  | 76
| |           |                                                                               |  |   
| | Item 16F. | CHANGE IN
 REGISTRANTS CERTIFYING ACCOUNTANT                                 |  | 76
| |           |                                                                               |  |   
| | Item 16G. | CORPORATE
 GOVERNANCE                                                         |  | 76
| |           |                                                                               |  |   
| | Item 17.  | FINANCIAL
 STATEMENTS                                                         |  | 76
| |           |                                                                               |  |   
| | Item 18.  | FINANCIAL
 STATEMENTS                                                         |  | 76
| |           |                                                                               |  |   
| | Item 19.  | EXHIBITS                                                                      |  | 76

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 29, 2009, the exchange rate
between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 4.196
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. You should read the following selected
financial data 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 2006, 2007 and 2008, and the selected consolidated balance sheet
data as of December 31, 2007 and 2008, 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, 2004 and 2005
and the selected consolidated balance sheet data as of December 31, 2004, 2005
and 2006, 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) |        
|                                                                           |  |                                                           |        
|                                                                           |  | 2004                                                      |         | 2005 |   | 2006   |   | 2007 |        | 2008 |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Statement of Income Data:                                                  |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Revenues:                                                                  |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Products                                                                   |  | $                                                         | 21,670  |      | $ | 25,317 |   | $    | 27,554 |      | $ | 25,722 |   | $ | 30,134 |  
|Services                                                                   |  |                                                           | 16,128  |      |   | 17,909 |   |      | 18,560 |      |   | 20,195 |   |   | 22,152 |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Total revenues                                                             |  |                                                           | 37,798  |      |   | 43,226 |   |      | 46,114 |      |   | 45,917 |   |   | 52,286 |  
|Cost of revenues:                                                          |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Products                                                                   |  |                                                           | 16,645  |      |   | 13,015 |   |      | 14,783 |      |   | 12,504 |   |   | 16,381 |  
|Services                                                                   |  |                                                           | 9,719   |      |   | 9,203  |   |      | 9,571  |      |   | 8,545  |   |   | 7,865  |  
|Impairment of capitalized software                                         |  |                                                           | 3,597   |      |   | 177    |   |      |       |      |   |       |   |   |       |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Total cost of revenues                                                     |  |                                                           | 29,961  |      |   | 22,395 |   |      | 24,354 |      |   | 21,049 |   |   | 24,246 |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Gross profit                                                               |  |                                                           | 7,837   |      |   | 20,831 |   |      | 21,760 |      |   | 24,868 |   |   | 28,040 |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Operating expenses:                                                        |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Research and development, net                                              |  |                                                           | 10,744  |      |   | 9,136  |   |      | 9,578  |      |   | 9,433  |   |   | 11,407 |  
|Selling and marketing                                                      |  |                                                           | 19,220  |      |   | 11,977 |   |      | 10,214 |      |   | 7,857  |   |   | 9,996  |  
|General and administrative                                                 |  |                                                           | 6,636   |      |   | 6,325  |   |      | 6,679  |      |   | 6,952  |   |   | 6,351  |  
|Impairment of goodwill                                                     |  |                                                           |        |      |   |       |   |      |       |      |   |       |   |   | 1,401  |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Allowance for doubtful accounts and bad debt write-off                     |  |                                                           | (50     | )    |   |       |   |      |       |      |   |       |   |   |       |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Total operating expenses                                                   |  |                                                           | 36,550  |      |   | 27,438 |   |      | 26,471 |      |   | 24,242 |   |   | 29,155 |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Operating income (loss)                                                    |  |                                                           | (28,713 | )    |   | (6,607 | ) |      | (4,711 | )    |   | 626    |   |   | (1,115 | )
|Other income                                                               |  |                                                           |         |      |   |        |   |      | 150    |      |   | 33     |   |   |       |  
|Financial income (loss), net                                               |  |                                                           | 1,326   |      |   | 153    |   |      | 662    |      |   | 2,150  |   |   | (515   | )
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Income (loss) before income taxes                                          |  |                                                           | (27,387 | )    |   | (6,454 | ) |      | (3,899 | )    |   | 2,809  |   |   | (1,630 | )
|Income taxes (benefit)                                                     |  |                                                           | 2,107   |      |   | 624    |   |      | (96    | )    |   | (87    | ) |   | 371    |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Net income (loss)                                                          |  | $                                                         | (29,494 | )    |   | (7,078 | ) |      | (3,803 | )    |   | 2,896  |   |   | (2,001 | )
|Deemed dividend associated with Beneficial Conversion Feature              |  |                                                           |        |      |   | (1,981 | ) |      |       |      |   |       |   |   |       |  
|Income attributable to preferred shareholders                              |  |                                                           |        |      |   |       |   |      |       |      |   | (449   | ) |   |       |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Net income (loss) attributable to ordinary shareholders                    |  | $                                                         | (29,494 | )    |   | (9,059 | ) |      | (3,803 | )    |   | 2,447  |   |   | (2,001 | )
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Net Basic and diluted income (loss) attributable to ordinary
 shareholders |  | $                                                         | (2.48   | )    |   | (0.72  | ) |      | (0.20  | )    |   | 0.15   |   |   | (0.13  | )
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Weighted average number of shares used in computing:                       |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic net earnings (loss) per share attributed to ordinary
 shareholders   |  |                                                           | 11,873  |      |   | 12,577 |   |      | 15,076 |      |   | 16,001 |   |   | 16,003 |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                           |         |      |   |        |   |      |        |      |   |        |   |   |        |  
|Diluted net earnings (loss) per share attributed to ordinary
 shareholders |  |                                                           | 11,873  |      |   | 12,577 |   |      | 15,076 |      |   | 16,122 |   |   | 16,003 |  

7

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|                          |  |                                     |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|------------------------- |  | ----------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                          |  | December 31,(dollars in
 thousands) |       
|                          |  |                                     |       
|                          |  | 2004                                |        | 2005 |   | 2006   |  | 2007 |        | 2008 |  
|                          |  |                                     |        |      |   |        |  |      |        |      |  
|                          |  |                                     |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Balance Sheet Data:       |  |                                     |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Cash and cash equivalents |  | $                                   | 5,472  |      | $ | 18,034 |  | $    | 31,410 |      | $ | 33,408 |  | $ | 24,957 | 
|Short term bank deposits  |  |                                     | 2,372  |      |   | 1,973  |  |      | 984    |      |   | 98     |  |   |       | 
|Marketable securities     |  |                                     | 12,626 |      |   | 15,713 |  |      |       |      |   |       |  |   |       | 
|Short-term bank debt      |  |                                     | 967    |      |   |       |  |      |       |      |   |       |  |   |       | 
|Working capital           |  |                                     | 16,806 |      |   | 23,613 |  |      | 24,462 |      |   | 30,519 |  |   | 27,829 | 
|Total assets              |  |                                     | 46,497 |      |   | 55,851 |  |      | 53,585 |      |   | 58,594 |  |   | 52,401 | 
|Shareholders equity      |  |                                     | 26,293 |      |   | 32,443 |  |      | 30,495 |      |   | 33,436 |  |   | 31,478 | 

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 near future.

We incurred net losses of
$3.8 million in 2006, net income of $2.9 million in 2007 and net losses of $2.0
million in 2008. Although we have been profitable in the recent past, we may
not be profitable or meet the level of expectations of the investment community
in the near future. This could have a material adverse impact on our share price.
Even if we achieve 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 will 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 42% of
our total revenues in 2006, 38% of our total revenues in 2007 and 49% of our
total revenue in 2008. Due to 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.

8

---

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The global economic recession could cause slowdown and
cancellations of significant sales of our products and services,which
could seriously harm our operating results.

The
second half of 2008 was affected by the global economic slowdown that
exacerbated into a severe global recession. Our customers, vendors as well as
partners and suppliers are affected by this recession in manner that affected
us in a number of ways, including the following:

| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | we
 have experienced, and expect to continue to experience, longer sales cycles;                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                  
| | · | some
 of our customers and vendors have cancelled and may cancel in the future
 their purchase plans and new projects;                                                                                                                           
| |   |                                                                                                                                                                                                                                                  
| | · | strong
 pressure on the price of our products and services; and                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                  
| | · | some
 of our customers are undergoing, and may undergo in the future, financial
 difficulties which may result in a longer period for collection of payments
 owed to us and, in certain cases, even seeking to avoid payments to us
 altogether.

The economic outlook for
2009 has worsened significantly, including in our largest markets, North
America and Europe, and the global economic recession appears set to continue
for some time. However, we are currently unable to predict how long the recession
will last or the full extent of its effects on our operating results and
financial condition.

In the past few years, the communications service provider industry
has undergone a period of consolidation. Consolidation of the service
providers, some of which are our 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 AT&T mergers with SBC (November 2005), Bellsouth
(December 2006) and Dobson (July 2007).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.

In
addition, in the past four years, we have identified a trend of consolidation
and acquisition in our competitors in the global operation support, or OSS market.
Examples of this trend are the IBM acquisition of Micromuse (December 2005) and of Vallent (December
2006).This trend has resulted in stronger competition
that threatens our market positioning.

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 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 6 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 6 to 24 months. The
implementation process may also be subject to delay. We cannot control such
delays and cannot control the timing of sales cycles or our sales revenue,
especially in light of the current global economic recession, which has
lengthened our sales cycles.

9

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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                     
| |   |                                                            
| |  | changes
 in communications service providers requirements.

In
addition, the introduction of new technologies and new industry standards and
practices can render our existing products obsolete and unmarketable. As a
result, the life cycles of our products are difficult to estimate and we could
lose market acceptance and have reduced related revenues. Accordingly, our
financial performance and growth is dependent on our ability to, among other
things:

| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enhance
 and improve our existing products;                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                
| |  | develop
 and introduce, on a timely and cost-effective basis, new products and product
 features that keep pace with technological developments and emerging industry
 standards, including next-generation and third-generation (3G) networks;
| |   |                                                                                                                                                                                                                                                
| |  | address
 the increasingly sophisticated needs of our customers;                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                
| |  | incorporate
 new technologies and new infrastructures; and                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                
| |  | 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.

Although
we continue to invest in improving our products and solutions, we cannot assure
you that they will receive market acceptance. Thus, our future operating
results depend on the market acceptance of our existing and new products and
services, and if these investments do not achieve market acceptance, our
business and financial results may be adversely affected.

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 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, or Telesens, a
Ukraine-based software house, 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 acquired technologies, operations, services and
corporate culture of the acquired business 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 Telesens, 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.

Our internal investigation in
connection with the acquisition of Telesens revealed improper conduct by one of
our RBU managers. As a result, our business and reputation may be harmed. In
addition, we may not be able to prevent similar events in the future.

Our
Audit Committee completed an internal investigation that revealed that one of
our RBU (Region Business Unit) managers, who is also the son of our Chairman
and CEO, received improper commissions from the former key shareholder of
Telesens (who is also the general manager of Telesens) in connection with our
acquisition of Telesens in January 2008. While we concluded that the results of
the internal investigation and related procedures do not have any impact on our
financial results for the year ended December 31, 2008 or any other period, and
that the investigation did not reveal any material weakness in our internal
control over financial reporting, our business and reputation may be harmed. In
addition, at the recommendation of our Audit Committee, we are in the process
of taking a number of steps designed to improve and safeguard against the
recurrence of improper conduct. These steps include clarifying the existing
prohibition in our Code of Ethics on receiving improper personal gain. However,
the effectiveness of these remedial measures will not be ultimately known until
we have had an opportunity to establish a history with them. If we are unable
to implement additional effective controls, there is a risk that we may not be
able to prevent or detect improper personal gains that could harm our business
and reputation, and, in certain events, such as when an improper personal gain
affected our agreement with third parties, even cause a material misstatement
of our annual or interim consolidated financial statements.

For
additional details, see Item 8A  Legal Proceedings  Internal Investigation.

We may not be successful in our ongoing dispute with the
former shareholders of Telesens.

Under
the terms of the stock purchase agreement with the shareholders of Telesens, the
aggregate purchase price is up to $2.7 million, subject to downward adjustments
related to certain performance parameters, including Telesens actual 2007
annual turnover. The purchase price was to be paid by us in cash in three
installments, as follows: (1) the first payment, of $1.0 million, was paid at
closing; (2) 70.0% of the balance of the purchase price (subject to the
relevant deductions) was supposed to be paid in February 2009; and (3) the
remainder is scheduled to be paid in February 2010.

In
early 2009, we engaged in discussions with Mr. Rubin, one of the selling
shareholders of Telesens, with respect to our demand, in accordance with the
purchase agreement, to make downward adjustments to the purchase price based on
the performance parameters of Telesnes. In light of, among others, the
objection of the selling shareholders to our demands and the internal
investigation that was ongoing at the time, we have determined to hold the
payment of the second installment, scheduled for February 2009, until
resolution of these matters. On March 21, 2009, Mr. Rubin notified us that the
selling shareholders initiated legal proceedings against us in Ukraine with
respect to the purchase agreement. According to Mr. Rubins notice, the lawsuit
alleges, among others, that we have breached the purchase agreement by not
making the timely and full payment of the second installment. Accordingly, the
plaintiffs seek to rescind the transaction, such that the selling shareholders
will receive their shares of Telesens, and seek additional damages of
approximately $500,000. If and when we are served with the lawsuit, we intend to vigorously defend our position.
However, given the preliminary stage of this matter, we cannot predict the
ultimate outcome of this matter at this time. In the event of an unfavorable resolution,
we may be required to pay damages and other costs which could have an adverse
effect on our results of operations and financial condition.

11

---

---



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 30 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, including
 the current global economic recession;                                                                                                          
| |   |                                                                                                                                                                                                                                    
| |  | 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.

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.

12

---

---



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

In
order to continue to sell our products 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 the products and
services actually provided 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.

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

Market
consolidation has led to the strengthened position of fewer carrier customers
on one hand and fewer OSS vendors on the other hand. 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. In addition, 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.

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 IBM, which owns Micromuse and Vallent,
 Hewlett-Packard, Infovista, and Telecordia Technology;                                                                                                                       
| |   |                                                                                                                                                                                                                                                              
| |  | communications
 equipment vendors, such as 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 Alcatel, Nokia 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.

Currency fluctuations could have an
impact on 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 have an impact on 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.

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.

13

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

Our
success and ability to compete depend in part on our proprietary software
technology. We currently have only one registered patent. To protect our
proprietary rights, we rely on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures.

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

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

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

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

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

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

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

| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we
 expect that software product developers will be increasingly subject to infringement
 claims as the number of products and competitors in our industry segment
 grows and the functionality of products in different industry segments
 overlaps;          
| |   |                                                                                                                                                                                                                                                                
| |  | we
 may inadvertently violate the intellectual property rights of other parties
 and other parties may assert infringement claims against us;                                                                                                                  
| |   |                                                                                                                                                                                                                                                                
| |  | if we
 violate the intellectual property rights of other parties we may be required
 to modify our products or intellectual property or obtain a license to permit
 their continued use;                                                                       
| |   |                                                                                                                                                                                                                                                                
| |  | 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.                                                                        

14

---

---



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.      

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.

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 have resulted in increased general and
administrative expenses and a devotion of management time and attention to
compliance activities, and we expect these efforts to require the continued
commitment of significant resources. If we fail to maintain the adequacy of our
internal controls, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over financial reporting.
We may also identify material weaknesses or significant deficiencies in our
internal control over financial reporting. In addition, our internal control
over financial reporting has not yet been audited by our independent registered
public accounting firm. In the future, if we are unable to assert that our
internal controls are effective, our investors could lose confidence in the
accuracy and completeness of our financial reports, which in turn could cause
our stock price to decline. Failure to maintain effective internal control over
financial reporting could also result in investigation 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.

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.

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, in the summer of
2006, Israel engaged in a war with Hezbollah, a Lebanese Islamist Shiite
militia group, which involved thousands of missile strikes and disrupted most
day-to-day civilian activity in northern Israel. Since June 2007, thousands of
missiles have been fired from Gaza at population centers in southern Israel, leading
to an armed conflict between Israel and the Hamas in January 2009. In addition,
Iran has threatened to attack Israel and is widely believed to be developing
nuclear weapons. Any 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 2006, 2007 and 2008,
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 entitled
to 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. If we have to pay additional
taxes, this could harm our business and our profitability when achieved. 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 and some were called to duty during armed conflicts, such
as the one in January 2009. 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.

We may not satisfy the NASDAQ
requirements for continued listing. If we cannot satisfy these requirements,
NASDAQ could delist our ordinary shares.

Our
ordinary shares are listed on the NASDAQ Global Market, or NASDAQ, under the
symbol TTIL. To continue to be listed on the NASDAQ, we will need to satisfy a
number of conditions, including a minimum bid price of at least $1.00 per
share. Since November 2008, the bid price of our ordinary shares closed below
the minimum bid price requirement of $1.00 per share. Accordingly, we are not
in compliance with the NASDAQ listing requirments. However, NASDAQ has
temporarily suspended the enforcement of the minimum bid price and minimum
market value of publicly held shares, or MVPHS, requirements until July 20,
2009. During the temporary suspension, NASDAQ will not issue any new citations
for bid price or MVPHS violations. We cannot assure you that we will be able to
satisfy the minimum bid, or meet the other continued listing requirements of
NASDAQ in the future. If we are delisted from the NASDAQ, trading in our
ordinary shares may be conducted, if available, on the OTC Bulletin Board
Service or, if available, another medium. In the event of such delisting, an
investor would likely find it significantly more difficult to dispose of, or to
obtain accurate quotations as to the value of our ordinary shares, and our
ability to raise future capital through the sale of our ordinary shares could
be severely limited.

18

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In
addition, if our ordinary shares were delisted from NASDAQ, our ordinary shares
could be considered a penny stock under the U.S. federal securities laws.
Additional regulatory requirements apply to trading by broker-dealers of penny
stocks that could result in the loss of an effective trading market for our
ordinary shares.

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 2008, 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.

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

As of
March 19, 2009, we had approximately 16.0 million ordinary shares issued and
outstanding and approximately 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 19, 2009, Shlomo Eisenberg, the former chairman of our board of
directors, beneficially owned 4,689,924 ordinary shares, which represents
approximately 24.76% 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 6,636,391 Series A Preferred Shares to the
investors in the private placement transaction described elsewhere in this
annual report. As of March 19, 2009, 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.                                                                                                        

19

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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

Corporate History and Details

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., currently known as Malam - Team Ltd., after having
operated as a division of Malam - Team since 1988. In April 2005, Malam - Team
distributed most of the ordinary shares of TTI held by it to its 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 February 1999, we conducted a follow-on public offering of
our ordinary shares, in which 1,150,000 ordinary shares were issued and sold by
us at the price of $7.875 per share. In March 2000, we conducted a follow-on
public offering of our ordinary shares, in which 1,100,000 ordinary shares were
issued and sold by us at the price of $34.875 per share.

In
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.

Recent Business Developments

In
January 2008, we acquired Telesens LLC, a software house headquartered in the
Ukraine, as part of our strategy to expand our sales platform within the CIS
market. For additional details regarding the transaction and associated legal
proceedings, see Item 5A  Operating Results, and under the titles Telesens
and Internal Investigation in Item 8A  Legal Proceedings.

Principal Capital Expenditure and
Divestitures

During
2008, our capital expenditures totaled approximately $4.6 million (compared to
$4.3 million during 2007 and $1.7 million during 2006), which was principally
used for purchasing computers and peripheral equipment (including software and
development tools) and motor vehicles in 2006 and 2007 and, in 2008, also for
acquisition of Telesens. All of the above expenditures were paid from
internally generated funds.

During the
past three years, we did not make any significant divestitures.

B. Business Overview

Introduction

We are
a leading provider of next generation Operations Support Systems (OSSs) to
Communications Service Providers (CSPs) worldwide. For incumbent and emerging
CSPs spanning fixed, mobile and cable markets, we provide a robust OSS platform
that helps manage their networks and services effectively. With nearly two
decades of experience in delivering our products and solutions to industry
leading companies in more than 30 countries, we have a proven track record
managing some of the worlds largest, most complex networks.

20

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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, 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 fixed, mobile, Internet Protocol (IP), cable, digital subscriber line
(DSL) and Voice Over IP (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 dozens of 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 and
world leading system integrators. These alliances enable us to provide
end-to-end integrated solutions as well as stand-alone modules to meet our
customers needs.

Industry Background; Market Opportunity

We
identified three main trends in the market that we operate in:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | First,
 in recent years, communication service providers have been upgrading their
 networks introducing new technologies such as Internet Protocol Television
 (IPTV), 3G (UMTS, HSPA, EVDO) and IP multimedia subsystems (IMS). These
 changes require adaptation of OSS systems to support new technologies and
 services.                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   | 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 fixed and mobile networks. These
 technologhical developments and evolving market trends force service providers
 to implement new technologies and deliver new services, all while increasing
 business efficiency. We believe this evolution in supplied services, the
 growing complexity of the networks and the evolving business models by which
 carriers operate, all require an efficient network management system which we
 believe our solutions offer.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | The
 way telecom carriers operate and manage themselves is also evolving. The need
 to secure new sources of revenue and profit, and to integrate changing
 customer expectations into their service portfolios, significantly transforms
 the business models that successful carriers pursue while developing their
 value propositions and brands. Facing competition, the service providers,
 which aim to deploy cost effective services without sacrificing quality, and
 the incumbents, which seek to protect their markets, place a greater emphasis
 on customer satisfaction.                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | New
 markets emerge in developing countries and regions, such as India and Africa,
 introducing new challenges and market growth potential.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

We
believe these trends are affecting Communication Service Providers in several
ways. First, it is becoming imperative to deliver timely services to customers
over efficient networks. The focus on customer service takes place against a
backdrop of increasing network complexity as voice and data transmissions
converged and new services and technologies emerged. In addition, service
providers are seeking 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.

However, we identified
additional trends that are negatively affecting the markt that we operate in:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | The communications service
 provider industry is undergoing a period of consolidation and mergers.
 Examples of this trend are AT&T mergers with SBC (November 2005),
 Bellsouth (December 2006) and Dobson (July 2007). 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | · | This trend of consolidation, can also be seen in the
 OSS vendors arena as well. Acquistion deals such as the IBM acquisition of
 Micromuse (December 2005) and the IBM acquisition of Vallent (December 2006) have resulted in stronger competition in the OSS vendors market that threatens our market
 positioning.                                                                                                                                                                                                                                             

21

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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 capabilities and technologies, including next-generation
 architectures and managed IP services. We intend to strive to build strong
 brand recognition for our products.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Leverage Installed Base for Additional Sales.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 and Develop Additional Strategic Alliances. Our strategic alliances
 with leading integrators, software vendors and hardware vendors strengthen
 our brand name, enable us to generate sales leads, assist in expanding our
 installed base, assist in entering new markets shorten our time to market by
 leveraging their integration power. For these reasons, we intend to
 strengthen our existing strategic partnerships and to create new alliances.                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                

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 almost two decades 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 key advantages:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | End-to-End Integrated and Modular Product Offering. Our Netrac suite of
 products consists of products that may be used in any combination to suit a
 communications service providers specific business needs. Our Netrac modules
 integrate with one another to either provide a comprehensive solution or to
 address specific functions.                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | Innovative products. We continuously
 invest resources in developing innovative key differentiating products that
 support IP based networks and NGN technologies (including IMS, UMTS, HSDPA,
 EVDO, IP, and IPTV etc.). Understating carriers needs, we specifically
 invests development resources in innovative modules that serve the future,
 service oriented business models of carriers, modules that will enable the
 reduction of operation costs and modules that will provide carriers customers
 with higher quality of services in the diversified networks that service
 providers are managing.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | 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.                                                                                                                                     

22

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Management of Convergence Networks.Our Netrac suite of
 products is designed to manage convergence (fixed and mobile) networks via
 one unified management platform. As a result, communication service providers
 will be able to manage heterogeneous networks consisting of both fixed and
 mobile technologies and protect investments in their systems.                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | Flexible Platform. Our modular Netrac 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.                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | Open Architecture.Netracs open mature
 Application Protocol Interfaces, or API 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | Rapidly Deployable Solutions.Our Netrac suite of
 products is network equipment vendor-independent and includes a pre-built set
 of modules, libraries and applications, which enable communications service
 providers too rapidly and cost effectively deploy new network elements and
 services.                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | 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.                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | Accommodation to Partners. Our Netrac products are used in recent years by world
 leading system integrators. We consider these alliances of strategic
 importance and will continue to invest resources in accommodating our
 products to be customized, implemented and integrated, by integrators, within
 a communications service providers existing OSS and BSS environment.                                                                                                                                                                                                               

Products and Services

Our
Netrac products are capable of service assurance, provisioning and activation
and managing complex fixed and mobile 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.

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.

23

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Fault Management
Product Line

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 product line includes the following products and
add-ons:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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.                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Netrac FaM 10 Cruiser, which was released
 in 2008, is a new client of the FaM product, with a comprehensive graphical
 interface. The client 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.                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Reporter (FaM add-on module) is a Web based tool
 that provides insight into the networks long-term behavior by producing
 informative reports.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Fam Analyzer (FaM add-on module)is a Web based tool
 that provides insight into the networks long-term behavior. It comes with a
 built-in statistical engine, converts alarms and action events into counters
 which enables saving historical data for longer periods of time.                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | FaultPro (FaM add-on module)automates the
 resolution of recurring problems in the network. In full automatic mode, it
 transmits corrective commands to the network. In automatic or semi-automatic
 mode, FaultPro provides a list of possible corrective actions from which NOC
 personnel can select the most appropriate one.                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Correlator TRS is an alarm correlation system that detects and
 isolates root-cause faults from the incoming alarm volume using network-wide
 topology data. Using information on the physical and logical connections that
 exist between network elements, Correlator +TRS reduces large alarm volumes
 into root-cause alarms, thus considerably shortening, Mean Time to Repair, or
 MTTR and the number of alarms operators must handle. The product includes a
 rich, out of the box, set of rules and scenarios supporting various
 technologies including Synchronous Digital Hierarchy, or SDH, Asynchronous
 Transfer Mode, or ATM, and IP.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Netrac Trouble Ticket (NeTkT)manages trouble
 tickets from creation through resolution. NeTkT allows communications service
 providers to implement the desired workflow in the problem resolution cycle
 and ensure the assignment of problems to the appropriate personnel.                                                                                                                                                                                                                                                                                                                                                                        

Performance Management
Product Line

Our
Netrac performance management products proactively 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 line includes the following products and
add-ons:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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 Traffic View)(PMM add-on module)
 utilizes the tight integration of performance and Mediation solutions to
 process thresholds, at real-time and as an integral part of the KPIs
 creation. TrafficGuard 2.0 uses the robust and scalable Netrac Mediation of
 us to collect output data from all network elements and element managers. The
 collected data is parsed, formatted and enriched by the Netrac Mediation, to
 be then forwarded to a web based interface that eases the operator ability to
 make timely decisions.

24

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | PMM Reporter(PMM add-on module) allows service providers to
 easily access web-based reports that provide detailed view of network and
 service performance. PMM Reporter enables users to detect critical problems,
 developing trends, and take proactive actions before these events escalate
 into a crisis. PMM Reporter also allows for network planning and marketing
 reports based on network and service performance data. PMM Reporter uses
 BusinessObjectstm XI technology. This technology provides an
 effective platform for retrieving business information from corporate
 databases, and delivering interactive web pages to end-users.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | · | CallExpert(PMM add-on module) 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.                                                                                                                                                                                                                                                                                                                      

Infrastructure Product
Line

Netrac
is a scalable OSS, supporting the management of multi-vendor networks of
various domains and technologies, as well as customization and extension to
suit the changing needs of our customers. We continue enhancing and improving
the product architecture to guarantee that it remains robust, open, secure,
scalable and extensible and designed to facilitate a seamless integration into
our customers IT and network environments.

Many
carriers and service providers worldwide use the Netrac platform and have
successfully integrated it with other OSS and BSS applications, using various
interface methods. Our APIs are based on XML over JMS or HTTP web services
correspondingly with the Service Oriented Architecture (SOA). We are also an
active member of the TM Forum Interface Program (TIP) group and contribute to
the fault and performance standard specifications regularly.

Our
infrastructure product line includes the following products and add-ons:

| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Netrac Mediation Engine is a core component
 built into the Netrac platform that is capable of collecting all types of
 data from the network, including network events, performance measurements,
 call detail records (CDRs), IP detail records (IPDRs), and configuration
 data.        
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                             | o | The
 engine processes the information into a unified format and provides filtered
 and meaningful generic data from hybrid networks to upstream OSS/BSS systems.
 Mediation rules can be either defined through the Netrac Mediation platforms
 user-friendly GUI, or be loaded from our mediation libraries, which contain
 ready-to-use mediation rules for specific technologies, vendors, protocols,
 and network element types.
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                             | o | In
 addition, the mediation platform includes the innovative ability to configure
 and send commands to network elements from a remote client. This enhances the
 platforms data collection capabilities and enables sending corrective and
 diagnostic commands to network elements, regardless of protocol, vendor, or
 domain.                                                                                                   
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Netrac Studio an integrated, user-friendly, graphical
 development environment for managing Mediation libraries and project layer
 customizations.                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | AutoDiscoveryis a network discovery tool that uses ICMP and
 SNMP to discover IP based networks. The engine uses SNMP requests to get
 information stored in standard and vendor specific MIBs that are used to
 discover network elements, their internal structure and connectivity.     
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Dashboard is a web-based tool for operators and managers
 who require real-time, visual, full network view. Integrated with Netrac
 application such as: FaM, ServiceImpact, NeTkT and PMM. By using this tool,
 operators and managers are quickly updated on network and services status.
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | GIS Maps tool provides users with a spatial view of the
 network topology. The application displays network entities at their
 respective locations, network elements, sites and links on Geographical
 Information System (GIS) maps.                                                     
| |   |                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | Schematic Views is a user-friendly graphical drag-and-drop
 application that allows users to view their network health. Users have the
 flexibility to view different sections of the network topology in multiple
 views. The users can also view fault information.                      

25

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | · | Base Configuration is a telecom
 assurance-oriented configuration repository. Base Configuration can be used
 for alarm enrichment, topology based correlation, service impact analysis and
 trouble ticket management.                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 
| | · | NetImport module is used to import configuration data from
 external data sources into Base Configuration. The NetImport module is used
 for initial population of BC and for continuous updates of configuration with
 changes occurring in the network. SecureAccess provides a centralized gateway
 through which authorized users can view, access and send commands to
 different network elements based on their security authorizations.

Service Fulfillment
Product Line

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.

Our
Netrac provisioning product line includes the following products:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NetOrder (former Work
 Order) is an order management system that enables service
 providers to effectively manage the service order and change order
 fulfillment processes. NetOrder controls the entire process, from order
 creation and modification through tracking, provisioning, and closure,
 culminating in efficient archiving for later comparison and analysis.
 NetOrder streamlines fulfillment of network re-configuration and service
 orders across multi-vendor, multi-technology and multi-domain networks.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Activateautomatically activates services end-to-end
 across multi-vendor, multi-technology networks. Activate replaces manual
 processes with automated activities, thus eliminating the problems that tend
 to plague manual activation and reducing service activation times, and
 performs rollback in case of an activation failure. This product also enables
 scheduling of network activation operations.                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | NetTask manages the manual tasks assigned to
 individuals or group of users as part of the order fulfillment life cycle.
 NetTask is an add-on to the workflow engine that allows service providers to
 automate the order process and the integration between the different OSS and
 BSS systems involved, thus increasing the operational efficiency and
 accelerating services and products roll out.                                                                                                                       

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, 2008, our professional services personnel
consisted of 160 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.

26

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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 become 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. A project is
considered completed when the stabilization period is over.

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

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

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

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.                     

27

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---



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 about 30
countries (many of them are Tier 1 and Tier 2 communication service providers).

Sales and Marketing

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

We have
focused our direct sales activities on North America, Europe, Africa and the
Asia Pacific regions. 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.

Sales
effected through our strategic relationships with partners such as Nortel and
Siemens accounted for approximately 12% of our revenues in 2006, approximately
12% of our revenues in 2007 and approximately 6% of our revenues in 2008. 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).

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 6 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. Since early 2008, we operate using Regional Business
Units, or RBUs, including Americas RBU; Western Europe & Asia RBU; Eastern
& Central Europe & Africa RBU; Israel RBU and Australia & New
Zealand RBU. The main objectives of this operation strategy is to impose
end-to-end accountability on the RBUs mainly with respect to sales and
delivery, and to increase the commitment of each of the RBUs personnel to our
customers needs in order to acheive 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, Ukraine and in several locations in the United States. In addition,
we have sales representatives and sales consultants located throughout the
world.

As of
December 31, 2008, we employed 28 sales and marketing personnel. To date, we
have established relationships with many equipment, software and service
providers. Through these alliances, we deliver a joint, comprehensive solution
that builds on each respective companys strengths. We intend to strengthen our
existing strategic alliances, 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.

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, 2008, we employed 119 employees in research and development (excluding
the  research and development employees of Telesens). 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;               

28

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| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
 fixed and mobile 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 $9.6 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. Gross research and development expenses
were approximately $11.4 million, or 21.8% of our revenues, for the year ended
December 31, 2008. 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. In previous years, we relied on these
grants for the financing of a portion of our product development expenditures.
Through December 2008 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
addition, 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 and in 2008, 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, 2008, our total contingent liability in respect of grants received
from the Chief Scientist and the BIRD Foundation, net of royalties paid or
accrued, was approximately $2.7 million. Although we have received grants in
the past, and may continue to do so in the future, we intend to fund future
research and development efforts primarily from our own funds and through fees
charged for customization and enhancement of products for our customers. For
additional details regarding terms and conditions relating to grants from the
Chief Scientist, seeItem 5B  Grants from
the Office of the Chief Scientist.

Competition

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

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

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

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| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | communications
 equipment vendors, such as Ericsson, Nokia and Lucent Technologies;                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                       
| |  | systems
 integrators who provide programming services to develop customer-specific
 applications, such as Accenture, Ericsson, ATOS, LogicaCMG, BusinessEdge
 Solutions, Capgemini and IBM Global Services.                                           
| |   |                                                                                                                                                                                                                                                       
| |  | managed
 service providers, such as Ericsson and Alcatel, that offer their customers
 management services on top of their networks rather than building their own
 network operation center, or NOC, and purchasing an independent management
 system.

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

Intellectual Property

We rely
on a combination of trade secret, copyright and trademark laws, nondisclosure
and other contractual agreements and technical measures to protect our
proprietary rights. We currently have only one registered patent in the United
States and one patent application pending in Europe. We have also obtained
trademark registrations for Netrac®, and our logo in the United States.

We seek
to protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. As part of our
confidentiality procedures, we generally enter into invention assignment and
proprietary information agreements with our employees and consultants and
nondisclosure agreements with our customers and distributors. We also generally
limit access to the source code of our products, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary.

In
addition, in particular instances we are required by our customers to place the
source codes for certain of our products into escrow arrangements to ensure
that customers will not be adversely affected by an interruption in our
business or if we materially breach our agreement with such customer. In
limited circumstances, we are required to grant to our customers access to such
source code to enable them to continue to support the products purchased, in
accordance with the agreed upon terms that limit the right to use such software,
and without transferring any intellectual property rights in the licensed
software to such customers. Such arrangements relating to our source code may
increase the likelihood of misappropriation or other misuse of our intellectual
property. Moreover, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries, making the possibility of
misappropriation of our proprietary technology more likely.

The
steps we take to protect our proprietary technology may not prevent
misappropriation of such technology, and such protections may not prevent
competitors from developing products with functionality or features similar or
superior to our products. For example, we currently have one patent application
pending in Europe. If our pending patent application will be rejected, our
ability to protect the proprietary information underlying such application may
be limited. We believe that, because of the rapid pace of technological change
in the market for our products, legal protections of our proprietary technology
are less significant factors in our success than the knowledge, technical
expertise, ability and experience of our employees, the frequency of product
enhancements, timely introduction of new products and the quality of
professional services and customer support we provide.

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

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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, Business Objects, 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 December 2014,
and the annual rent is approximately $577,000.

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.

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 4,418 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 $910,000 in
2008. We expect to pay total leasing expenses for our facilities of
approximately $1.1 million in 2009.

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.

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Overview

We
commenced independent operations in September 1992, as a subsidiary of Team
Computers and Systems Ltd., currently known as Malam - Team Ltd., an Israeli
publicly traded company, after having operated as a division of Malam - Team
Ltd. 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 $6.0
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 6 to 24 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 150 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.

Highlights of 2008

In
2008, total revenues were $52.3 million, compared to $45.9 million in 2007. Our
operating loss was $1.1 million compated to operating income of $0.6 million in
2007 and we incurred a net loss of $2.0 million, compared to a net income of
$2.9 million in 2007. We had cash and cash equivalents of approximately $25.0
million as of December 31, 2008 compared to $33.4 million as of December 31,
2008.

During
the fourth quarter 2008 and the first quarter 2009, we initiated efforts to
reduce our operating costs aimed at aligning our expenses to the current
economic conditions. One of the steps taken was implemented in March 2009 and
involved a company-wide salary reduction of approximately 5.0%.

In
January 2008, we acquired Telesens LLC, a software house headquartered in the
Ukraine, as part of our strategy to expand our sales platform within the CIS
market. The acquisition was effected by way of a stock purchase agreement
between us and the selling shareholders. Under the terms of the agreement, the
aggregate purchase price is up to $2.7 million, subject to downward adjustments
related to certain performance parameters, including Telesens actual 2007
annual turnover. The purchase price is to be paid by us in cash in three
installments, as follows: (1) the first payment, of $1.0 million, was paid
subsequent to the acquisition date, at closing; (2) 70.0% of the balance of the
purchase price (subject to the relevant deductions) was supposed to be paid in
February 2009, but due to a dispute with the selling shareholders, primarily on
the size of the payment, was not paid as of yet; and (3) the remainder is
scheduled 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 said two deferred payments.

For
additional details regarding the transaction and associated legal proceedings,
see below under Internal Investigation and also under the titles Telesens
and Internal Investigation in Item 8A  Legal Proceedings.

Internal Investigation

In
January 2009, our Board of Directors received a written complaint of Mr. Edward
Rubin, a former key shareholder of Telesens LLC who is also the current general
manager of Telesens LLC, a Ukraine-based software house that was acquired by us
in January 2008, alleging, among other things, that a Region Business Unit
manager, or the RBU Manager, who is also the son of our Chairman and CEO,
received improper commissions from Mr. Rubin with respect to the acquisition of
Telesens.

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Our
Audit Committee engaged Barlev Investigative Auditing to lead an internal
investigation. Based on the report of the independent investigator, our Audit
Committee concluded, among other things, that (1) the RBU Manager received,
directly or indirectly, approximately $90,000 (while he was entitled to receive
under the finder agreement he had with Mr. Rubin up to $350,000) and that he
failed to disclose the said commission to us, and (2) none of our other
employees, officers or directors was aware of such commission or was engaged in
any improper personal conduct. Our Audit Committee also made certain
recommendations to our management, including terminating the engagement with
the RBU Manager immediately.

We
evaluated the effects, if any, of the results of the internal investigation and
related procedures on our financial results for the year ended December 31,
2008 or any other period. The investigation concluded that the misconduct of
the RBU Manager in our acquisition of Telesens did not affect the terms,
including purchase price, of the transaction, and therefore, we determined it
should not impact the accounting for the acquisition. We are currently
exploring our legal status regarding the acquisition of Telesens and Mr. Rubin.

Based, among others, on our
assessment of the financial results of Telesens for the year ended December 31,
2008 and the dispute with the former shareholders of Telesens, including Mr.
Rubin, we determined that indicators for impairment exist, and according to FAS
144 and FAS 142 we performed an impairment test on Telesens. Based on such
assessment, the goodwill acquired in the transaction and other long-lived
assets were impaired by $1.5 million. The impairment was prompted primarily by
the reduced projections for Telesens, as a result of the continued
deterioration in market conditions in general and the decrease in our projected
income from Telesens for future periods.

For
additional details, see also under the titles Telesens and Internal
Investigation in Item 8A  Legal Proceedings.

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, or SFAS 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 currency fluctuation risk. When the U.S dollar devaluates
against the NIS, the cost of our operations in Israel will increase and vice
versa.

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.

Business Combination

In
January 2008, we acquired Telesens through a stock purchase agreement, which
means that we acquired all the assets and assumed all the liabilities of
Telesens. The acquisition was accounted in accordance with business combination
accounting. In accordance with business combination accounting, we allocate the
purchase price of acquired company to the tangible and intangible assets
acquired and liabilities assumed, based on their estimated fair values. We
engage third-party appraisal firm to assist us in determining the fair values
of certain assets acquired and liabilities assumed. Such valuations require our
management to make significant estimates and assumptions, especially with
respect to intangible assets.

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Our
management makes estimates of fair value based upon assumptions believed to be
reasonable. These estimates are based on historical experience and information
obtained from the management of the acquired company and are inherently
uncertain. Critical estimates in valuing certain assets acquired and
liabilities assumed include: future expected cash flows from license and
service sales, maintenance agreements, customer contracts and estimated cash
flows from the projects when completed, the acquired companys brand awareness
and discount rate. Unanticipated events and circumstances may occur that may
affect the accuracy or validity of such assumptions, estimates or actual
results.

Goodwill and Other Intangible Assets

Goodwill
represents the excess of purchase price over the fair value of identifiable net
assets acquired in business combinations. The goodwill and the identifiable
intangible assets (current technology and customer relations) on our balance
sheet or that have been impaired at year end are a result of our acquisition of
Telesens.

We
review goodwill for potential impairment annually in the last quarter of each
fiscal year and when events or changes in circumstances indicate the carrying
value of the goodwill or other intangible assets may be impaired, we obtain an
appraisal from an independent valuation firm to determine the amount of
impairment, if any. In addition to the use of an independent valuation firm, we
perform internal valuation analyses and consider other publicly available
market information. At year end, we also reviewed our long-lived assets for
impairment as required by FAS 144.

We
perform our annual impairment analysis of goodwill as of December 31 of each
year, or more often if there are indicators of impairment present. The
provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, require that a two-step impairment test be
performed on goodwill at the level of the reporting units. In the first step,
or Step 1, we compare the fair value of each reporting unit to its carrying
value. If the fair value exceeds the carrying value of the net assets, goodwill
is considered not impaired, and we are not required to perform further testing.
If the carrying value of the net assets exceeds the fair value, then we must
perform the second step, or Step 2, of the impairment test in order to
determine the implied fair value of goodwill. If the carrying value of goodwill
exceeds its implied fair value, then we would record an impairment loss equal
to the difference. To determine the fair value used in Step 1, we use
discounted cash flows. If and when we are required to perform a Step 2
analysis, determining the fair value of our net assets and our off-balance
sheet intangibles would require us to make judgments that involve the use of
significant estimates and assumptions.

We
determine fair value using widely accepted valuation techniques, including
discounted cash flow. These types of analyses require us to make assumptions
and estimates regarding industry economic factors and the profitability of
future business strategies. It is our policy to conduct impairment testing
based on our current business strategy in light of present industry and
economic conditions, as well as future expectations.

If our
estimates or their related assumptions change in the future, we may be required
to record additional impairment charges for our intangible assets. We
determined, based on a valuation conducted as of December 31, 2008, that
goodwill acquired in the Telesens acquisition should be impaired and that there
was partial impairment of our other intangible assets, namely current
technology and customer relations. The impairment was prompted primarily by the reduced projections for
Telesens, as a result of the continued deterioration in market conditions in
general and the decrease in our projected income from Telesens for future
periods.

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.

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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, 2006, 2007 and 2008, 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.

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, or FIN 48, an interpretation of Statement No. 109
issued by the Financial Accounting Standard Board, or FASB. 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

We
account for equity-based compensation in accordance with SFAS No. 123(R),
Share-Based Payment, or SFAS 123(R). Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as an expense
over the requisite service periods. Determining the fair value of stock-based
awards at the grant date requires the exercise of judgment, including the
amount of stock-based awards that are expected to be forfeited. If actual
forfeitures differ from our estimates, equity-based compensation expense and
our results of operations would be impacted.

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We
estimate the fair value of employee stock options using a Black-Scholes-Merton
valuation model. The fair value of an award is affected by our stock price on
the date of grant as well as other assumptions, including the estimated
volatility of our stock price over the expected term of the awards, and the
estimated period of time that we expect employees to hold their stock options.
The risk-free interest rate assumption is based upon U.S. Treasury interest
rates appropriate for the expected life of the awards. We use the historical
volatility of our publicly traded stock in order to estimate future stock price
trends. Our expected dividend rate is zero since we do not currently pay cash
dividends on our shares and do not anticipate doing so in the foreseeable
future. We used the simplified method to establish the expected term of the
awards as allowed under SAB 110. This approach means that the expected term
would be the mid-point between the vesting date and the end of the contractual
term. The interest rate for periods within the contractual life of the award is
based on the U.S. Treasury yield curve in effect at the time of grant.

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

Impact of Recently Issued Accounting
Standards

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or
SFAS No. 141(R). This Statement replaces SFAS No. 141, Business Combinations,
or SFAS 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,
or SFAS 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.

SFAS
141(R) also amends SFAS No. 142, Goodwill and Other Intangible Assets, or
SFAS 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. We do
not expect that the adoption of SFAS 141R will have any impact on our
consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, Or SFAS 160. 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. We do not
expect the adoption of SFAS 160 will have a significant impact on our
consolidated financial statements.

In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
Accounting for Defensive Intangible Assets, or EITF 08-7, which clarifies the
accounting for certain separately identifiable intangible assets which an
acquirer does not intend to actively use but intends to hold to prevent its
competitors from obtaining access to them. EITF 08-7 requires an acquirer in a
business combination to account for a defensive intangible asset as a separate
unit of accounting which should be amortized to expense over the period the
asset diminishes in value. EITF 08-7 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. We are currently
evaluating the potential impact, if any, of the adoption of EITF 08-7 on our
consolidated financial statements.

36

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In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13 and FASB Staff Position No.
FAS 157-2, Effective Date of FASB Statement No. 157. Collectively, these
Staff Positions defer the effective date of SFAS 157 to fiscal years beginning
after November 15, 2008 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value on a recurring
basis at least annually, and amend the scope of SFAS 157. In addition, in
October 2008 the FASB issued FASB Staff Position FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active,
which clarified the application of how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FSP No. 157-3
was effective upon issuance, including prior periods for which financial
statements had not been issued. As described in Note 3 to our consolidated
financial statements contained elsewhere in this annual report, we adopted SFAS
157 and the related FASB staff positions except for those items specifically
deferred under FSP FAS 157-2.

In
April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination
of the Useful Life of Intangible Assets, or FSP FAS 142-3, which amends the
factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008 and early adoption
is prohibited. We are currently evaluating the potential impact, if any, of the
adoption of FSP FAS 142-3 on our consolidated financial statements.

In June
2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
Embedded Feature) is indexed to an Entitys Own Stock, or EITF 07-5. EITF 07-5
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Companys own stock and (b) classified in stockholders
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuers own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. We believe adopting this statement will have
no impact on our consolidated 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:

|                                                       |  |      |       |      |  |       |   |  |       |  
|------------------------------------------------------ |  | ---- | ----- | ---- |  | ----- | - |  | ----- | -
|                                                       |  | 2006 |       | 2007 |  | 2008  |  
|                                                       |  |      |       |      |  |       |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Revenues:                                              |  |      |       |      |  |       |   |  |       |  
|Product                                                |  |      | 59.8  | %    |  | 56    | % |  | 57.6  | %
|Service                                                |  |      | 40.2  |      |  | 44    |   |  | 42.4  |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Total revenues                                         |  |      | 100.0 |      |  | 100.0 |   |  | 100.0 |  
|Cost of revenues:                                      |  |      |       |      |  |       |   |  |       |  
|Product                                                |  |      | 32.1  |      |  | 27.2  |   |  | 31.3  |  
|Service                                                |  |      | 20.8  |      |  | 18.6  |   |  | 15.1  |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Total cost of revenues                                 |  |      | 52.8  |      |  | 45.8  |   |  | 46.4  |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Gross profit                                           |  |      | 47.2  |      |  | 54.2  |   |  | 53.6  |  
|Operating expenses:                                    |  |      |       |      |  |       |   |  |       |  
|Research and development, net                          |  |      | 20.8  |      |  | 20.5  |   |  | 21.8  |  
|Selling and marketing                                  |  |      | 22.1  |      |  | 17.1  |   |  | 19.1  |  
|General and administrative                             |  |      | 14.5  |      |  | 15.1  |   |  | 12.2  |  
|Impairment of goodwill                                 |  |      |      |      |  |      |   |  | 2.7   |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Total operating expenses                               |  |      | 57.4  |      |  | 52.7  |   |  | 55.8  |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Operating income (loss)                                |  |      | (10.2 | )    |  | 1.5   |   |  | (2.2  | )
|Other Income                                           |  |      | 0.3   |      |  | 0.1   |   |  |      |  
|Financial income, net                                  |  |      | 1.4   |      |  | 4.7   |   |  | (0.9  | )
|                                                       |  |      |       |      |  |       |   |  |       |  
|Income (Loss) before income taxes                      |  |      | (8.5  | )    |  | 6.3   |   |  | (3.1  | )
|Income taxes (tax benefit)                             |  |      | (0.2  | )    |  | (0.1  | ) |  | 0.7   |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|                                                       |  |      |       |      |  |       |   |  |       |  
|Net Income (Loss) attributable to common
 shareholders |  |      | (8.2  | )%   |  | 6.2   | % |  | (3.8  | )

37

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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, |      
|                           |  |                          |      
|                           |  | 2006                     |       | 2007 |  | 2008  |  
|                           |  |                          |       |      |  |       |  
|                           |  |                          |       |      |  |       |   |  |       |  
|Sales by Geographic Areas: |  |                          |       |      |  |       |   |  |       |  
|Israel                     |  |                          | 6.9   | %    |  | 7.7   | % |  | 8.7   | %
|North America              |  |                          | 41.0  |      |  | 35.1  |   |  | 30.0  |  
|Europe                     |  |                          | 26.7  |      |  | 35.5  |   |  | 43.9  |  
|Australia                  |  |                          | 8.1   |      |  | 5.7   |   |  | 5.6   |  
|South America              |  |                          | 6.7   |      |  | 4.9   |   |  | 2.0   |  
|Far East                   |  |                          | 3.5   |      |  | 7.0   |   |  | 6.6   |  
|Africa                     |  |                          | 7.0   |      |  | 4.1   |   |  | 3.2   |  
|                           |  |                          |       |      |  |       |   |  |       |  
|Total                      |  |                          | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|                           |  |                          |       |      |  |       |   |  |       |  

Comparison of 2006, 2007 and 2008

Revenues

|                |  |                         |      |          |   |          |  |               |      |               |  |      |    |  |      |  
|--------------- |  | ----------------------- | ---- | -------- | - | -------- |  | ------------- | ---- | ------------- |  | ---- | -- |  | ---- | -
|                |  | Year ended December 31, |      |          |   |          | 
|                |  |                         |      | % Change |   | % Change | 
|($ in millions) |  | 2006                    |      | 2007     |   | 2008     |  | 2006 vs. 2007 |      | 2007 vs. 2008 | 
|                |  |                         |      |          |   |          |  |               |      |               | 
|                |  |                         |      |          |   |          |  |               |      |               |  |      |    |  |      |  
|Product
 sales  |  | $                       | 27.5 |          | $ | 25.7     |  | $             | 30.1 |               |  | (6.5 | )% |  | 17.1 | %
|                |  |                         |      |          |   |          |  |               |      |               |  |      |    |  |      |  
|                |  |                         |      |          |   |          |  |               |      |               |  |      |    |  |      |  
|Services        |  |                         | 18.6 |          |   | 20.2     |  |               | 22.2 |               |  | 8.6  | %  |  | 9.9  | %
|                |  |                         |      |          |   |          |  |               |      |               |  |      |    |  |      |  
|                |  |                         |      |          |   |          |  |               |      |               |  |      |    |  |      |  
|Total revenues  |  |                         | 46.1 |          |   | 45.9     |  |               | 52.3 |               |  | (0.4 | )% |  | 13.9 | %

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

The
increase in our product and service revenues compared to 2007 is mainly
attributable to (1) the improvement of our sales process and our frame
agreement with France Telecom; and (2) the increase in the value of the Euro
against the US dollar during 2008 compared to its value during 2007. In
addition, nearly $2 million of our revenues in 2008 are attributed to our new
subsidiary, Telesens.

The
decrease in our product revenues in 2007 compared to 2006 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 weakness was primarily attributed to the
consolidation trend of our customers. Service revenues increased 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).

Cost of Revenues

|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   
|---------------------- |  | ------------------------ | ---- | -------- | - | -------- |  | ------------- | ---- | ------------- |  | ----- | -- |  | ---- | --
|                       |  | Years ended December 31, |      |          |   |          | 
|                       |  |                          |      | % Change |   | % Change | 
|($ in millions)        |  | 2006                     |      | 2007     |   | 2008     |  | 2006 vs. 2007 |      | 2007 vs. 2008 | 
|                       |  |                          |      |          |   |          |  |               |      |               | 
|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   
|Cost of product sales  |  | $                        | 14.8 |          | $ | 12.5     |  | $             | 16.3 |               |  | (15.5 | )% |  | 30.4 | % 
|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   
|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   
|Cost of services       |  |                          | 9.6  |          |   | 8.5      |  |               | 7.9  |               |  | (11.5 | )% |  | (7.1 | )%
|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   
|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   
|Total cost of revenues |  |                          | 24.4 |          |   | 21.0     |  |               | 24.2 |               |  | (13.9 | )% |  | 15.2 | % 
|                       |  |                          |      |          |   |          |  |               |      |               |  |       |    |  |      |   

38

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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.

The
total cost of revenues increased to $24.2 million in 2008 from $21.0 million in
2007. This increase was mainly due to the increase of sales and the increased
expenses associated with the U.S dollars weakness compared to the NIS. Because
a substantial portion of our expenses is incurred in NIS, the devaluation of
the dollar against the NIS during 2008 resulted in an increase in the dollar
cost of our operations in Israel.

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.

Gross Profit

|                   |  |                          |      |          |   |          |  |               |      |               |      |   |  |      |   | 
|------------------ |  | ------------------------ | ---- | -------- | - | -------- |  | ------------- | ---- | ------------- | ---- | - |  | ---- | - | 
|                   |  | Years ended December 31, |      |          |   |          | 
|                   |  |                          |      | % Change |   | % Change | 
|($ in millions)    |  | 2006                     |      | 2007     |   | 2008     |  | 2006 vs. 2007 |      | 2007 vs. 2008 |     
|                   |  |                          |      |          |   |          |  |               |      |               |     
|                   |  |                          |      |          |   |          |  |               |      |               |      |   |  |      |   | 
|Product sales      |  |                          | 12.8 |          |   | 13.2     |  |               | 13.7 |               | 3.1  | % |  | 3.8  | % | 
|Services           |  |                          | 9.0  |          |   | 11.7     |  |               | 14.3 |               | 30.0 | % |  | 22.2 | % | 
|Total gross profit |  | $                        | 21.8 |          | $ | 24.9     |  | $             | 28.0 |               | 14.2 | % |  | 12.4 | % | 
|                   |  |                          |      |          |   |          |  |               |      |               |      |   |  |      |   | 

Gross profit as a percentage of
revenues

|                    |  |                          |   |      |      |      |  |      |   | 
|------------------- |  | ------------------------ | - | ---- | ---- | ---- |  | ---- | - | 
|                    |  | Years ended December 31, |  
|                    |  |                          |  
|                    |  | 2006                     |   | 2007 |      | 2008 | 
|                    |  |                          |   |      |      |      | 
|                    |  |                          |   |      |      |      |  |      |   | 
|Product
 sales      |  | 46.3                     | % |      | 51.4 | %    |  | 45.6 | % | 
|Services            |  | 48.4                     | % |      | 57.7 | %    |  | 64.5 | % | 
|Total
 gross profit |  | 47.2                     | % |      | 54.2 | %    |  | 53.6 | % | 

Total
gross profit increased to $28.0 million in 2008 from $24.9 million in 2007.
However, as a percentage of revenues, the gross profit decreased from 54.2% to
53.6%. This is mainly due to the dollars weakness compared to the NIS which
resulted in an increase of the dollar cost of our operations in Israel.

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.

Operating Expenses

|                              |  |                         |      |          |   |          |  |               |      |               |       |    |  |      |    | 
|----------------------------- |  | ----------------------- | ---- | -------- | - | -------- |  | ------------- | ---- | ------------- | ----- | -- |  | ---- | -- | 
|                              |  | Year ended December 31, |      |          |   |          | 
|                              |  |                         |      | % Change |   | % Change | 
|($ in millions)               |  | 2006                    |      | 2007     |   | 2008     |  | 2006 vs. 2007 |      | 2007 vs. 2008 |      
|                              |  |                         |      |          |   |          |  |               |      |               |      
|                              |  |                         |      |          |   |          |  |               |      |               |       |    |  |      |    | 
|Research and development, net |  | $                       | 9.6  |          | $ | 9.4      |  | $             | 11.4 |               | (2.1  | )% |  | 21.3 | %  | 
|Selling and marketing         |  |                         | 10.2 |          |   | 7.8      |  |               | 10   |               | (23.5 | )% |  | 28.2 | %  | 
|General and administrative    |  |                         | 6.7  |          |   | 7.0      |  |               | 6.4  |               | 4.5   | %  |  | (8.6 | )% | 
|Impairment of goodwill        |  |                         |     |          |   |         |  |               | 1.4  |               |      |    |  | 100  | %  | 
|                              |  |                         |      |          |   |          |  |               |      |               |       |    |  |      |    | 
|Total operating expenses      |  |                         | 26.5 |          |   | 24.2     |  |               | 29.2 |               | (8.7  | )% |  | 20.7 | %  | 
|                              |  |                         |      |          |   |          |  |               |      |               |       |    |  |      |    | 

39

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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.

|                                       |  |                         |     |      |   |      |  |   |      | 
|-------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | ---- | 
|                                       |  | Year ended December 31, |    
|                                       |  |                         |    
|($ in millions)                        |  | 2006                    |     | 2007 |   | 2008 | 
|                                       |  |                         |     |      |   |      | 
|                                       |  |                         |     |      |   |      |  |   |      | 
|Total cost of research and development |  | $                       | 9.7 |      | $ | 9.4  |  | $ | 11.4 | 
|Less grant participations              |  |                         | 0.1 |      |   |     |  |   |     | 
|Research and development, net          |  |                         | 9.6 |      |   | 9.4  |  |   | 11.4 | 

Gross
research and development expenditures increased 21.3% to $11.4 million in 2008,
from $9.4 million in 2007. The increase in 2008 was primarily due to the
increased expenses associated with the devaluation of the US dollar against the
NIS.

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. 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 approximately $10.0 million, or 19.1% of total
revenues, in 2008; $7.8 million, or 17.1% of total revenues, in 2007; and $10.2
million, or 22.1% of total revenues, in 2006. The increase in selling and
marketing expenses in 2008 is primarily due to (1) our efforts to increase
sales and to increase our market share (2) the devaluation of the US dollar
against the Euro and the NIS.

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 decrease in 8.6%
to $6.4 million, or 12.0% of our total revenues in
2008, from $7.0 million, or 15.1% of total revenues in 2007. The decrease was
primarily due to lower legal expenses compared to 2007, mainly associated with
our lawsuit against Hutchison UK, that was settled in 2008.

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 two 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. Our
financial expenses were $0.5 million in 2008 and our financial income was $2.2
million in 2007. This decrease was primarily due to the devaluation of the Euro
against the US dollar. Because a substantial portion of our customers are
paying in Euro, the devaluation of the Euro compared to the US dollar during
2008 increased our financial expenses in 2008. 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 against the Euro and the NIS.

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, 2007 and 2008.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 and 2008. 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.

40

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---



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 insignificant amounts in the past few
years and have not received grants from the BIRD Foundation since 1996.

Impairment of Goodwill and other
long-lived assets

The
expense of the impairment of goodwill was $1.4 million and it was recorded as a
result of the annual tests required for goodwill. This resulted from the
acquisition of Telesens in January 2008. The expense of the impairment of other
long-lived assets was at the amount of $132,000.

Corporate Tax Rate

Israeli
companies are generally subject to Corporate Tax on their taxable income at the
rate of 27% for the 2008 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:
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.

During the years ended
December 31, 2006, 2007 and 2008, we provided for a full valuation allowance
against the increase in our deferred tax assets, resulting from our net
operating losses carryforwards, in the amount of $1.1 million, $0.6 million and $0.5 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, |   
|                             |  |                         |   
|                             |  | 2008                    |    | 2007 |      | 2006 |  | 2005 |    | 2004 |     
|                             |  |                         |    |      |      |      |  |      |    |      |     
|                             |  |                         |    |      |      |      |  |      |    |      |      |    |  |      |    | 
|Inflation
 (Deflation)       |  | 3.8                     | %  |      | 3.4  | %    |  | (0.1 | )% |      | 2.4  | %  |  | 1.2  | %  | 
|Devaluation
 (Revaluation)   |  | (1.1                    | )% |      | (9.0 | )%   |  | (8.2 | )% |      | 6.8  | %  |  | (1.6 | )% | 
|Inflation
 (devaluation) gap |  | 4.9                     | %  |      | 12.4 | %    |  | 8.1  | %  |      | (4.4 | )% |  | 2.8  | %  | 

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.

41

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B. Liquidity and Capital Resources

We had cash and cash equivalents, marketable securities and bank
deposits of $32.5 million at December 31, 2006, $33.5 million at December 31,
2007 and $25.0 million at December 31, 2008.

Our operating activities provided (used) cash of $(2.6) million for the
year ended December 31, 2006, $3.7 million for the year ended December 31, 2007 and $(4.3) million
for the year ended December 31, 2008. $3.6 million out of the cash provided by
operating activities in 2008 is due to the decrease in the credit balance of
our related party Malam - Team Ltd.

Our capital expenditures were approximately, $1.7 million in 2006, $4.3
million in 2007 and $4.6 million in 2008. Our capital
investments for improvements of leased premises were $0.02 million in 2006,
$2.11 million in 2007 and $0.40 million in 2008. In 2008, our capital
expenditures were approximately $4.6 million, of which $3.5 million were used
for purchase of fixed assets and $1.1 million for the acquisition of our
subsidiary  Telesens.

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 2009 will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the next twelve
months.

Market Risk

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.

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 generally repaid through a mandatory
royalty based on revenues from products (and ancillary services) incorporating know-how
developed with the grants. This government support is conditioned 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 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.

42

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The R&D Law also provides that know-how developed under an approved
research and development program may not be transferred to third parties in
Israel without the approval of the Chief Scientist. Such approval is not
required for the sale or export of any products resulting from such research or
development. The R&D Law further provides that the know-how developed under
an approved research and development program may not be transferred to any
third parties outside Israel, except in certain 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 119 employees in research and development (excluding research and
development employees of Telesens). 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.
Gross research and development expenses were approximately $11.4 million, or
21.8% of our revenues, for the year ended December 31, 2008. 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.

43

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D. Trend Information

Spending in the global OSS market in which we operate is built on the need
for service providers to support new services and network equipment. The second
half of 2008 was affected by the global economic slowdown that exacerbated into
a severe global recession. Consequently, the economic outlook for 2009
has worsened significantly, including in our largest markets, North America and
Europe, and the global economic recession appears set to continue for some
time. This severe recession affects spending
in the global OSS market, including service providers capital
expenditures, which in turn is expected to reduce our sales and increase the pressure on the price of our products and
services. Each of these factors could have a material adverse effect on our operating results.

In addition,
the communications service provider industry is undergoing a period of
consolidation. Examples of this trend are AT&T mergers with SBC (November
2005), Bellsouth (December 2006) and Dobson (July 2007). Consolidations and
mergers of the providers will result in less potential customers and less
networks to monitor and manage. Furthermore, the resulting consolidation of our
prospective customers may delay or cause cancellations of significant sales of
our products, which could seriously harm our operating results.

Furthermore, in the past four years, there has been a trend of mergers
and acquisitions in the OSS market.
Examples of this trend are the IBM acquisition of Micromuse (December 2005) and of Vallemt (December 2006).This consolidation results in stronger competition from a large competitor
that could threaten our market position and decrease our sales.

With regards to our product portfolio, in the past few years, we have
identified a continuous requirement in the OSS market for service management
solutions. This trend, along with customers requirements has led us to
integrate service and customer oriented capabilities into our product
portfolio.

During the last few years, we have seen an increasing interest from
existing and potential customers in performance solutions to proactively manage
network and service level availability. This trend, which we believe is
associated with the nature of next generation networks, their complexity and
the increased requirement for fast time-to-market, has increased the relative
portion of our performance systems solutions within our current and potential
business.

In 2009, we expect market growth to slow or even be negative due to to
the global recession. More specifically, we expect that global IT expenditure
and OSS spending will decrease and we will experience a reduction in sales, as
well as downward pressure on the price of our products and services. The above
scenarios would have a material adverse effect on our business, operating
results and financial condition. As we are unable to predict how long the
recession will last and to what extent, we are taking precautionary steps to
adjust our operating expenses to expected demand while securing our ability to
be competitive and maintain revenues.

For more information on trends in our industry, please see Item 4,
Information on the CompanyBusiness OverviewIndustry Background; Market
Opportunity.

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, 2008, our known
contractual obligations by type of obligation and for the periods indicated:

|                                                       |  |                                           |  |                   |       |           |  |           |  |                    |       |  |  |       |  | 
|------------------------------------------------------ |  | ----------------------------------------- |  | ----------------- | ----- | --------- |  | --------- |  | ------------------ | ----- |  |  | ----- |  | 
|                                                       |  | Payment due by period (in thousands
 US$) | 
|                                                       |  |                                           | 
|Contractual Obligations                                |  | Total                                     |  | Less than
 1 year |       | 1-3 years |  | 3-5 years |  | More
 than5
 years |      
|                                                       |  |                                           |  |                   |       |           |  |           |  |                    |      
|                                                       |  |                                           |  |                   |       |           |  |           |  |                    |       |  |  |       |  | 
|Long-Term Debt                                         |  | 1,592                                     |  |                   | 221   |           |  | 442       |  |                    | 442   |  |  | 487   |  | 
|Operating Lease Obligations
 (facilities and vehicles) |  | 6,066                                     |  |                   | 1,391 |           |  | 2,385     |  |                    | 1,527 |  |  | 763   |  | 
|Uncertain Income Tax Positions                         |  | 120                                       |  |                   | 120   |           |  |           |  |                    |       |  |  |       |  | 
|Accured Serverance Pay                                 |  | 6,412                                     |  |                   |       |           |  |           |  |                    |       |  |  |       |  | 
|                                                       |  |                                           |  |                   |       |           |  |           |  |                    |       |  |  |       |  | 
|Total                                                  |  | 14,190                                    |  |                   | 1,732 |           |  | 2,827     |  |                    | 1,969 |  |  | 1,250 |  | 

In addition, we obtained performance guarantees in favor of certain
customers from several banks in Israel amounting to $3.1 million and $0.8
million for the years ended December 31, 2007 and 2008, respectively. We
obtained other guarantees in favor of facility and car leasers from banks in
Israel amounting to $0.4 million for both years ended December 31, 2007 and
2008.

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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           |  | 63  |  | Chairman of the Board, and Chief Executive Officer    
|Meir Dvir* (1)(2)      |  | 78  |  | Director                                              
|Julie Kunstler*+(1)(2) |  | 53  |  | Director                                              
|Doron Zinger*+(1)(2)   |  | 56  |  | Director                                              
|Ilan Toker             |  | 40  |  | Director                                              
|Tali Cohen - Tueg      |  | 38  |  | Acting Chief Financial Officer                        
|Shachar Ebel           |  | 39  |  | Chief Operational Officer and Chief Technology Officer
|Duby Yoely             |  | 48  |  | Vice President Marketing and Solution Engineering     
|Asaf Shirazi           |  | 40  |  | Vice President Reaserch and Development               
|Shuki Rozanski         |  | 43  |  | 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, or Team, our former principal
shareholder. Mr. Lipshes 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 serves 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. from
1994 to 2008, 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 is a director or observer for several privately-held
communications technology companies, including: FiberZone Networks, Teknovus
and Teranetics. 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 has
served as the chief executive officer of Zinger Communications Ltd., a
consulting and management company, since July 2008. From 2005 to 2008 he was
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.

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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 Chief Financial Officer since 2000. Mr. Toker is the Chief
Financial Officer of Malam - Team 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.) From 1997 until 2007 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 a director in Isras Investment Company Ltd. and 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.

Tali
Cohen-Tueg, Acting
Chief Financial Officer since September 2008. Prior to her CFO appointment,
Mrs. Cohen-Tueg served as our Controller. She joined us in 1997. From 1994 to
1997, Mrs. Cohen-Tueg worked and specialized in a CPA firm. She holds her BA
degrees in Economics and Accounting from Hebrew University in Jerusalem. She is
a Certified Public Accountant in Israel.

Shachar
Ebel, Chief
Operating Officer since July 2008 and Chief Technology Officer since 2004.
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 holds 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. 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 16 years of expertise in sales,
marketing and business development within the telecommunication and hitech
industries. Mr. Rozanskis career at TTI Telecom also spanned positions as AVP
Sales, managing the company sales team in EMEA, and prior to that, Director of
Sales Western Europe, based in London. 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

During 2008, our Chief Financial Officer left the company and since
September 2008 Tali Cohen-Tueg has served as our Acting Chief Financial
Officer. In February 2008, Lior Bergman, who served as our director since
December 2004, stepped down from our board of directors.

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

46

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B. Compensation

Directors

In 2008, our directors, other than Meir Lipshes, received annual
compensation of approximately $20,000 each and approximately $750
(approximately $450 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 $120,000 in 2008. Our directors, other than
Meir Lipshes, will continue to receive the aforesaid compensation in 2009.

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 $3.50 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.

Executive
Officers

We pay Meir Lipshes, our Chairman and Chief Executive Officer, a
monthly management fee of approximately NIS 120,000 (approximately $31,500
according to the exchange rate prevailing on December 31, 2008) linked to the
CPI, plus applicable social benefits. The total compensation paid to Meir
Lipshes, our Chairman and Chief Executive Officer, during 2008 was approximately
$568,000 compared to approximately $415,000 in 2007. The total amount of
compensation paid to Meir Lipshes during 2007 and 2008 includes pension,
retirement and similar benefits. The amount paid to Meir Lipshes in 2008 also
includes a bonus of $145,000. In November 2004, our board of directors
authorized the grant of options to Meir Lipshes to purchase up to 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 in November 2004 expired in October 2008.

Total compensation during 2008 to the members of senior management
(consisting of 7 persons, not  including Meir Lipshes) amounted to approximately
$1.6 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 $0.7 million paid in 2008 to two
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. For further information, see Item 16G  Corporate
Governance.

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.

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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. Our
board of directors determined that, 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.

48

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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 and Doron Zinger serve as our external directors. Ms.
Kunstler commenced her term as an external director in August 2006. Mr. Zinger
commenced his term as an external director in April 2004 and was reelected in
December 2006 for a term that commenced in April 2007.

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 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.

49

---

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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 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.

50

---

---



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

Related-Party Transactions

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

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

Under Israeli law, an extraordinary
transaction is a transaction:

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

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

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

D.
Employees

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

|                                                          |  |                                     |  |                     |    |                                           |  |                    |  |       |     |  |  |     |  | 
|--------------------------------------------------------- |  | ----------------------------------- |  | ------------------- | -- | ----------------------------------------- |  | ------------------ |  | ----- | --- |  |  | --- |  | 
|Approximate numbers of employees by category of
 activity |  | Research
 & Development
 & projects |  | Sales and marketing |    | Management,
 Finance and 
 Administration |  | Others (Telesens)* |  | Total |    
|                                                          |  |                                     |  |                     |    |                                           |  |                    |  |       |    
|                                                          |  |                                     |  |                     |    |                                           |  |                    |  |       |     |  |  |     |  | 
|2008                                                      |  | 285                                 |  |                     | 28 |                                           |  | 40                 |  |       | 119 |  |  | 472 |  | 
|2007                                                      |  | 274                                 |  |                     | 35 |                                           |  | 43                 |  |       | N/A |  |  | 352 |  | 
|2006                                                      |  | 277                                 |  |                     | 42 |                                           |  | 42                 |  |       | N/A |  |  | 361 |  | 

|                                                         |  |        |  |          |    |        |  |      |  |        |    |           |  |          |  |       |   |  |  |     |  |  |     |  | 
|-------------------------------------------------------- |  | ------ |  | -------- | -- | ------ |  | ---- |  | ------ | -- | --------- |  | -------- |  | ----- | - |  |  | --- |  |  | --- |  | 
|Approximate numbers of employees by geographic
 location |  | Israel |  | Americas |    | Europe |  | Asia |  | Africa |    | Australia |  | Ukraine* |  | Total |  
|                                                         |  |        |  |          |    |        |  |      |  |        |    |           |  |          |  |       |  
|                                                         |  |        |  |          |    |        |  |      |  |        |    |           |  |          |  |       |   |  |  |     |  |  |     |  | 
|2008                                                     |  | 256    |  |          | 66 |        |  | 13   |  |        | 9  |           |  | 5        |  |       | 4 |  |  | 119 |  |  | 472 |  | 
|2007                                                     |  | 241    |  |          | 77 |        |  | 11   |  |        | 12 |           |  | 7        |  |       | 4 |  |  | N/A |  |  | 352 |  | 
|2006                                                     |  | 247    |  |          | 87 |        |  | 11   |  |        | 5  |           |  | 6        |  |       | 5 |  |  | N/A |  |  | 361 |  | 

* The numbers shown in this table
reflect nearly 119 employees that were added to our workforce as a result of
the acquisition of Telesens in January 2008, out of which 13 employees from
Telesens provide R&D services to TTI.

51

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Competition for technical personnel
in the communications and computer industry is intense. Although we believe we
have been able to attract talented development and other support personnel,
there is a large demand for highly qualified technical personnel in Israel and
competition is intense.

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

Our Israeli 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 19, 2009,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)                                                                                               |  | 476,563                  |  |                                 | 2.5 | % | 
|All other directors and executive officers, as a group (consisting of
 9 persons, other than Meir Lipshes) (2) |  | 168,667                  |  |                                 | *   |   | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | less than 1% of
 our outstanding ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(1) | As of March 19,
 2009, Malam - Team
 Ltd. 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 19, 2009, Meir Lipshes, the Chairman of our board of
 directors and our acting Chief Executive Officer, owned approximately 7.0% of
 Malam - Team Ltd.s
 shares. Mr. Lipshes disclaims any beneficial interest in the ordinary shares
 owned by Team Software or Malam -
 Team Ltd. in us.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | 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.                                                                                                                                                                                                                                                                                                           

52

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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.

2008 Grants

In February 2008, we granted
options exercisable into 25,000 ordinary shares at exercise prices of $3.0 per
share.

We did not grant any options to our
directors in 2007 and 2008.

Total Outstanding Options

The following table sets forth, as
of March 31, 2009, 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   
|                  |  |                         |  |                   
|                  |  |                         |  |                   
|56,000            |  | $6.0-$8.0 *             |  | June 30, 2009     
|                  |  |                         |  |                   
|120,000           |  | $3.5                    |  | January 10,
 2011 
|220,334           |  | $3.9                    |  | February 13,
 2011
|29,000            |  | $4.3                    |  | March 26, 2011    
|20,000            |  | $3.0                    |  | November 13,
 2011
|45,000            |  | $3.5                    |  | November 13,
 2011
|18,000            |  | $3.0                    |  | March 27, 2012    
|25,000            |  | $3.0                    |  | February 17,
 2013
|                  |  |                         |  |                   
|Total: 533,334**  |  |                         |  |                   

|   |                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | The higher of
 $8.0 or the average of the market price in the 30 days prior to the end 12
 months from the date the option was granted (i.e., the period between April
 12, 2005 and May 11, 2005).
|** | Out of which
 options to purchase 489,000 ordinary shares are currently exercisable.                                                                                                               

53

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|         |                                                   
|-------- | --------------------------------------------------
|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 19, 2009:

|                                            |  |                                  |  |                                                     |      |                                   |  |                                                       |  |                                      |      |                                                     |  |           |  |  |      |   | 
|------------------------------------------- |  | -------------------------------- |  | --------------------------------------------------- | ---- | --------------------------------- |  | ----------------------------------------------------- |  | ------------------------------------ | ---- | --------------------------------------------------- |  | --------- |  |  | ---- | - | 
|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)                  |  | 4,689,924                        |  |                                                     | 29.3 | %                                 |  |                                                      |  |                                      |     |                                                     |  | 4,689,924 |  |  | 24.8 | % | 
|                                            |  |                                  |  |                                                     |      |                                   |  |                                                       |  |                                      |      |                                                     |  |           |  |  |      |   | 
|Neuberger & Berman (4)(5)                   |  | 1,180,332                        |  |                                                     | 7.4  | %                                 |  | 1,799,995                                             |  |                                      | 61.3 | %                                                   |  | 3,980,325 |  |  | 21.0 | % | 
|                                            |  |                                  |  |                                                     |      |                                   |  |                                                       |  |                                      |      |                                                     |  |           |  |  |      |   | 
|Rima Management, LLC and Richard Mashaal(6) |  | 1,104,705                        |  |                                                     | 8.3  | %                                 |  | 227,300                                               |  |                                      | 7.7  | %                                                   |  | 1,332,005 |  |  | 7    | % | 
|                                            |  |                                  |  |                                                     |      |                                   |  |                                                       |  |                                      |      |                                                     |  |           |  |  |      |   | 
|S Squared Technology (7)                    |  | 363,637                          |  |                                                     | 2.3  | %                                 |  | 909,091                                               |  |                                      | 30.9 | %                                                   |  | 1,272,728 |  |  | 6.7  | % | 

* Based on an aggregate of
16,003,155 ordinary shares outstanding as of March 18, 2009.
** Based on an aggregate of 2,936,391 preferred shares outstanding as of March
18, 2009.
*** 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, 2009.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Shlomo Eisenberg holds 1,069,530 ordinary shares, 67,468 ordinary
 shares through a wholly owned corporation, and his wife, Tirza Eisenberg,
 holds 175,000 ordinary shares. In addition, Mr. Eisenberg, directly and
 indirectly (through a wholly owned corporation), owns approximately 14% of
 Malam - Team 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, Malam - Team Ltd. 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 approximately 50% of
 Malam - Team Ltd. and, therefore, may be deemed to beneficially own the ordinary
 shares held by Malam - Team Ltd. 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. Malam - Team Ltd. holds
 5,300 ordinary shares. Since Malam - Team Ltd. 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. Malam - Team Ltd., 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 19, 2009, Meir Lipshes,
 the Chairman of our board of directors and CEO, owned approximately 7% of
 Malam - Team Ltd.s shares. Mr. Lipshes disclaims any beneficial ownership.
 As of March 19, 2009, 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.

54

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 1,332,005ordinary 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(7) | As of December 31,
 2008, based on a Schedule 13G/A filed by S Squared Technology, LLC with the
 SEC on February 2, 2009. 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, Team Software
transferred 5,200,000 of our ordinary shares held thereby to Malam - Team Ltd., its parent company, such that Malam - Team Ltd. held 5,200,020 or our ordinary shares
directly and 762,530 of our ordinary shares through Team Software. In April
2005, Malam - Team Ltd. distributed
to its shareholders 5,166,062 ordinary shares, such that immediately following
the distribution, Malam - Team Ltd. 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 Malam - Team Ltd., 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, Malam - Team Ltd.
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 19, 2009, approximately 56% of all Series A Preferred Shares
issued have been converted into ordinary shares.

Record Holders

As of March 19, 2009, there were
approximately 34 record holders of our ordinary shares, of which 15 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 19, 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, Malam
- Team Ltd., 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 Malam - Team Ltd.. This
relationship is reflected in an agreement between us and Malam - Team Ltd. dated October 1996. Malam - Team Ltd. 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 Malam - Team Ltd. from
these sales less the cost to Malam -
Team Ltd.. In connection with these sales, we recorded commissions
of approximately $502,000 in 2007 and $364,000 in 2008. We have not recorded any commissions in 2006.

55

---

---



In addition, Malam - Team Ltd. provided us certain administrative
services, including computer servicing, salary administration, automotive fleet
maintenance, legal counsel and basic insurance coverage, and we reimbursed Malam - Team Ltd. for the actual cost of such services.
We recorded expenses for such services of $160,000 in 2006 and $164,000 in
2007. In 2008, we relocated our offices to Rosh Haayin and therefore Malam - Team Ltd. no longer provides us administrative
services and we did not record any expenses for such services in 2008.

Since 1992, we have also purchased
fixed assets, such as computer hardware, from Malam - Team Ltd. and Omnitek-Eichut Ltd.
(Omnitek-Eichut), a subsidiary of Malam
- Team Ltd. The payments made by us to Malam - Team Ltd. and Omnitek-Eichut in respect of such
asset purchases were, in the aggregate, approximately $352,000 in 2006,
$437,000 in 2007 and $249,000 in 2008. 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.

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 Malam - Team Ltd. 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 $1.2
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.

Compensation to Directors

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

C.
Interests of Experts and Counsel

Not applicable.

|         |                       
|-------- | ----------------------
|Item
 8. | FINANCIAL
 INFORMATION

A.
Consolidated Statements and Other Financial Information

Financial Statements

See Item 18.

56

---

---



Legal Proceedings

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, an agreement in principle was reached
and memorandum of understanding outlining such agreement was executed. A motion
seeking preliminary approval of the settlement from the court was filed on
April 14, 2008 and an order preliminary approving the settlement and setting a
hearing on September 11, 2008 was filed on May 29, 2008. The hearing was
held on September 11, 2008 and the court entered a final judgment approving the
settlement and dismissing the action with prejudice. More than 30 days have
elapsed from the date of entry of the final judgment has and accordingly, the
time to appeal from the final judgment has expired. The settlement is being
paid by the directors and officers insurance of the Company.

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
and demanded reimbursement for the additional withholding tax from Mr.
Eisenberg. In August 2008 the court ruled in our favor and ordered that Mr.
Eisenberg will pay us the amount of approximately NIS 1.7 million
(approximately $ 459,000), including linkage differentials and interest and
including attorney fees. In October 2008 Mr. Eisenberg appealed to the district
court. A preliminary hearing in the district court is scheduled for September
16, 2009.

Internal
Investigation

On January 26, 2009, our Board of
Directors received a written complaint of Mr. Eduard Rubin, a former key
shareholder of Telesens LLC who also serves as the general manager of Telesens
LLC, a Ukraine-based software house that was acquired by us in January 2008,
alleging, among other things, that Mr. Moti Lipshes, a Region Business Unit
manager, or the RBU Manager, who is also the son of Mr. Meir Lipshes, the
Chairman of our Board of Directors and our Chief Executive Officer, received
improper commissions from Mr. Rubin with respect to the acquisition of
Telesens.

Our Audit Committee engaged Barlev
Investigative Auditing, an Israeli accounting firm with significant experience
in investigating improper business conduct, to lead an internal investigation.
Based, among other things, on the report of the independent investigator, the
Audit Committee concluded that (1) a finder fee agreement between Mr. Rubin and
the RBU manager was entered into in September 2006, whereby the RBU manager
agreed to assist and promote a sale of Telesens to a third party in
consideration for a finder fee; (2) in early 2007, the RBU manager introduced
Telesens to the senior management of TTI Telecom as a potential acquisition
target, and in December 2007, we entered into a definitive agreement to acquire
Telesens from its two shareholders, including Mr. Rubin; (3) neither the RBU
manager nor Mr. Rubin informed us of the said finder fee agreement; and (4) the
evidence obtained and reviewed in the investigation did not establish any
wrongdoing or improper personal conduct by Mr. Meir Lipshes, the Chairman of
our Board of Directors and our Chief Executive Officer, or any other employees,
officers or directors of TTI Telecom, and the Audit Committee continues to have
full confidence in the integrity of the current management team.

In light of its conclusions, the
Audit Committee made the following recommendations, as endorsed by our Board of
Directors and performed by our management, (1) to instruct management to
terminate the engagement with the RBU Manager immediately and examine all other
legal remedies available to the Company under the circumstances; (2) to instruct
management to explore the legal status of the Company regarding Telesens and
Mr. Rubin under the circumstances; and (3) to instruct management to prepare
and present to the Audit Committee a report regarding the clarity of the
existing prohibition on personnel and contractors of the company from engaging
in improper personal gain, and to suggest remedial measures if needed.

57

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---



We intend to pursue all legal
remedies available under the circumstances against the RBU manager, Telesnes
and its selling shareholders. In addition, at the recommendation of our Audit Committee, we are in the
process of taking a number of steps designed to improve and safeguard against
the recurrence of improper conduct. These steps include clarifying the existing
prohibition in our Code of Ethics on receiving improper personal gain and
establishing a company-wide educational program.

We also evaluated and concluded that the results of the internal
investigation and related procedures do not have any impact on our financial results
for the year ended December 31, 2008 or any other period (other than the
expenses associated with such investigation), and that the investigation did
not reveal any material weakness in our internal controls over financial
reporting.

Telesens

Under the terms of the stock purchase agreement with the shareholders
of Telesens, the aggregate purchase price is up to $2.7 million, subject to
downward adjustments related to certain performance parameters, including
Telesens actual 2007 annual turnover. The purchase price was to be paid by us
in cash in three installments, as follows: (1) the first payment, of $1.0
million, was paid at closing; (2) 70.0% of the balance of the purchase price
(subject to the relevant deductions) was supposed to be paid in February 2009;
and (3) the remainder is scheduled to be paid in February 2010.

In early 2009, we engaged in discussions with Mr. Rubin, one of the
selling shareholders of Telesens, with respect to our demand, in accordance
with the purchase agreement, to make downward adjustments to the purchase price
based on the performance parameters of Telesnes. In light of, among others, the
objection of the selling shareholders to our demands and the internal
investigation that was ongoing at the time, we have determined to hold the
payment of the second installment, scheduled for February 2009, until
resolution of these matters. On March 21, 2009, Mr. Rubin notified us that the
selling shareholders initiated legal proceedings against us in Ukraine with
respect to the purchase agreement. According to Mr. Rubins notice, the lawsuit
alleges, among others, that we have breached the purchase agreement by not
making the timely and full payment of the second installment. Accordingly, the
plaintiffs seek to rescind the transaction, such that the selling shareholders
will receive their shares of Telesens, and seek additional damages of
approximately $500,000. If and when we are served with the lawsuit, we
intend to vigorously defend our position. However, given the preliminary stage
of this matter, we cannot predict the ultimate outcome of this matter at this time. In the event of an unfavorable resolution,
we may be required to pay damages and other costs which could have an adverse
effect on our results of operations and financial condition.

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, 2008, except as otherwise disclosed in this annual report.

58

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|        |                       
|------- | ----------------------
|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 |  
|                                     |  |      |      |     |  
|                                     |  |      |      |     |   |      | 
|2004:                                |  |      |      |     |   |      | 
|Full Year                            |  | $    | 6.40 |     | $ | 1.71 | 
|2005:                                |  |      |      |     |   |      | 
|Full Year                            |  | $    | 3.58 |     | $ | 1.84 | 
|2006:                                |  |      |      |     |   |      | 
|Full Year                            |  | $    | 5.50 |     | $ | 2.36 | 
|2007:                                |  |      |      |     |   |      | 
|Full Year                            |  | $    | 3.22 |     | $ | 2.20 | 
|                                     |  |      |      |     |   |      | 
|First Quarter                        |  |      | 2.70 |     |   | 2.44 | 
|Second Quarter                       |  |      | 3.00 |     |   | 2.30 | 
|Third Quarter                        |  |      | 3.22 |     |   | 2.51 | 
|Fourth Quarter                       |  |      | 2.66 |     |   | 2.20 | 
|                                     |  |      |      |     |   |      | 
|2008:                                |  |      |      |     |   |      | 
|Full Year                            |  | $    | 2.42 |     | $ | 0.53 | 
|                                     |  |      |      |     |   |      | 
|First Quarter                        |  |      | 2.42 |     |   | 1.83 | 
|Second Quarter                       |  |      | 2.27 |     |   | 1.86 | 
|Third Quarter                        |  |      | 2.09 |     |   | 1.36 | 
|Fourth Quarter                       |  |      | 1.36 |     |   | 0.53 | 
|                                     |  |      |      |     |   |      | 
|Most
 Recent Six Months              |  |      |      |     |   |      | 
|September 2008                       |  |      | 1.70 |     |   | 1.36 | 
|October 2008                         |  |      | 1.36 |     |   | 1.00 | 
|November 2008                        |  |      | 1.00 |     |   | 0.53 | 
|December 2008                        |  |      | 0.74 |     |   | 0.59 | 
|January 2009                         |  |      | 0.67 |     |   | 0.57 | 
|February 2009                        |  |      | 0.72 |     |   | 0.56 | 
|March 2009
 (through March 27, 2009) |  |      | 0.62 |     |   | 0.52 | 

On March 27, 2009, the last
reported closing sale price of our ordinary shares on the NASDAQ National
Market was $0.62 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

The following is a summary description of
certain provisions of our Memorandum of Association and Articles of
Association, and certain relevant provisions of the Israel Companies Law which
apply to us. This description is only a summary and does not purport to be
complete and is qualified by reference to the full text of the Memorandum and
Articles, which are incorporated by reference as exhibits to this Annual
Report, and to Israeli law.

59

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Objects and Purposes

We were first registered by the
Israeli Registrar of Companies on February 5, 1990, as a private company. On
November 17, 1996, we became a public company. We are registered with the
Israeli Registrar of Companies under No. 52-004301-9.

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

Directors

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

Election of Directors

Directors, other than external
directors, are elected by our shareholders at our annual general meeting of
shareholders, or by our board of directors. In the event that any directors are
appointed by our board of directors, their appointment is required to be
ratified by the shareholders at the next shareholders meeting following the
appointment. Our shareholders may remove a director from office under certain
circumstances.

There is no requirement that a
director own any of our shares. Directors may appoint alternate directors in
their stead. See Item 6C  Board
Practices.

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.

60

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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 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 and under the Companies
Law, the following rights, preferences and restrictions:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | weighted-average
 anti-dilution protection in the event that following the closing of the
 private placement transaction in which the Series A Preferred Shares were
 issued (i.e., January 3, 2005), we issue or are deemed to have issued
 (subject to certain exceptions) ordinary shares at a price per share that is
 lower than the conversion price in effect at the time of such issuance or
 deemed issuance, which could result in dilution of the holdings of ordinary
 shareholders;                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | automatic
 conversion into ordinary shares in the event that, at any time commencing two
 years from the effective date (which has not occurred as of yet) of the
 registration statement which we filed in connection with the aforesaid
 private placement, our ordinary shares trade at a closing bid price of 100%
 above the price per share of $2.20 in the private placement (i.e., $4.40) for
 a 20 consecutive trading day period, with an average daily trading volume of
 at least 100,000 shares per day during such period;                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | one vote at
 meetings of our shareholders in respect of each ordinary share into which a
 Series A Preferred Share held of record could be converted;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | the right to
 share pro rata in any distributions of dividends; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | in the event of
 any voluntary or involuntary liquidation, dissolution or winding up of TTI,
 the holders of Series A Preferred Shares then outstanding shall be entitled
 to be paid out of the assets of TTI available for distribution to our
 shareholders, before any payment shall be made to the holders of our ordinary
 shares or any other class or series of stock ranking on liquidation junior to
 the Series A Preferred Shares by reason of their ownership thereof, an amount
 equal to the greater of: (i) $2.20 per share (subject to appropriate
 adjustment in the event of any stock dividend, stock split, combination or
 other similar recapitalization affecting such shares), plus any dividends
 declared but unpaid thereon, or (ii) such amount per share as would have been
 payable had each such share been converted into ordinary shares immediately
 prior to such liquidation, dissolution or winding up.

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

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 also be paid in kind,
i.e., through the distribution of assets or shares, debentures, or debentures
stock of our company or of other companies. However, in such event, we will be
required to obtain the approval of our shareholders in addition to the
declaration required by our board of directors.

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.

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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 one third (33 1/3 %) of the voting power of
our company. If there is no quorum within an hour of the time set, the meeting
is postponed until the following week, or any other time that the chairman of
the board of directors and the shareholders present agree to. At the postponed
meeting, any two shareholders will constitute a quorum. Every ordinary share
entitles the holder thereof to one vote. A shareholder may only vote the shares
for which all calls have been paid up on, except in separate general meetings
of a particular class. A shareholder may vote in person or by proxy, or if the
shareholder is a corporate body, by its representative.

Duties of Shareholders

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

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

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

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.

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Insurance of Office Holders

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

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

Indemnification of Office Holders

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a financial
 liability imposed on him in favor of another person by any judgment,
 including a settlement or an arbitration award approved by a court; such
 indemnification may be approved (i) after the liability has been incurred or
 (ii) in advance, provided that our undertaking to indemnify is limited to
 events that our board of directors believes are foreseeable in light of our
 actual operations at the time of providing the undertaking and to a sum or criterion
 that our board of directors determines to be reasonable under the
 circumstances;                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | reasonable
 litigation expenses, including attorneys fees, expended by the office holder
 as a result of an investigation or proceeding instituted against him by a
 competent authority, provided that such investigation or proceeding concluded
 without the filing of an indictment against him and either (A) concluded
 without the imposition of any financial liability in lieu of criminal
 proceedings or (B) concluded with the imposition of a financial liability in
 lieu of criminal proceedings but relates to a criminal offense that does not
 require proof of criminal intent; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | reasonable
 litigation expenses, including attorneys fees, expended by the office holder
 or charged to him by a court, in proceedings we institute against him or
 instituted on our behalf or by another person, a criminal indictment from
 which he was acquitted, or a criminal indictment in which he was convicted
 for a criminal offense that does not require proof of criminal intent.                                                                                                                                                                                                     

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.                                                                                                                                                                                                                   

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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.

Conclusion

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.

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.

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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 federal, foreign, state or local taxes.

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

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

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

Distributions on Ordinary Shares

We have never paid cash dividends
on our ordinary shares, and we do not intend to pay cash dividends in the
foreseeable future. In the event that we do pay dividends, and subject to the
discussion under the heading Passive Foreign Investment Companies below, a
U.S. holder will be required to include in gross income as ordinary income the
amount of any distribution paid on ordinary shares to the extent that such
distribution does not exceed our current and accumulated earnings and profits,
as determined for U.S. federal income tax purposes. The amount of a distribution
which exceeds our earnings and profits will be treated first as a non-taxable
return of capital, reducing the U.S. holders tax basis for the ordinary shares
to the extent thereof, and then as capital gain. Preferential tax rates for
long-term capital gains may apply (currently through the end of 2010) to
dividends received by 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.

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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, and such U.S. holder makes
an appropriate election. 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 31-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, Treasury regulations require the loss to be allocated to foreign
source income to the extent certain dividends were received by the taxpayer within
the 24-month period preceding the date on which the taxpayer recognized the
loss. The deductibility of a loss realized on the sale, exchange or other
disposition of ordinary shares is subject to limitations.

Passive Foreign Investment Companies

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

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

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.

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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.

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.

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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 27% for the
2008 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: 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.

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

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.

68

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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. The years limitation does not apply to the
exemption 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, 2008 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
are 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.

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.

69

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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.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Similar to the
 currently available alternative route, exemption from corporate tax on
 undistributed income for a period of two to ten years, depending on the
 geographic location of the Benefited Enterprise within Israel, and a reduced
 corporate tax rate of 10% to 25% for the remainder of the benefits period,
 depending on the level of foreign investment in each year. Benefits may be
 granted for a term of from seven to ten years, depending on the level of
 foreign investment in the Company. If the Company pays a dividend out of
 income derived from the Benefited Enterprise during the tax exemption period,
 such income will be subject to corporate tax at the applicable rate
 (10%-25%). The Company is required to withhold tax at the source at a rate of
 15% from any dividends distributed from income derived from the Benefited
 Enterprise.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | A special tax
 route enabling companies owning facilities in certain geographical locations
 in Israel to pay corporate tax at the rate of 11.5% on income of the
 Benefited Enterprise. The benefits period is ten years. Upon payment of
 dividends, the Company is required to withhold tax at source at a rate of 15%
 for Israeli residents and at a rate of 4% for foreign residents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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

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

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.

Inflationary Adjustments Law

Under the
Income Tax (Inflationary Adjustments) Law,
1985, results for tax purposes were measured in real terms in accordance with the changes in
the Israeli Consumer Price Index, or the Israeli CPI. Accordingly, until 2002,
results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in
the Israeli CPI.
Commencing in fiscal year 2003, we have elected to measure our taxable income and file our 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. Such an election obligated us for three years. Accordingly, commencing with fiscal
year 2003, results for tax purposes are measured in terms of earnings in dollars. We filed for one-year extensions
in 2006 and 2007. Beginning
January 1, 2008, the Inflationary Adjustments Law was repealed.

70

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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.

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 Income Tax Law (Inflationary Adjustments), 1985 (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).

71

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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 (in which case a
partial exemption may be available). 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.

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 by an Israeli company to non-residents of Israel,
other than bonus shares or stock dividends, income tax is applicable 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.

72

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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.

I.
Subsidiary Information

Not applicable.

|          |                                                            
|--------- | -----------------------------------------------------------
|Item
 11. | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A majority of our revenues are paid in U.S
dollars and Euro 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. However, the revenues that are paid in Euro
are influenced by fluctuations in the Euro / U.S dollar exchange rate,
devaluaion of the Euro compared to the U.S dollar decreases our revenues.

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.

73

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|          |                         
|--------- | ------------------------
|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, 2008.
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:

| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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, 2008. 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, 2008 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, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

74

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|           |                                  
|---------- | ---------------------------------
|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 our directors and employees,
including our 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.

For details regarding a violation of our Code of Ethics, see Item 8A 
Legal Proceedings  Internal Investigation.

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

Fees Paid to Independent Public Accountants

In
the annual meeting held on December 30, 2008 our shareholders re-appointed Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst
& Young, to serve as our independent registered accounting firm until the
next annual meeting. The following table sets forth, for each of the years indicated,
the fees paid to Ernst & Young and the percentage of each of the fees out
of the total amount paid to them.

|                  |  |                         |         |             |     |      |  |             |         |  |     |   | 
|----------------- |  | ----------------------- | ------- | ----------- | --- | ---- |  | ----------- | ------- |  | --- | - | 
|                  |  | Year Ended December 31, |        
|                  |  |                         |        
|                  |  | 2007                    |         | 2008        |    
|                  |  |                         |         |             |    
|Services Rendered |  | Fees                    |         | Percentages |     | Fees |  | Percentages |        
|                  |  |                         |         |             |     |      |  |             |        
|                  |  |                         |         |             |     |      |  |             |         |  |     |   | 
|Audit (1)         |  | $                       | 135,000 |             | 63  | %    |  | $           | 190,000 |  | 83  | % | 
|Audit-related (2) |  | $                       | 20,000  |             | 9   | %    |  | $           | 38,000  |  | 17  | % | 
|Tax (3)           |  | $                       | 45,000  |             | 21  | %    |  |             |        |  |    |   | 
|Other (4)         |  | $                       | 15,000  |             | 7   | %    |  |             |        |  |    |   | 
|Total             |  | $                       | 215,000 |             | 100 | %    |  | $           | 228,000 |  | 100 | % | 

---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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. In
 2008, most of these fees were for audit services related to Telesens
 acquisition.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(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.

75

---

---



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

None.

|          |                                              
|--------- | ---------------------------------------------
|Item 16F. | CHANGE IN
 REGISTRANTS CERTIFYING ACCOUNTANT

Not applicable.

|          |                      
|--------- | ---------------------
|Item 16G. | CORPORATE
 GOVERNANCE

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

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

|         |                      
|-------- | ---------------------
|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 - 9

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

76

---

---



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 Rosh Haayin, Israel on the 31 day of
March, 2009.

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

77

---

---



EXHIBIT INDEX

|             |       |         |  |                                                                                                                                                                                                                
|------------ | ----- | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 No. |       | Exhibit
|             |       |        
|             | 1.1   |         |  | Second Amended and Restated Articles
 of Association of Registrant, as amended through December 27, 2005 (1);
 Certificate of Amendment, dated August 10, 2006 (2); and amendment, effective
 June 19, 2008 (3)
|             |       |         |  |                                                                                                                                                                                                                
|             | 1.2   |         |  | Memorandum of Association of
 Registrant, as amended through December 29, 2004. (4)                                                                                                                            
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.6   |         |  | The Registrants Share Option
 Plan, dated November 15, 1996. (5)                                                                                                                                              
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.8   |         |  | 2004 Employee Share Option Plan,
 adopted December 29, 2004. (4)                                                                                                                                               
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.9   |         |  | Agreement, dated October 9, 1996,
 between the Registrant and Team. (6)                                                                                                                                        
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.10  |         |  | Registration Rights Agreement,
 dated October 22, 1996, between the Registrant and TSIL. (6)                                                                                                                   
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.12  |         |  | Lease, dated February 1, 1998,
 between the Registrant and Team. (7)                                                                                                                                           
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.13  |         |  | Amendment to Lease Agreement
 dated September 2, 2002. (8)                                                                                                                                                     
|             |       |         |  |                                                                                                                                                                                                                
|             | 4.14  |         |  | Second Amendment to Lease
 Agreement dated July 14, 2005. (9)                                                                                                                                                  
|             |       |         |  |                                                                                                                                                                                                                
|             | 8     |         |  | Subsidiaries                                                                                                                                                                                                   
|             |       |         |  |                                                                                                                                                                                                                
|             | 10.11 |         |  | Consent of Independent Auditors
 of the Registrant                                                                                                                                                             
|             |       |         |  |                                                                                                                                                                                                                
|             | 11    |         |  | Code of Ethics and Business
 Conduct. (10)                                                                                                                                                                     
|             |       |         |  |                                                                                                                                                                                                                
|             | 12.1  |         |  | Certification of the Principal
 Executive Officer pursuant to §302 of the Sarbanes-Oxley Act                                                                                                                   
|             |       |         |  |                                                                                                                                                                                                                
|             | 12.2  |         |  | Certification of the Principal
 Financial Officer pursuant to §302 of the Sarbanes-Oxley Act                                                                                                                   
|             |       |         |  |                                                                                                                                                                                                                
|             | 13.1  |         |  | Certification of the Principal
 Executive Officer pursuant to §906 of the Sarbanes-Oxley Act                                                                                                                   
|             |       |         |  |                                                                                                                                                                                                                
|             | 13.2  |         |  | Certification of the Principal
 Financial Officer pursuant to §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 as Item 2 of TTIs Proxy
 Statement filed on Report of Foreign Private Issuer on Form 6-K submitted to
 the SEC on May 5, 2008, and incorporated herein by reference.          
|     |                                                                                                                                                                                                 
|(4)  | Previously filed on TTIs Form 20-F for the year
 ended December 31, 2004, and incorporated herein by reference.                                                                                
|     |                                                                                                                                                                                                 
|(5)  | 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.        
|     |                                                                                                                                                                                                 
|(6)  | Previously filed as an exhibit to TTIs
 Registration Statement on Form F-1 (Registration No. 333-5902), and
 incorporated herein by reference.                                                 
|     |                                                                                                                                                                                                 
|(7)  | 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.
|     |                                                                                                                                                                                                 
|(8)  | 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.
|     |                                                                                                                                                                                                 
|(9)  | Previously filed on TTIs Form 20-F for the year
 ended December 31, 2005, and incorporated herein by reference.                                                                                
|     |                                                                                                                                                                                                 
|(10) | Previously filed on TTIs Form 20-F for the year
 ended December 31, 2003, and incorporated herein by reference.                                                                                

78

---

---

TTI TEAM TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008

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 - F - 8 
|                                                            |  |               
|Notes to Consolidated
 Financial Statements                 |  | F - 9 - F - 42

---

---



(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, 2007
and 2008 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, 2008. 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, 2007 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles which differ in certain aspects from
International Financial Reporting Standard (IFRS) and with the provisions of
the Israeli Securities Regulations (Preparation of Annual Financial
Statements), 1993 as described in Note 15).

|                  |  |                                  | 
|----------------- |  | -------------------------------- | 
|Tel-Aviv,
 Israel |  | KOST FORER GABBAY & KASIERER     | 
|March 31,
 2009   |  | 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, |       
|                                                                                                                      |  |              |       
|                                                                                                                      |  | 2007         |        | 2008 |  
|                                                                                                                      |  |              |        |      |  
|                                                                                                                      |  |              |        |      |   |        | 
|ASSETS                                                                                                                |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|CURRENT ASSETS:                                                                                                       |  |              |        |      |   |        | 
|Cash and cash equivalents                                                                                             |  | $            | 33,408 |      | $ | 24,957 | 
|Short-term bank deposits                                                                                              |  |              | 98     |      |   |       | 
|Trade receivables (net of allowance for
 doubtful accounts - $0 and $105 at December 31, 2007 and 2008, respectively) |  |              | 8,185  |      |   | 10,032 | 
|Unbilled receivables                                                                                                  |  |              | 3,155  |      |   | 3,215  | 
|Related party (Note 12)                                                                                               |  |              | 409    |      |   | 459    | 
|Other accounts receivable
 and prepaid expenses (Note 3)                                                              |  |              | 3,192  |      |   | 2,305  | 
|                                                                                                                      |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|Total current assets                                                                                                  |  |              | 48,447 |      |   | 40,968 | 
|                                                                                                                      |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|LONG-TERM INVESTMENTS AND
 RECEIVABLES:                                                                               |  |              |        |      |   |        | 
|Investment in a company                                                                                               |  |              | 165    |      |   | 165    | 
|Severance pay fund                                                                                                    |  |              | 3,937  |      |   | 3,836  | 
|                                                                                                                      |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|Total long-term investments and receivables                                                                           |  |              | 4,102  |      |   | 4,001  | 
|                                                                                                                      |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|PROPERTY AND EQUIPMENT, NET
 (Note 4)                                                                                 |  |              | 6,045  |      |   | 7,283  | 
|                                                                                                                      |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|OTHER INTENGIBLE ASSETS (Note
 5)                                                                                     |  |              |       |      |   | 149    | 
|                                                                                                                      |  |              |        |      |   |        | 
|                                                                                                                      |  |              |        |      |   |        | 
|Total assets                                                                                                          |  | $            | 58,594 |      | $ | 52,401 | 
|                                                                                                                      |  |              |        |      |   |        | 

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, |        
|                                                                                                                                                                                                                                           |  |              |        
|                                                                                                                                                                                                                                           |  | 2007         |         | 2008 |  
|                                                                                                                                                                                                                                           |  |              |         |      |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|LIABILITIES AND
 SHAREHOLDERS EQUITY                                                                                                                                                                                                      |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                       |  |              |         |      |   |         |  
|Trade payables                                                                                                                                                                                                                             |  | $            | 2,364   |      | $ | 2,284   |  
|Deferred revenues                                                                                                                                                                                                                          |  |              | 4,666   |      |   | 3,648   |  
|Related party (Note 12)                                                                                                                                                                                                                    |  |              | 3,932   |      |   | 420     |  
|Other accounts payable and
 accrued expenses (Note 7)                                                                                                                                                                                      |  |              | 6,966   |      |   | 6,787   |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|Total current liabilities                                                                                                                                                                                                                  |  |              | 17,928  |      |   | 13,139  |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|ACCRUED SEVERANCE PAY                                                                                                                                                                                                                      |  |              | 5,651   |      |   | 6,412   |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|LONG TERM LIABILITY (Note
 8b)                                                                                                                                                                                                             |  |              | 1,579   |      |   | 1,372   |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|COMMITMENTS AND CONTINGENT
 LIABILITIES (Note 8)                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|SHAREHOLDERS EQUITY (Note
 10):                                                                                                                                                                                                           |  |              |         |      |   |         |  
|Share capital:                                                                                                                                                                                                                             |  |              |         |      |   |         |  
|Ordinary shares of NIS 0.5
 par value -
 Authorized: 30,000,000 shares at December 31, 2007 and 2008; Issued and
 outstanding: 16,003,158 shares at December 31, 2007 and 2008                                                             |  |              | 2,261   |      |   | 2,261   |  
|Preferred A shares of NIS
 0.5 par value 
 Authorized: 6,636,391 at December 31, 2007 and 2008; Issued and outstanding:
 2,936,391 shares at December 31, 2007 and 2008: Aggregate liquidation
 preference of $6,460 at December 31, 2008 |  |              | 334     |      |   | 334     |  
|Additional paid-in capital                                                                                                                                                                                                                 |  |              | 75,038  |      |   | 75,251  |  
|Accumulated other
 comprehensive loss                                                                                                                                                                                                      |  |              |        |      |   | (170    | )
|Accumulated deficit                                                                                                                                                                                                                        |  |              | (44,197 | )    |   | (46,198 | )
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|Total shareholders equity                                                                                                                                                                                                                 |  |              | 33,436  |      |   | 31,478  |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  
|Total liabilities and shareholders
equity                                                                                                                                                                                                 |  | $            | 58,594  |      | $ | 52,401  |  
|                                                                                                                                                                                                                                           |  |              |         |      |   |         |  

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, |           
|                                                                                                                                |  |                         |           
|                                                                                                                                |  | 2006                    |            | 2007 |   | 2008       |  
|                                                                                                                                |  |                         |            |      |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Revenues (Note 13):                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                        |  | $                       | 27,554     |      | $ | 25,722     |   | $ | 30,134     |  
|Services                                                                                                                        |  |                         | 18,560     |      |   | 20,195     |   |   | 22,152     |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Total revenues                                                                                                                  |  |                         | 46,114     |      |   | 45,917     |   |   | 52,286     |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Cost of revenues:                                                                                                               |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                        |  |                         | 14,783     |      |   | 12,504     |   |   | 16,381     |  
|Services                                                                                                                        |  |                         | 9,571      |      |   | 8,545      |   |   | 7,865      |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Total cost of revenues                                                                                                          |  |                         | 24,354     |      |   | 21,049     |   |   | 24,246     |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Gross profit                                                                                                                    |  |                         | 21,760     |      |   | 24,868     |   |   | 28,040     |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Operating expenses:                                                                                                             |  |                         |            |      |   |            |   |   |            |  
|Research and development,
 net (Note 14a)                                                                                       |  |                         | 9,578      |      |   | 9,433      |   |   | 11,407     |  
|Selling and marketing                                                                                                           |  |                         | 10,214     |      |   | 7,857      |   |   | 9,996      |  
|General and administrative                                                                                                      |  |                         | 6,679      |      |   | 6,952      |   |   | 6,351      |  
|Impairment of goodwill                                                                                                          |  |                         |           |      |   |           |   |   | 1,401      |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Total operating expenses                                                                                                        |  |                         | 26,471     |      |   | 24,242     |   |   | 29,155     |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Operating income (loss)                                                                                                         |  |                         | (4,711     | )    |   | 626        |   |   | (1,115     | )
|Other income (Note 14c)                                                                                                         |  |                         | 150        |      |   | 33         |   |   |           |  
|Financial income (expenses),
 net (Note 14b)                                                                                    |  |                         | 662        |      |   | 2,150      |   |   | (515       | )
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Income (loss) before income
 taxes                                                                                              |  |                         | (3,899     | )    |   | 2,809      |   |   | (1,630     | )
|Income taxes (Note 9)                                                                                                           |  |                         | (96        | )    |   | (87        | ) |   | 371        |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Net income (loss)                                                                                                               |  |                         | (3,803     | )    |   | 2,896      |   |   | (2,001     | )
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Loss attributable to
 preferred shareholders                                                                                    |  |                         |           |      |   | (449       | ) |   |           |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Net income (loss)
 attributable to ordinary shareholders                                                                        |  | $                       | (3,803     | )    | $ | 2,447      |   | $ | (2,001     | )
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Earning (loss) per share
 (Note 11):                                                                                            |  |                         |            |      |   |            |   |   |            |  
|Basic and diluted net
 earning (loss) per share attributed to Ordinary shareholders                                             |  | $                       | (0.20      | )    | $ | 0.15       |   | $ | (0.13      | )
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of
 shares used for computing basic net earning (loss) per share attributed to
 Ordinary shareholders   |  |                         | 15,075,881 |      |   | 16,001,148 |   |   | 16,003,158 |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of
 shares used for computing diluted net earning (loss) per share attributed to
 Ordinary shareholders |  |                         | 15,075,881 |      |   | 16,121,989 |   |   | 16,003,158 |  
|                                                                                                                                |  |                         |            |      |   |            |   |   |            |  

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 |            | Ordinary      |  | Preferred  |  | Ordinary    |      | paid-in |   | other |  | Accumulated |        | comprehensive |   | shareholders |  
|                                                                                                            |  | A shares  |            | shares        |  | A shares   |  | shares      |      | capital |   | loss  |  | deficit     |        | income (loss) |   | equity        |  
|                                                                                                            |  |           |            |               |  |            |  |             |      |         |   |       |  |             |        |               |   |               |  
|                                                                                                            |  |           |            |               |  |            |  |             |      |         |   |       |  |             |        |               |   |               |   |   |         |   |   |        |   |   |        |  
|Balance as of January 1, 2006                                                                               |  |           | 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 |  
|Write-off of accruals for stock issuance
 costs                                                             |  |           |           |               |  |           |  |             |     |         |   |      |  |             | 146    |               |   |              |   |   |        |   |   |       |   |   | 146    |  
|Share-based compensation                                                                                    |  |           |           |               |  |           |  |             |     |         |   |      |  |             | 67     |               |   |              |   |   |        |   |   |       |   |   | 67     |  
|Foreign currency translation
adjustment                                                                     |  |           |           |               |  |           |  |             |     |         |   |      |  |             |       |               |   | (170          | ) |   |        |   | $ | (170   | ) |   | (170   | )
|Net loss                                                                                                    |  |           |           |               |  |           |  |             |     |         |   |      |  |             |       |               |   |              |   |   | (2,001  | ) | $ | (2,001 | ) |   | (2,001 | )
|                                                                                                            |  |           |            |               |  |            |  |             |      |         |   |       |  |             |        |               |   |               |   |   |         |   |   |        |   |   |        |  
|Total comprehensive loss                                                                                    |  |           |            |               |  |            |  |             |      |         |   |       |  |             |        |               |   |               |   |   |         |   | $ | (2,171 | ) |   |        |  
|                                                                                                            |  |           |            |               |  |            |  |             |      |         |   |       |  |             |        |               |   |               |   |   |         |   |   |        |   |   |        |  
|Balance as of December 31, 2008                                                                             |  |           | 2,936,391  |               |  | 16,003,158 |  | $           | 334  |         | $ | 2,261 |  | $           | 75,251 |               | $ | (170          | ) | $ | (46,198 | ) |   |        |   | $ | 31,478 |  
|                                                                                                            |  |           |            |               |  |            |  |             |      |         |   |       |  |             |        |               |   |               |   |   |         |   |   |        |   |   |        |  

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, |       
|                                                                                                             |  |                         |       
|                                                                                                             |  | 2006                    |        | 2007 |   | 2008   |  
|                                                                                                             |  |                         |        |      |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Cash flows from operating activities:                                                                        |  |                         |        |      |   |        |   |   |        |  
|Net income (loss)                                                                                            |  | $                       | (3,803 | )    | $ | 2,896  |   | $ | (2,001 | )
|Adjustments required to reconcile net
 income (loss) to net cash provided by (used in) operating activities: |  |                         |        |      |   |        |   |   |        |  
|Depreciation and amortization                                                                                |  |                         | 2,589  |      |   | 1,964  |   |   | 2,272  |  
|Impairment of goodwill and other
assets                                                                      |  |                         |       |      |   |       |   |   | 1,533  |  
|Gain from sale of property and
equipment                                                                     |  |                         | (73    | )    |   | (221   | ) |   | (210   | )
|Amortization of premium and accretion of
 accrued interest on available-for-sale marketable debt securities  |  |                         | 1,305  |      |   |       |   |   |       |  
|Accrued severance pay, net                                                                                   |  |                         | 513    |      |   | 319    |   |   | 862    |  
|Share-based compensation                                                                                     |  |                         | 451    |      |   | 113    |   |   | 67     |  
|Increase in trade receivables,
net                                                                           |  |                         | (764   | )    |   | (3,521 | ) |   | (1,444 | )
|Increase in unbilled receivables                                                                             |  |                         | (1,870 | )    |   | (321   | ) |   | (116   | )
|Increase (decrease) in balance with
 related parties                                                         |  |                         | 34     |      |   | 3,856  |   |   | (3,562 | )
|Decrease (increase) in other accounts
 receivable and prepaid expenses                                       |  |                         | (47    | )    |   | (927   | ) |   | 819    |  
|Decrease in long-term trade and unbilled
 receivables                                                        |  |                         | 613    |      |   | 3,324  |   |   |       |  
|Increase (decrease) in trade
payables                                                                        |  |                         | 641    |      |   | (144   | ) |   | (504   | )
|Decrease in deferred revenues                                                                                |  |                         | (1,893 | )    |   | (3,667 | ) |   | (1,018 | )
|Decrease in other accounts payable and
 accrued expenses                                                     |  |                         | (276   | )    |   | (3     | ) |   | (1,044 | )
|Accrued interest on long-term liability
 and short-term bank deposits                                        |  |                         | (23    | )    |   | (4     | ) |   | 22     |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) operating
 activities                                                         |  |                         | (2,603 | )    |   | 3,664  |   |   | (4,324 | )
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Cash flows from investing activities:                                                                        |  |                         |        |      |   |        |   |   |        |  
|Investment in short-term and long-term
 bank deposits                                                        |  |                         | (188   | )    |   | (2,000 | ) |   |       |  
|Proceeds from short-term bank
deposits                                                                       |  |                         | 1,984  |      |   | 2,987  |   |   | 99     |  
|Proceeds from sale of available-for-sale
 marketable securities                                              |  |                         | 14,744 |      |   |       |   |   |       |  
|Purchase of property and
equipment                                                                           |  |                         | (1,746 | )    |   | (4,318 | ) |   | (3,533 | )
|Proceeds from sale of property and
 equipment                                                                |  |                         | 117    |      |   | 372    |   |   | 542    |  
|Acquisition of subsidiary (Note
1)                                                                           |  |                         |       |      |   |       |   |   | (1,071 | )
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) investing
 activities                                                         |  |                         | 14,911 |      |   | (2,959 | ) |   | (3,963 | )
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Cash flows from financing activities:                                                                        |  |                         |        |      |   |        |   |   |        |  
|Proceeds from (repayment of) long-term
 debt from landlord                                                   |  |                         |       |      |   | 1,286  |   |   | (144   | )
|Exercise of warrants                                                                                         |  |                         | 1,068  |      |   | 7      |   |   |       |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) financing
 activities                                                         |  |                         | 1,068  |      |   | 1,293  |   |   | (144   | )
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Translation differences from cash
 balance of subsidiary                                                     |  |                         |       |      |   |       |   |   | (20    | )
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Increase (decrease) in cash and cash
 equivalents                                                            |  |                         | 13,376 |      |   | 1,998  |   |   | (8,451 | )
|Cash and cash equivalents at the
 beginning of the year                                                      |  |                         | 18,034 |      |   | 31,410 |   |   | 33,408 |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of
 the year                                                            |  | $                       | 31,410 |      | $ | 33,408 |   | $ | 24,957 |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  
|Supplemental disclosure of cash flows
 information:                                                          |  |                         |        |      |   |        |   |   |        |  
|Cash paid during the year for:                                                                               |  |                         |        |      |   |        |   |   |        |  
|Taxes                                                                                                        |  | $                       | 1,707  |      | $ | 187    |   | $ | 427    |  
|                                                                                                             |  |                         |        |      |   |        |   |   |        |  

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

F - 7

---

---



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

|    |                                                                        |  |                          |   |      |   |     | 
|--- | ---------------------------------------------------------------------- |  | ------------------------ | - | ---- | - | --- | 
|    |                                                                        |  | Year ended
 December 31, |  
|    |                                                                        |  |                          |  
|    |                                                                        |  | 2007                     |   | 2008 |  
|    |                                                                        |  |                          |   |      |  
|    |                                                                        |  |                          |   |      |   |     | 
|(a) | Non - cash activities:                                                 |  |                          |   |      |   |     | 
|    |                                                                        |  |                          |   |      |   |     | 
|    | Return
 of issuance costs                                              |  | $                        |  |      | $ | 146 | 
|    |                                                                        |  |                          |   |      |   |     | 
|    |                                                                        |  |                          |   |      |   |     | 
|    | Accrual
 for the second payment account of the acquisition of Telesens |  | $                        |  |      | $ | 630 | 
|    |                                                                        |  |                          |   |      |   |     | 

F - 8

---

---



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

|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | 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, Hong-Kong and Ukraine.                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |         | As to
 principal markets and customers, see Note 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | b.      | Acquisitions
 of a subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |         | In January
 2008, the Company acquired Telesens LLC (Telesens), a software house
 headquartered in the Ukraine with a presence in the CIS (Commonwealth of Independent States)
 market. Under the terms of the agreement, the aggregate purchase price is up to $2,700, subject to
 downward adjustments. Such adjustments are mainly based on Telesens results
 of operations during 2007, 2008 and 2009. The purchase price will be paid
 over 3 annual payments.                                                                                                                        
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |         | Telesens
 results of operations have been included in the Companys consolidated financial
 statements since the acquisition date.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |         | Until the balance sheet date, the Company paid on account of the
 acquisition $1,150. In addition, at December 31, 2008 the Company accrued
 additional $630 on account of the second payment for the seller that should
 have been executed in February 2009 (see also discussion below about the
 dispute with the seller of Telesens subsequent to the balance sheet date).
 Future payments are subject to potential downward adjustments and can not be
 determined at this point therefore they will account for as they occur. All deductions should be concluded at the end
 of 2009.

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 1:- | GENERAL (Cont.)
|         |                
|         |                 | The
 acquisition was accounted for under the purchase method of accounting and,
 accordingly, the purchase price was allocated to the assets acquired and
 liabilities assumed based on their relative fair values as of the acquisition
 date, as follows:

|                          |  |   |       |  
|------------------------- |  | - | ----- | -
|Trade receivables         |  | $ | 365   |  
|Other accounts receivable |  |   | 60    |  
|Property and equipment    |  |   | 239   |  
|Customer relations        |  |   | 244   |  
|Contracts in progress     |  |   | 230   |  
|Current Technology        |  |   | 51    |  
|Trade payables            |  |   | (541  | )
|Deferred revenues         |  |   | (61   | )
|Other current liabilities |  |   | (207  | )
|Deferred tax liabilities  |  |   | (80   | )
|Goodwill (a)              |  |   | 1,401 |  
|                          |  |   |       |  
|                          |  |   |       |  
|                          |  | $ | 1,701 |  
|                          |  |   |       |  

| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a)                                                                                                            | As discussed
 above goodwill includes $630 on account of the second payment for the seller
 that should have been executed in February 2009.                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | The value
 assigned to the tangible assets, intangible assets and liabilities has been
 determined as follows:
| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 1.                                                                                                             | Telesens
 current assets and liabilities were recorded at their carrying amounts. The
 carrying amounts of the current assets and liabilities were reasonable
 proxies for their market values due to their short term maturity.                                                                                                                                                                                                                              
| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 2.                                                                                                             | The value
 assigned to the customer-relations and current technology intangibles
 amounted to $295. The fair value of these intangibles is determined using the
 Income Approach.                                                                                                                                                                                                                                                                             
| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 3.                                                                                                             | Contracts in
 progress - The amount allocated to contracts in progress was based on the
 estimated fair value of these contracts at the acquisition date. The fair
 value assigned to these contracts is based on the remaining amounts to be
 billed under the contracts, reduced by the estimated cost to complete the
 contracts and an allowance for normal profit related to the activities that
 will be performed by the Company after the acquisition.
| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 4.                                                                                                             | The Company
 recorded a deferred tax liability of $80 for the difference between the
 assigned values and the tax bases of the customer-relations and technology
 intangible assets. The deferred tax liability was decreased and as of December
 31, 2008 amounts to $37.                                                                                                                                                                                    
| |  |                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | (b)                                                                                                            | On January
 26, 2009, the Board of Directors of the Company received a written complaint,
 from the former shareholder and current general manager of Telesens, alleging
 improper commissions were made with respect to the acquisition of Telesens
 (See also note 8f). As a result of these allegations and the related
 investigation, the Company decided to hold February 2009 payment on account
 of Telesens acquisition.                             

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 1:- | GENERAL (Cont.)
|         |                 |                                                                                                                                                                                                                                                                                                                         
|         |                 | Consequently,
 as discussed above, the goodwill impairment in 2008 includes $630 that is
 resulting from the accrual of on account of the second payment for the seller
 that should have been executed in February 2009.                                                                                               
|         |                 |                                                                                                                                                                                                                                                                                                                         
|         | .               | The Company,
 based on the results of the investigation (as described in Note 8f),
 concluded that the improprieties with respect to the Companys acquisition of
 Telesens did not affect the terms, including purchase price, of the
 transaction, and therefore should not impact the accounting of the
 acquisition.
|         |                 |                                                                                                                                                                                                                                                                                                                         
|         | c.              | Pro forma
 financial information:                                                                                                                                                                                                                                                                                       
|         |                 |                                                                                                                                                                                                                                                                                                                         
|         |                 | The
 following table for the year ended December 31, 2007 presents certain
 combined unaudited statements of income data as if the acquisition of
 Telesens had occurred on January 1, 2007, after giving effect to purchase
 accounting adjustments, including amortization of identifiable intangible
 assets:        

|                     |  |                   |        | 
|-------------------- |  | ----------------- | ------ | 
|                     |  | Year ended        |       
|                     |  | December 31, 2007 |       
|                     |  |                   |       
|                     |  | Unaudited         |       
|                     |  |                   |       
|                     |  |                   |       
|                     |  |                   |        | 
|Revenues             |  | $                 | 47,922 | 
|                     |  |                   |        | 
|                     |  |                   |        | 
|Net income           |  | $                 | 1,675  | 
|                     |  |                   |        | 
|                     |  |                   |        | 
|Earnings per
 share: |  |                   |        | 
|Basic                |  | $                 | 0.09   | 
|                     |  |                   |        | 
|Diluted              |  | $                 | 0.09   | 
|                     |  |                   |        | 

| |    |                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The pro
 forma financial information is not necessarily indicative of the combined
 results that would have been attained had the acquisitions taken place at the
 beginning of 2007, nor is it necessarily indicative of future results.                    
| |    |                                                                                                                                                                                                                                                              
| | d. | Termination
 of agreements:                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                              
| |    | In July
 2007, the Company signed a settlement and release agreement with a former
 customer, under which the Company received from the customer £ 1,700 ($3,450)
 (without admission of liability) and both parties waived 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 - 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | The
 accompanying financial statements have been prepared in U.S. dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | A majority
 of the revenues of the Company and most of 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 most of its subsidiaries operate. Thus, the functional and
 reporting currency of the Company and most of 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.                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | The
 functional currency of the Companys subsidiary in Ukraine has been
 determined to be the local currency, the Hryvnia. Accordingly, assets and
 liabilities of this entity are translated at year-end exchange rates and
 income and expenses are translated using average exchange rates for the year.
 Translation adjustments are shown under foreign currency translation adjustments,
 a component of accumulated other comprehensive loss, in the consolidated
 statements of changes in shareholders equity.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | 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 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 4.10% for 2007. The short-term deposits are presented at
 their cost, including accrued interest. As of December 31, 2008 the Company
 has no short-term bank deposits.                                                                                                                                                                

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.)                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | Investment in a 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 FASB Staff Position
 (FSP) No. SFAS 115-1 (FSP 115-1) and SFAS 124-1, The Meaning of
 Other-Than-Temporary Impairment and Its Application to Certain Investments.
 As of December 31, 2008, 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 and other 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. As of
 December 31, 2008 the Company recorded impairment loss in the amount of $132
 related to such assets.                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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, 2008, a full valuation allowance was provided by the Company.
 See Note 9j for the impact of adoption of FIN 48, Accounting for uncertainty
 in Income Taxes, in 2007.

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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | 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, 2007 and 2008, 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, 2007 and 2008, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | The Company
 identifies short-term projects (STP) and accounts for such projects, under
 SOP 81-1, using the completed contract method. As of December 31, 2008 the
 Company capitalized $46, in prepaid expenses, related to costs of STP in
 progress that are being accounted for under completion contract method.                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | 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.                                                                                                                                                                                                                                                                                                                                   

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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | 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 2006, 2007 and 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | Royalty bearing grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | Royalty-bearing
 grants from the Government of Israel 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | 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 and trade and unbilled receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | The
 Companys and its subsidiaries cash and cash equivalents 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. Generally, these deposits may be redeemed upon demand
 and, therefore, bear minimal risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | The
 Companys trade receivables are geographically diversified primarily between
 the United States and Europe. To a lesser extent, in Israel, India, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | 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 earning (loss) per share for each class of
 shares (ordinary and preferred shares) to be calculated assuming 100% of the
 Companys earnings are distributed as dividends to each class of shares based
 on their contractual rights.                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | In
 compliance with EITF 03-6, the series of preferred shares are not
 participating securities in losses, and therefore are not included in the
 computation of net loss per share.                                                                                                                                                                                                                                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | Basic net
 earning (loss) per share is computed based on the weighted average number of
 shares of Ordinary Shares outstanding during each year. Diluted net earning
 (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 year
 ended December 31, 2006 all outstanding options and warrants were excluded
 from the calculations of diluted net earning (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. For the year ended December 31, 2008 all outstanding
 options and warrants were excluded from the calculations of diluted net
 earning (loss) per share, since they would have an anti-diluted effect.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | Accounting for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | The Company
 accounts for stock-based compensation in accordance with SFAS No. 123
 (revised 2004), Share-Based Payment (SFAS No. 123(R)). SFAS No. 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 an expense
 over the requisite service periods in the Companys consolidated income
 statements.                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | The fair
 value for options granted in 2006, 2007 and 2008 is amortized over their
 vesting period and is estimated at the date of grant using a Black-Scholes
 options pricing model with the following weighted average assumptions:                                                                                                                                                                                                                                                                                                                  

|                               |  |                         |   |      |     |      |  |     |   | 
|------------------------------ |  | ----------------------- | - | ---- | --- | ---- |  | --- | - | 
|                               |  | Year ended December 31, |  
|                               |  |                         |  
|Employee stock options         |  | 2006                    |   | 2007 |     | 2008 | 
|                               |  |                         |   |      |     |      | 
|                               |  |                         |   |      |     |      |  |     |   | 
|Expected volatility            |  | 45                      | % |      | 45  | %    |  | 45  | % | 
|Risk-free interest             |  | 5                       | % |      | 5   | %    |  | 4   | % | 
|Dividend yield                 |  | 0                       | % |      | 0   | %    |  | 0   | % | 
|Expected life of up to (years) |  | 3.4                     |   |      | 3.5 |      |  | 3.5 |   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
 recognizes these compensation costs net of a forfeiture rate for only those
 shares expected to vest on accelerated attribution basis, rather than a straight-line method
 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.

F - 16

---

---



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

|         |                                                                                                                                                                                                                                                                                                                                                                                                               | 
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 2:- | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                               | 
|         | The Company
selected the Black-Scholes-Merton option pricing model as the most appropriate
fair value method for its stock-options awards and values restricted stock
based on the market value of the underlying shares at the date of grant. The
option-pricing model requires a number of assumptions, of which the most
significant are the expected stock price volatility and the expected option
term.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 computation of expected volatility is based on realized historical stock
 price volatility of the Company. 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 has historically not paid dividends
 and has no foreseeable plans to pay dividends. In December 2007, the SEC
 staff issued Staff Accounting Bulletin No. 110 (SAB 110), which became
 effective on January 1, 2008. SAB 110 amends Staff Accounting Bulletin No.
 107 (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 SAB 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. The adoption of SAB 110 did not have any
 effect on the Companys financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company
 adopted the provision of FASB Statement 157 Fair Value Measurements and
 certain related FASB staff positions (Statement 157) on January 1, 2008.
 Statement 157 defines fair value as the price that would be received from
 selling an asset or paid to transfer a liability in an orderly transaction
 between market participants at the measurement date. When determining the
 fair value measurements for assets and liabilities required to be recorded at
 fair value, the Company considers the principal or most advantageous market
 in which it would transact and consider assumptions that market participants
 would use when pricing the asset or liability, such as inherent risk,
 transfer restrictions, and risk of nonperformance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Statement
 157 also establishes a fair value hierarchy that requires an entity to
 maximize the use of observable inputs and minimize the use of unobservable
 inputs when measuring fair value. A financial instruments categorization
 within the fair value hierarchy is based upon the lowest level of input that
 is significant to the fair value measurement. Statement 157 establishes three
 levels of inputs that may be used to measure fair value:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Level 1:
 quoted prices in active markets for identical assets or liabilities;                                                                                                                                                                                                                                                                                                                                            
| | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Level 2:
 inputs other than Level 1 that are observable, either directly or indirectly,
 such as quoted prices in active markets for similar assets or liabilities,
 quoted prices for identical or similar assets or liabilities in markets that
 are not active, or other inputs that are observable or can be corroborated by
 observable market data for substantially the full term of the assets or
 liabilities; or
| | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Level 3:
 unobservable inputs that are supported by little or no market activity and
 that are significant to the fair value of the assets or liabilities.                                                                                                                                                                                                                                                                

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.)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The actual
 value at which such financial assets could actually be sold or settled with a
 willing buyer or seller may differ from such estimated fair values depending
 on a number of factors including, but not limited to, current and future
 economic conditions, the quantity sold or settled, the presence of an active
 market and the availability of a willing buyer or seller.                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | As of
 December 31, 2008 the Company has only deposits which are highly liquid
 investments that are readily convertible to cash with maturities of three
 months or less at acquisition.                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | 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, 2006, 2007 and 2008 were
 $1,236, $964 and $1,820, respectively.                                                                                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | Advertising
 expenses are charged to the statements of operations as incurred. Advertising
 expenses for the years ended December 31, 2006, 2007 and 2008 were $110, $140
 and $382, 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.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | Accumulated other Comprehensive loss:                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | Accumulated
 other Comprehensive income is
 the sum of net loss and all other non-owner changes in equity, such as
 foreign currency translation adjustments.                                                                                                                                                                                                                                                                                                             

|                                         |  |                                     |     | 
|---------------------------------------- |  | ----------------------------------- | --- | 
|                                         |  | Accumulated othercomprehensive loss |    
|                                         |  |                                     |    
|                                         |  |                                     |     | 
|Balance as of December 31, 2007          |  | $                                   |    | 
|Foreign currency translation adjustments |  |                                     | 170 | 
|                                         |  |                                     |     | 
|                                         |  |                                     |     | 
|Balance as of December 31, 2008          |  | $                                   | 170 | 
|                                         |  |                                     |     | 

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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Other Intangible Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Intangible assets acquired in a business
 combination, should be amortized over their useful life using a method of
 amortization that reflects the pattern in which the economic benefits of the
 intangible assets are consumed or otherwise used up, in accordance with
 Statement of Financial Accounting Standards No. 142 Goodwill and Other
 Intangible Assets, (SFAS No. 142). Acquired technology is amortized using
 proportional over 5 years, and customer relations is amortized over 8 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Goodwill represents excess of the costs
 over the net assets of businesses acquired. Under Statement of Financial
 Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS
 No. 142) goodwill, is not amortized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | SFAS No. 142 requires goodwill to be tested
 for impairment at least annually or between annual tests in certain
 circumstances, and written down when impaired. Goodwill attributable to each
 of the reporting units is tested for impairment by comparing the fair value
 of each reporting unit with its carrying value. Fair value is determined,
 using discounted cash flows, market multiples and market capitalization.
 Significant estimates used in the methodologies include estimates of future
 cash flows, future short-term and long-term growth rates, weighted average
 cost of capital and estimates of market multiples for each of the reportable
 units. See Note 6 for the impairment losses that have been recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | The Company
 concluded that it operates in two reporting units for goodwill Impairment
 test. The reporting units one Telesens and the rest of the Company. The
 definition of the reporting unit is stated on Paragraph 30 of SFAS 142.
 Telesens is identified as a reporting unit since it has independent economic
 characteristics and discrete financial information available. All goodwill
 was assigned to Telesens reporting unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | 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.

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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | 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 November
 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
 Accounting for Defensive Intangible Assets. EITF 08-7 clarifies the
 accounting for certain separately identifiable intangible assets which an
 acquirer does not intend to actively use but intends to hold to prevent its
 competitors from obtaining access to them. EITF 08-7 requires an acquirer in
 a business combination to account for a defensive intangible asset as a
 separate unit of accounting which should be amortized to expense over the
 period the asset diminishes in value. EITF 08-7 is effective for fiscal years
 beginning after December 15, 2008, with early adoption prohibited. The
 Company is currently evaluating the potential impact, if any, of the adoption
 of EITF 08-7 on its consolidated financial statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | In April
 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of
 the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that
 should be considered in developing renewal or extension assumptions used to
 determine the useful life of a recognized intangible asset under FASB
 Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is
 effective for fiscal years beginning after December 15, 2008 and early
 adoption is prohibited. The Company is currently evaluating the potential
 impact, if any, of the adoption of FAS 142-3 on its consolidated financial
 statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | In February
 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of FASB
 Statement No. 157 to FASB Statement No. 13 and Other Accounting
 Pronouncements That Address Fair Value Measurements for Purposes of Lease
 Classification or Measurement under Statement 13 and FASB Staff Position No.
 FAS 157-2, Effective Date of FASB Statement No. 157. Collectively, the
 Staff Positions defer the effective date of Statement 157 to fiscal years
 beginning after November 15, 2008 for nonfinancial assets and nonfinancial
 liabilities except for items that are recognized or disclosed at fair value
 on a recurring basis at least annually, and amend the scope of Statement 157.
 In addition, in October 2008 the FASB issued FASB Staff Position FAS 157-3,
 Determining the Fair Value of a Financial Asset When the Market for That
 Asset Is Not Active, which clarified the application of how the fair value
 of a financial asset is determined when the market for that financial asset
 is inactive. FSP No. 157-3 was effective upon issuance, including prior periods
 for which financial statements had not been issued.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | In June
 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
 Embedded Feature) is indexed to an Entitys Own Stock (EITF 07-5). EITF
 07-5 is effective for financial statements issued for fiscal years beginning
 after December 15, 2008, and interim periods within those fiscal years. Early
 application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that
 a contract that would otherwise meet the definition of a derivative but is
 both (a) indexed to the Companys own stock and (b) classified in
 stockholders equity in the statement of financial position would not be
 considered a derivative financial instrument. EITF 07-5 provides a new
 two-step model to be applied in determining whether a financial instrument or
 an embedded feature is indexed to an issuers own stock and thus able to
 qualify for the SFAS 133 paragraph 11(a) scope exception. The Company
 believes adopting this statement will have no impact on the consolidated
 financial statements.                                                                                                                              

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 3:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID
 EXPENSES

|                       |  |              |       |      |   |       | 
|---------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                       |  | December 31, |      
|                       |  |              |      
|                       |  | 2007         |       | 2008 |  
|                       |  |              |       |      |  
|                       |  |              |       |      |   |       | 
|Landlord (1)           |  | $            | 1,339 |      | $ |      | 
|Prepaid expenses       |  |              | 1,083 |      |   | 1,306 | 
|Employees              |  |              | 300   |      |   | 119   | 
|Government authorities |  |              |      |      |   | 203   | 
|Advances to Suppliers  |  |              | 235   |      |   | 312   | 
|Others                 |  |              | 235   |      |   | 365   | 
|                       |  |              |       |      |   |       | 
|                       |  |              |       |      |   |       | 
|                       |  | $            | 3,192 |      | $ | 2,305 | 
|                       |  |              |       |      |   |       | 

| |     |                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 8b.

|         |                            
|-------- | ---------------------------
|NOTE 4:- | PROPERTY AND EQUIPMENT, NET

|                                    |  |              |        |      |   |        | 
|----------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                    |  | December 31, |       
|                                    |  |              |       
|                                    |  | 2007         |        | 2008 |  
|                                    |  |              |        |      |  
|                                    |  |              |        |      |   |        | 
|Cost:                               |  |              |        |      |   |        | 
|Computers and peripheral
 equipment |  | $            | 15,070 |      | $ | 16,874 | 
|Office furniture and
 equipment     |  |              | 1,721  |      |   | 2,204  | 
|Motor vehicles                      |  |              | 4,237  |      |   | 4,654  | 
|Leasehold improvements              |  |              | 5,638  |      |   | 2,600  | 
|                                    |  |              |        |      |   |        | 
|                                    |  |              |        |      |   |        | 
|                                    |  |              | 26,666 |      |   | 26,332 | 
|                                    |  |              |        |      |   |        | 
|Accumulated depreciation:           |  |              |        |      |   |        | 
|Computers and peripheral
 equipment |  |              | 13,818 |      |   | 15,291 | 
|Office furniture and
 equipment     |  |              | 1,055  |      |   | 1,253  | 
|Motor vehicles                      |  |              | 2,268  |      |   | 2,083  | 
|Leasehold improvements              |  |              | 3,480  |      |   | 422    | 
|                                    |  |              |        |      |   |        | 
|                                    |  |              |        |      |   |        | 
|                                    |  |              | 20,621 |      |   | 19,049 | 
|                                    |  |              |        |      |   |        | 
|                                    |  |              |        |      |   |        | 
|Depreciated cost                    |  | $            | 6,045  |      | $ | 7,283  | 
|                                    |  |              |        |      |   |        | 

| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Depreciation expenses for the years ended
 December 31, 2006, 2007 and 2008 were $2,589, $1,964 and $2,202, respectively.

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 5:- | OTHER ASSETS, NET
|         |                   |                                                 
|         | a.                | Intangible assets acquired in 2008 (see note 1):

|                                                   |  |              |     | 
|-------------------------------------------------- |  | ------------ | --- | 
|                                                   |  | December 31, |    
|                                                   |  | 2008         |    
|                                                   |  |              |    
|                                                   |  |              |     | 
|Cost:                                              |  |              |     | 
|Customer relations                                 |  | $            | 244 | 
|Current Technology                                 |  |              | 51  | 
|                                                   |  |              |     | 
|                                                   |  |              |     | 
|                                                   |  |              | 295 | 
|                                                   |  |              |     | 
|Accumulated amortization (including write
 downs): |  |              |     | 
|Customer relations
 (including $82 write downs)    |  |              | 120 | 
|Current Technology
 (including $17 write downs)    |  |              | 26  | 
|                                                   |  |              |     | 
|                                                   |  |              |     | 
|                                                   |  |              | 146 | 
|                                                   |  |              |     | 
|                                                   |  |              |     | 
|Depreciated cost                                   |  | $            | 149 | 
|                                                   |  |              |     | 

| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Estimated amortization expenses for the
 year ended December 31, 2009 is in amount of $149.

|         |                                                                                                       | 
|-------- | ----------------------------------------------------------------------------------------------------- | 
|NOTE 6:- | GOODWILL                                                                                             
|         |                                                                                                      
|         | The changes in the carrying amount of
 goodwill for the year ended December 31, 2008, are as follows:

|                                                     |  |              |        |  
|---------------------------------------------------- |  | ------------ | ------ | -
|                                                     |  | December 31, |       
|                                                     |  | 2008         |       
|                                                     |  |              |       
|                                                     |  |              |        |  
|Goodwill acquired during the year (see also
 note 1) |  | $            | 1,401  |  
|Impairment losses                                    |  |              | (1,401 | )
|                                                     |  |              |        |  
|                                                     |  |              |        |  
|Balance as of December 31, 2008                      |  | $            |       |  
|                                                     |  |              |        |  

| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Telesens was determined to be a separate reporting unit. As discussed
 in more details in note 1, the goodwill impairment includes $630 that is
 related to the second payment on account of the acquisition that should have
 been executed in February 2009.

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:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

|                                                                       |  |              |       |      |   |       | 
|---------------------------------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                                                       |  | December 31, |      
|                                                                       |  |              |      
|                                                                       |  | 2007         |       | 2008 |  
|                                                                       |  |              |       |      |  
|                                                                       |  |              |       |      |   |       | 
|Employees and payroll accruals                                         |  | $            | 4,467 |      | $ | 4,257 | 
|Accrued expenses                                                       |  |              | 1,701 |      |   | 969   | 
|Government authorities                                                 |  |              | 494   |      |   | 605   | 
|Accrual for the second payment account of
 the acquisition of Telesens |  |              |      |      |   | 630   | 
|Others                                                                 |  |              | 304   |      |   | 326   | 
|                                                                       |  |              |       |      |   |       | 
|                                                                       |  |              |       |      |   |       | 
|                                                                       |  | $            | 6,966 |      | $ | 6,787 | 
|                                                                       |  |              |       |      |   |       | 

|         |                                        |                                                                                                       
|-------- | -------------------------------------- | ------------------------------------------------------------------------------------------------------
|NOTE 8:- | COMMITMENTS AND CONTINGENT LIABILITIES
|         |                                        |                                                                                                       
|         | a.                                     | Aggregate
 minimum rental commitments under non-cancelable leases at December 31, 2008 are as follows:

|                        |  |            |       |                 |   |       |  |   |       | 
|----------------------- |  | ---------- | ----- | --------------- | - | ----- |  | - | ----- | 
|Year ended December 31, |  | Facilities |       | Motor
 vehicles |   | Total | 
|                        |  |            |       |                 |   |       | 
|                        |  |            |       |                 |   |       |  |   |       | 
|2009                    |  |            | 1,297 |                 |   | 94    |  |   | 1,391 | 
|2010                    |  |            | 1,255 |                 |   | 49    |  |   | 1,304 | 
|2011                    |  |            | 1,082 |                 |   |      |  |   | 1,082 | 
|2012                    |  |            | 763   |                 |   |      |  |   | 763   | 
|2013                    |  |            | 763   |                 |   |      |  |   | 763   | 
|2014                    |  |            | 763   |                 |   |      |  |   | 763   | 
|                        |  |            |       |                 |   |       |  |   |       | 
|                        |  |            |       |                 |   |       |  |   |       | 
|                        |  | $          | 5,923 |                 | $ | 143   |  | $ | 6,066 | 
|                        |  |            |       |                 |   |       |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Facility
 lease expenses for the years ended December 31, 2006, 2007 and 2008 were $
 1,432, $1,409 and $910, respectively.                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Motor
 vehicle lease expenses for the years ended December 31, 2006, 2007 and 2008
 were approximately $106, $102 and $140, respectively.                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | b. | In December
 2007, the Company relocated its offices in Israel. The term of the lease is 7
 years and the Company has the option to extend the lease period for
 additional 3 years. 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.                                                                                                                                                                                                                              

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 8:- | COMMITMENTS AND CONTINGENT LIABILITIES
 (Cont.)
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                 | As of
 December 31, 2008, the
 Companys leasehold improvements assets are in an amount of $1,593 of which
 $428 were funded by landlord incentives and $1,165 as landlord loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                 | 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 discounted the cash flows using annual rate of 9.58% which
 represents the company market condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | c.                                              | 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 $2, $0.6 and $4 for the years ended December 31, 2006, 2007 and
 2008, respectively. The amounts were recorded in the cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                 | As of
 December 31, 2008, the Company has an outstanding contingent obligation to
 pay royalties in the amount of approximately $2,738 in respect of these
 grants. Management believes that none of its product sales is currently
 subject to OCS and BIRD-F royalties payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         | d.                                              | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                 | The Company
 has obtained performance guarantees in favor of certain customers from
 several banks in Israel amounting to $3,109 and $841 for the years ended
 December 31, 2007 and 2008, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                 | The Company
 has obtained other guarantees in favor of facility and car leases from bank
 in Israel amounting to $409 and $426 for the years ended December 31, 2007
 and 2008, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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 8:- | COMMITMENTS AND CONTINGENT LIABILITIES
 (Cont.)
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | e.                                              | Litigation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                 | Securities
 class action:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                 | A
 shareholders class action lawsuit was filed in September 2004 against the
 Company, Team Software Industries Ltd. and certain of the Companys executive
 officers. The lawsuit purports to be a class action filed on behalf of
 persons who held the Companys shares during the period between February 6,
 2002 and November 14, 2002. The complaint alleges that material
 misrepresentations and omissions concerning the Companys operations and
 performance artificially inflated the Companys stock price, causing damages
 to investors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                 | The Company
 filed a motion to dismiss the complaint which motion was granted by an
 opinion dated October 6, 2006. The opinion dismissed the amended and
 consolidated complaint but granted plaintiff the right to file a second
 amended and consolidated complaint. The second amended and consolidated
 complaint was filed on November 9, 2006. The Company filed a motion to
 dismiss the second amended and consolidated complaint on January 10, 2007,
 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. A motion seeking preliminary approval of the settlement
 from the court was filed on April 14, 2008 and a preliminary order approving
 the settlement and setting a hearing on September 11, 2008 was filed on May
 29, 2008. The hearing was held on September 11, 2008 and the court entered a
 final judgment approving the settlement and dismissing the action with
 prejudice. More than 30 days have elapsed from the date of entry of the final
 judgment has and accordingly, the time to appeal from the final judgment has
 expired. The settlement is being paid by the insurance of the Company of
 directors and officers.
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | f.                                              | Allegation
 for Improperness with respect to Telesens Acquisition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                 | On January
 26, 2009, the Board of Directors of the Company received a written complaint
 of Mr. Eduard Rubin (Mr. Rubin), a former key shareholder of Telesens, who
 also serves as the general manager of Telesens LLC (see also Note 1),
 alleging, among other things, that Mr. Moti Lipshes, an RBU (Region Business
 Unit) manager in the Company (the RBU Manager), who is also the son of Mr.
 Meir Lipshes, the Chairman and CEO of the Company, received improper
 commissions from Mr. Rubin with respect to the acquisition of Telesens.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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 8:- | COMMITMENTS AND CONTINGENT LIABILITIES
 (Cont.)
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                 | The Audit
 Committee of the Company has engaged Barlev Investigative Auditing to lead an
 internal investigation. Based on the report of the independent investigator,
 the Audit Committee concluded, among other things, that the allegations are
 not frivolous and that the RBU Manager received up to $90 (while he was
 entitled to receive under the agreement he had with Mr. Rubin to $350) and
 that he failed to disclose the said commission to the Company, but also
 concluded that none of the other employees, officers or directors of the
 Company was aware of such commission or was engaged in any improper personal
 conduct. The Audit Committee instructed the Company to take certain actions,
 which have been taken, including to terminate the engagement with the RBU
 Manager immediately and to prepare and present a report regarding the clarity
 of the existing prohibition on personnel and contractors of the company from
 engaging in improper personal gain, and to suggest remedial measures if
 needed. The Company intends to pursue all legal remedies available under the
 circumstances against the RBU Manager, and it also exploring the legal status
 of the Company regarding Telesens and Mr. Rubin under the circumstances. Due
 to the preliminary stage of the process currently the Company cannot estimate
 the outcome of the dispute with these parties
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                 | On March 21,
 2009, Mr. Rubin sent the Company a notification that he initiated legal
 proceeding against the Company with respect to the stock purchase agreement
 signed between the parties. Mr. Rubin demand to cancel the stock purchase
 agreement, to received the shares of Telesens back and to receive additional
 compensation of the amount of up to approximately $500. The Company is the
 preliminary stage of assessing the claim and reviewing the related documents.
 Currently, the Company can not estimate the outcome of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | g.                                              | Dispute with
 respect to balance with related party shareholder, See Note 12b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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 9:- | 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 2007, results for tax purposes were measured in terms of earnings in
 NIS after certain adjustments for increases in the Israeli CPI. Beginning January
 1, 2008, the Inflationary Adjustments Law was repealed.                                                                                                            
|         |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | b.           | Corporate
 tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |              | Taxable
 income of Israeli companies is subject to tax at the rate of 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, 2008 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.                                                                                                                                                                                                                                                                                                                                                                                 
|         |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |              | 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, 2008, management believes that the Company is meeting all
 of the aforementioned conditions.

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 9:- | INCOME TAXES (Cont.)
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                      | 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. The Period of tax benefits for a new Privileged Enterprise
 commences in the Year of Commencement. This year is the later of: (1) the
 tear is which taxable income is first generated by the Company, or (2) a year
 selected by the Company for commencement, on the condition that the Company
 meets certain provisions provided by the Law (Year of Election).
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                      | If a Company requested the Alternative Package of benefits for an
 Approved Enterprise under the old law before the 2005 amendment, it is
 precluded from filing a Year of Election notice for a Privileged Enterprise
 for two years after the year in which the Approved Enterprise was activated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                      | 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, 2008 in Israel, the U.S. and
 the U.K amount to $46,397, $11,737 and $8,376, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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 9:- | INCOME TAXES (Cont.)
|         |                      |                                                                                                                                                                                                                                                                                                                  
|         | 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, |       
|                                                      |  |              |       
|                                                      |  | 2007         |        | 2008 |  
|                                                      |  |              |        |      |  
|                                                      |  |              |        |      |   |        | 
|Reserves and
 allowances                              |  | $            | 5,733  |      | $ | 3,529  | 
|Net operating
 loss carryforward - foreign            |  |              | 7,791  |      |   | 6,503  | 
|Net operating
 loss carryforward - domestic           |  |              | 8,535  |      |   | 11,599 | 
|                                                      |  |              |        |      |   |        | 
|                                                      |  |              |        |      |   |        | 
|Total
 deferred tax assets before valuation allowance |  |              | 22,059 |      |   | 21,631 | 
|Valuation
 allowance                                  |  |              | 22,059 |      |   | 21,631 | 
|                                                      |  |              |        |      |   |        | 
|                                                      |  |              |        |      |   |        | 
|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 - 30

---

---



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

|         |                      | 
|-------- | -------------------- | 
|NOTE 9:- | INCOME TAXES (Cont.)

| |    |                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                      |  | Year ended December 31, |       
|                                                                                      |  |                         |       
|                                                                                      |  | 2006                    |        | 2007 |   | 2008   |  
|                                                                                      |  |                         |        |      |   |        |  
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|Income (loss) before taxes,
 as reported in the consolidated statements of operations |  | $                       | (3,899 | )    | $ | 2,809  |   | $ | (1,630 | )
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|Statutory tax rate                                                                    |  |                         | 31     | %    |   | 29     | % |   | 27     | %
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|Theoretical tax benefit on
 the above amount at the Israeli statutory tax rate:       |  | $                       | (1,209 | )    | $ | 815    |   | $ | (440   | )
|Tax adjustment in respect
 of foreign subsidiaries different tax rates                |  |                         | (84    | )    |   | 69     |   |   | 29     |  
|Deferred taxes on losses
 for which a valuation allowance was provided                |  |                         | 1,066  |      |   | 598    |   |   | 547    |  
|Nondeductible impairment
 charges                                                     |  |                         |       |      |   |       |   |   | 418    |  
|Temporary Differences                                                                 |  |                         | 590    |      |   | (1,573 | ) |   | 337    |  
|Taxes in respect of prior
 years                                                      |  |                         | (333   | )    |   |       |   |   | (15    | )
|Tax withholdings and credits                                                          |  |                         | 18     |      |   | (274   | ) |   | 174    |  
|Other                                                                                 |  |                         | (144   | )    |   | 278    |   |   | (679   | )
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|                                                                                      |  |                         |        |      |   |        |   |   |        |  
|Income taxes (tax benefit),
 as reported in the statements of operations              |  | $                       | (96    | )    | $ | (87    | ) | $ | 371    |  
|                                                                                      |  |                         |        |      |   |        |   |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, |     
|                                 |  |                         |     
|                                 |  | 2006                    |      | 2007 |   | 2008 |  
|                                 |  |                         |      |      |   |      |  
|                                 |  |                         |      |      |   |      |   |   |     |  
|Current taxes                    |  | $                       | 219  |      | $ | (87  | ) | $ | 386 |  
|Taxes in respect of prior
 years |  |                         | (315 | )    |   |     |   |   | (15 | )
|                                 |  |                         |      |      |   |      |   |   |     |  
|                                 |  |                         |      |      |   |      |   |   |     |  
|                                 |  | $                       | (96  | )    | $ | (87  | ) | $ | 371 |  
|                                 |  |                         |      |      |   |      |   |   |     |  
|                                 |  |                         |      |      |   |      |   |   |     |  
|Domestic                         |  | $                       | (248 | )    | $ | (274 | ) | $ | 127 |  
|Foreign                          |  |                         | 152  |      |   | 187  |   |   | 244 |  
|                                 |  |                         |      |      |   |      |   |   |     |  
|                                 |  |                         |      |      |   |      |   |   |     |  
|                                 |  | $                       | (96  | )    | $ | (87  | ) | $ | 371 |  
|                                 |  |                         |      |      |   |      |   |   |     |  

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

|         |  |                         |        |      |   |        |   |   |        |  
|-------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|         |  | Year ended December 31, |       
|         |  |                         |       
|         |  | 2006                    |        | 2007 |   | 2008   |  
|         |  |                         |        |      |   |        |  
|         |  |                         |        |      |   |        |   |   |        |  
|Domestic |  | $                       | (1,319 | )    | $ | 4,877  |   | $ | (4,388 | )
|Foreign  |  |                         | (2,580 | )    |   | (2,068 | ) |   | 2,758  |  
|         |  |                         |        |      |   |        |   |   |        |  
|         |  |                         |        |      |   |        |   |   |        |  
|         |  | $                       | (3,899 | )    | $ | 2,809  |   | $ | (1,630 | )
|         |  |                         |        |      |   |        |   |   |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $45.                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                                              |  |                    |     |  
|------------------------------------------------------------- |  | ------------------ | --- | -
|                                                              |  | December 31,
 2008 |    
|                                                              |  |                    |    
|                                                              |  |                    |     |  
|Gross unrecognized tax benefits
 at January 1, 2008           |  | $                  | 92  |  
|Increases in interest and penalties related
 to tax positions |  |                    | 13  |  
|Increases in tax positions for
 current year                  |  |                    | 25  |  
|Lapse in statute of limitations                               |  |                    | (10 | )
|                                                              |  |                    |     |  
|                                                              |  |                    |     |  
|Gross unrecognized tax benefits
 at December 31, 2008         |  | $                  | 120 |  
|                                                              |  |                    |     |  

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:- | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                       
|          |                      | 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, 2008, 430,217
 warrants were exercised 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,
 2008, none of these warrants were converted into the Companys Ordinary
 shares.                                                                                                                                                                                                                                         
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                       
|          |                      | In 2005, 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
 deemed dividend of $1,981 related to the beneficial conversion feature on the
 Preferred shares.                                                                                                                                                                                                                                                                                                       
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                       
|          |                      | 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.                                                                                                                                                                                                                         

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:- | SHAREHOLDERS EQUITY (Cont.)
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                              | 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. During 2008
 none of the Preferred shares were converted into the Companys Ordinary
 shares and none of the Warrants had been exercised into Ordinary shares.                                                                                                                                                                                                                                                                                                            
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          | c.                           | Share
 options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                              | Employee
 Share Option Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                              | In 1996, the
 Board of Directors of the Company adopted share option plans (as amended the
 Old Plans). As of December 31, 2008 94,000 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, 2008, an aggregate of 1,014,333 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 - 34

---

---



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

|          |                              |                                                                                
|--------- | ---------------------------- | -------------------------------------------------------------------------------
|NOTE 10:- | SHAREHOLDERS EQUITY (Cont.)
|          |                              |                                                                                
|          |                              | A summary of
 the stock option activities in 2006, 2007 and 2008 is as follows:

|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 
|---------------------------------- |  | ----------------------------- | --------- | -------------------------------- | - | ----------------------------- |  | --------------------------------- | --------- | ----------------- | - | --------------------------------- |  | ---------------------------------------------- | -------- | -------------------------- | - | ---- |  |  | ---- |  | - | - | 
|                                   |  | Year ended December 31,
 2006 |           | Year ended December 31,
 2007    |   | Year ended December 31,
 2008 | 
|                                   |  |                               |           |                                  |   |                               | 
|                                   |  | Amount
 of options            |           | Weighted average
 exercise price |   | Amount
 Of options            |  | Weighted average
 exercise
 price |           | Amount
 ofoptions |   | Weighted average
 exercise
 price |  | Weighted
 average
 remaining contractual
 term |          | Aggregate intrinsic
 value |  
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |  
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 
|Outstanding at beginning of year   |  |                               | 390,333   |                                  | $ | 4.55                          |  |                                   | 1,049,000 |                   | $ | 3.97                              |  |                                                | 740,667  |                            | $ | 4.03 |  |  |      |  |   |   | 
|Granted                            |  |                               | 755,500   |                                  | $ | 3.78                          |  |                                   | 18,000    |                   | $ | 3.00                              |  |                                                | 25,000   |                            | $ | 3.00 |  |  |      |  |   |   | 
|Exercised                          |  |                               |          |                                  | $ |                              |  |                                   |          |                   | $ |                                  |  |                                                |         |                            | $ |     |  |  |      |  |   |   | 
|Forfeited                          |  |                               | (93,500   | )                                | $ | 4.23                          |  |                                   | (185,004  | )                 | $ | 3.71                              |  |                                                | (46,667  | )                          | $ | 3.56 |  |  |      |  |   |   | 
|Expired                            |  |                               | (3,333    | )                                | $ | 20                            |  |                                   | (141,329  | )                 | $ | 3.63                              |  |                                                | (139,335 | )                          | $ | 3.61 |  |  |      |  |   |   | 
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 
|Outstanding at end of year         |  |                               | 1,049,000 |                                  | $ | 3.97                          |  |                                   | 740,667   |                   | $ | 4.03                              |  |                                                | 579,665  |                            | $ | 4.21 |  |  | 2.05 |  | $ |  | 
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 
|Options exercisable at end of year |  |                               | 266,330   |                                  | $ | 4.78                          |  |                                   | 375,336   |                   | $ | 4.51                              |  |                                                | 410,669  |                            | $ | 4.47 |  |  | 1.83 |  | $ |  | 
|                                   |  |                               |           |                                  |   |                               |  |                                   |           |                   |   |                                   |  |                                                |          |                            |   |      |  |  |      |  |   |   | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 2008 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, 2008. This
 amount changes based on the fair market value of the Companys stock. The
 share price as of December 31, 2008 is lower than the exercise price of all
 the changes during the year and therefore aggregate intrinsic value was not
 calculated.

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 10:- | SHAREHOLDERS EQUITY (Cont.)
|          |                              |                                                                                                                                                                                                       
|          |                              | The
 weighted-average grant-date fair value of options granted during the years
 2006, 2007 and 2008 was $1.45, $1.09 and $1.18, respectively.                                                        
|          |                              |                                                                                                                                                                                                       
|          |                              | 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, |    
|                                     |  |                           |    
|                                     |  | 2007                      |     | 2008 |  
|                                     |  |                           |     |      |  
|                                     |  |                           |     |      |   |    | 
|Cost
 of sales                       |  | $                         | 54  |      | $ | 30 | 
|Research
 and development expenses   |  |                           | 29  |      |   | 18 | 
|Sales
 and marketing                 |  |                           | 17  |      |   | 13 | 
|General
 and administrative expenses |  |                           | 13  |      |   | 6  | 
|                                     |  |                           |     |      |   |    | 
|                                     |  |                           |     |      |   |    | 
|                                     |  | $                         | 113 |      | $ | 67 | 
|                                     |  |                           |     |      |   |    | 

| |  |                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of
 December 31, 2008, there was $22 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 0.91 years.
| |  |                                                                                                                                                                                                                                                                                                 
| |  | The options
 outstanding as of December 31, 2008 have been separated into exercise prices,
 as follows:                                                                                                                                                                                         

|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         |  |  |         |  |   |      | 
|--------------- | ------- | --------------------------------------------- |  | -------------------------------------------- |  | --------------------------------- | ---- | --------------------------------------------- | - | ------------------------------------------------------- |  |  | ------- |  | - | ---- | 
|Exercise
 price |         | Options outstanding
 as of
 December 31, 2008 |  | Weighted average
 remaining contractual life |  | Weighted average
 exercise
 price |      | Options exercisable
 as of
 December 31, 2008 |   | Weighted average
 exercise price of exercisable options | 
|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         | 
|                |         |                                               |  |                                              |  | years                             |      |                                               |   |                                                         |  |  |         |  |   |     
|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         |  |  |         |  |   |     
|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         |  |  |         |  |   |      | 
|$               | 3.0     |                                               |  | 63,000                                       |  |                                   | 3.48 |                                               | $ | 3.0                                                     |  |  | 19,331  |  |   |      | 
|$               | 3.5     |                                               |  | 165,000                                      |  |                                   | 2.26 |                                               | $ | 3.5                                                     |  |  | 123,332 |  |   |      | 
|$               | 3.9     |                                               |  | 228,665                                      |  |                                   | 2.12 |                                               | $ | 3.9                                                     |  |  | 154,670 |  |   |      | 
|$               | 4.3     |                                               |  | 29,000                                       |  |                                   | 2.23 |                                               | $ | 4.3                                                     |  |  | 19,336  |  |   |      | 
|$               | 6.0-8.0 |                                               |  | 94,000                                       |  |                                   | 0.5  |                                               | $ | 7.0                                                     |  |  | 94,000  |  |   |      | 
|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         |  |  |         |  |   |      | 
|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         |  |  |         |  |   |      | 
|                |         |                                               |  | 579,665                                      |  |                                   | 1.83 |                                               | $ | 4.21                                                    |  |  | 410,669 |  | $ | 4.47 | 
|                |         |                                               |  |                                              |  |                                   |      |                                               |   |                                                         |  |  |         |  |   |      | 

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

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

|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                                                                                               |  | Years
 ended December 31, |           
|                                                                                                                               |  |                           |           
|                                                                                                                               |  | 2006                      |            | 2007 |   | 2008       | 
|                                                                                                                               |  |                           |            |      |   |            | 
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|Net income (loss) attributable to ordinary
 shareholders                                                                       |  | $                         | (3,803     | )    | $ | 2,447      |  | $ | (2,001     | )
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|Weighted average number of shares used for
 computing basic net earning (loss) per share attributed to Ordinary shareholders   |  |                           | 15,075,881 |      |   | 16,001,148 |  |   | 16,003,158 |  
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|Dilutive affect:                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|Employee stock options                                                                                                         |  |                           | *)        |      |   | 120,841    |  |   | *)        |  
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|Preferred shares as converted                                                                                                  |  |                           | *)        |      |   | *)        |  |   | *)        |  
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  
|Weighted average number of shares used for
 computing diluted net earning (loss) per share attributed to Ordinary shareholders |  |                           | 15,075,881 |      |   | 16,121,989 |  |   | 16,003,158 |  
|                                                                                                                               |  |                           |            |      |   |            |  |   |            |  

|          |                                           |               
|--------- | ----------------------------------------- | --------------
|          | *)                                        | Anti
 dilutive
|          |                                           |               
|NOTE 12:- | RELATED PARTIES TRANSACTIONS AND BALANCES
|          |                                           |               
|          | Composition:                             

|                                                      |  |              |        |      |   |      |  
|----------------------------------------------------- |  | ------------ | ------ | ---- | - | ---- | -
|                                                      |  | December 31, |       
|                                                      |  |              |       
|                                                      |  | 2007         |        | 2008 |  
|                                                      |  |              |        |      |  
|                                                      |  |              |        |      |   |      |  
|Balances between Team and the Company (see
 a below)  |  | $            | (3,932 | )    | $ | (420 | )
|                                                      |  |              |        |      |   |      |  
|                                                      |  |              |        |      |   |      |  
|Balance with related party
 shareholder (see b below) |  | $            | 409    |      | $ | 459  |  
|                                                      |  |              |        |      |   |      |  

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

|                                                       |  |                         |       |      |   |       |  |   |     | 
|------------------------------------------------------ |  | ----------------------- | ----- | ---- | - | ----- |  | - | --- | 
|                                                       |  | Year ended December 31, |      
|                                                       |  |                         |      
|                                                       |  | 2006                    |       | 2007 |   | 2008  | 
|                                                       |  |                         |       |      |   |       | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|Revenues:                                              |  |                         |       |      |   |       |  |   |     | 
|Commissions on product sales and
 payment for services |  | $                       |      |      | $ | 502   |  | $ | 364 | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|General and administrative expenses:                   |  |                         |       |      |   |       |  |   |     | 
|Rent and maintenance                                   |  | $                       | 1,160 |      | $ | 1,402 |  | $ |    | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|Administrative and management services                 |  | $                       | 160   |      | $ | 164   |  | $ |    | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|                                                       |  |                         |       |      |   |       |  |   |     | 
|Purchase of equipment                                  |  | $                       | 352   |      | $ | 437   |  | $ | 249 | 
|                                                       |  |                         |       |      |   |       |  |   |     | 

F - 37

---

---



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

|          |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|--------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 12:- | 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, 2008, 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 1,500 ($411 as of December 31, 2008) 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 - 38

---

---



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

|          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------- | ------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:- | RELATED PARTIES TRANSACTIONS AND BALANCES
 (Cont.)                
|          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                    | The Company
 filed a NIS 1,600 lawsuit and demanded reimbursement for the additional
 withholding tax from Mr. Eisenberg. On August 12, 2008 the court rendered a
 judgment which accepted the Companys lawsuit in its entirety and determined
 that Mr. Eisenberg will pay the Company the amount of NIS 1,745(approximately
 $459), including linkage differentials and interest, including attorney fees.
 On October 26, 2008, Mr. Eisenberg appealed on such judgment to the district
 court. A preliminary hearing on that matter in the district court is
 scheduled for September 16, 2009.
|          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 13:- | 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, 2006, 2007 and 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|               |  |                         |        |                    |   |                 |  |                    |        |                 |   |                    |  |   |        |  |   |       | 
|-------------- |  | ----------------------- | ------ | ------------------ | - | --------------- |  | ------------------ | ------ | --------------- | - | ------------------ |  | - | ------ |  | - | ----- | 
|               |  | Year ended December 31, |       
|               |  |                         |       
|               |  | 2006                    |        | 2007               |   | 2008            | 
|               |  |                         |        |                    |   |                 | 
|               |  | Total
 revenues         |        | Long-lived
 assets |   | Total
 revenues |  | Long-lived
 assets |        | Total
 revenues |   | Long-lived
 assets | 
|               |  |                         |        |                    |   |                 |  |                    |        |                 |   |                    | 
|               |  |                         |        |                    |   |                 |  |                    |        |                 |   |                    |  |   |        |  |   |       | 
|Israel         |  | $                       | 3,199  |                    | $ | 3,217           |  | $                  | 3,516  |                 | $ | 5,596              |  | $ | 4,566  |  | $ | 6,826 | 
|North America  |  |                         | 18,929 |                    |   | 600             |  |                    | 16,118 |                 |   | 397                |  |   | 15,677 |  |   | 342   | 
|Europe         |  |                         | 12,331 |                    |   | 4               |  |                    | 16,320 |                 |   | 2                  |  |   | 20,998 |  |   | 1     | 
|Eastern Europe |  |                         |       |                    |   |                |  |                    |       |                 |   |                   |  |   | 1,953  |  |   | 84    | 
|Australia      |  |                         | 3,724  |                    |   | 20              |  |                    | 2,598  |                 |   | 35                 |  |   | 2,902  |  |   | 21    | 
|South America  |  |                         | 3,085  |                    |   |                |  |                    | 2,251  |                 |   | 14                 |  |   | 1,040  |  |   |      | 
|Far East       |  |                         | 1,626  |                    |   | 1               |  |                    | 3,217  |                 |   | 1                  |  |   | 3,432  |  |   | 1     | 
|Africa         |  |                         | 3,220  |                    |   |                |  |                    | 1,897  |                 |   |                   |  |   | 1,718  |  |   | 8     | 
|               |  |                         |        |                    |   |                 |  |                    |        |                 |   |                    |  |   |        |  |   |       | 
|               |  |                         |        |                    |   |                 |  |                    |        |                 |   |                    |  |   |        |  |   |       | 
|               |  | $                       | 46,114 |                    | $ | 3,842           |  | $                  | 45,917 |                 | $ | 6,045              |  | $ | 52,286 |  | $ | 7,283 | 
|               |  |                         |        |                    |   |                 |  |                    |        |                 |   |                    |  |   |        |  |   |       | 

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

|           |  |                         |   |      |    |      |  |    |   | 
|---------- |  | ----------------------- | - | ---- | -- | ---- |  | -- | - | 
|           |  | Year ended December 31, |  
|           |  |                         |  
|           |  | 2006                    |   | 2007 |    | 2008 | 
|           |  |                         |   |      |    |      | 
|           |  |                         |   |      |    |      |  |    |   | 
|Customer A |  | 13                      | % |      | 15 | %    |  | 18 | % | 
|Customer B |  | 11                      | % |      | 7  | %    |  | 11 | % | 
|Customer C |  | 7                       | % |      | 6  | %    |  | 10 | % | 
|Customer D |  | 6                       | % |      | 6  | %    |  | 5  | % | 

F - 39

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

|          |                                        |                                
|--------- | -------------------------------------- | -------------------------------
|NOTE 14:- | SELECTED STATEMENTS OF OPERATIONS DATA
|          |                                        |                                
|          | a.                                     | Research and
 development, net:

|                                  |  |                         |       |      |   |       |  |   |        | 
|--------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ------ | 
|                                  |  | Year ended December 31, |      
|                                  |  |                         |      
|                                  |  | 2006                    |       | 2007 |   | 2008  | 
|                                  |  |                         |       |      |   |       | 
|                                  |  |                         |       |      |   |       |  |   |        | 
|Total cost                        |  | $                       | 9,632 |      | $ | 9,433 |  | $ | 11,407 | 
|Less - grants and
 participations |  |                         | 54    |      |   |      |  |   |       | 
|                                  |  |                         |       |      |   |       |  |   |        | 
|                                  |  |                         |       |      |   |       |  |   |        | 
|Research and development,
 net    |  | $                       | 9,578 |      | $ | 9,433 |  | $ | 11,407 | 
|                                  |  |                         |       |      |   |       |  |   |        | 

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

|                                                                     |  |                         |       |      |   |       |  |   |      |  
|-------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ---- | -
|                                                                     |  | Year ended December 31, |      
|                                                                     |  |                         |      
|                                                                     |  | 2006                    |       | 2007 |   | 2008  | 
|                                                                     |  |                         |       |      |   |       | 
|                                                                     |  |                         |       |      |   |       |  |   |      |  
|Financial income (expense), net                                      |  |                         |       |      |   |       |  |   |      |  
|Foreign currency translation adjustments                             |  | $                       | 41    |      | $ | 985   |  | $ | (774 | )
|Loss from sale of marketable securities                              |  |                         | (838  | )    |   |      |  |   |     |  
|Other than temporary decline in fair value
 of marketable securities |  |                         | (329  | )    |   |      |  |   |     |  
|Interest and others                                                  |  |                         | 1,788 |      |   | 1,165 |  |   | 259  |  
|                                                                     |  |                         |       |      |   |       |  |   |      |  
|                                                                     |  |                         |       |      |   |       |  |   |      |  
|Financial income, net                                                |  | $                       | 662   |      | $ | 2,150 |  | $ | (515 | )
|                                                                     |  |                         |       |      |   |       |  |   |      |  

| |    |                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 - 40

---

---



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

|          |                                                                                                                                                                                                                                                                |                                        
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------
|NOTE 15:- | RECONCILIATION TO IFRS                                                                                                                                                                                                                                        
|          |                                                                                                                                                                                                                                                                |                                        
|          | 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 IFRS, the effects on the financial statements
 would have been as follows:
|          |                                                                                                                                                                                                                                                                |                                        
|          | a.                                                                                                                                                                                                                                                             | Effect on
 the statement of operations:

|                                                |  |                         |       |                         |   |        |  
|----------------------------------------------- |  | ----------------------- | ----- | ----------------------- | - | ------ | -
|                                                |  | Year ended
 December 31 |       | Year ended
 December 31 |  
|                                                |  | 2007                    |       | 2008                    |  
|                                                |  |                         |       |                         |  
|                                                |  |                         |       |                         |   |        |  
|Net income (loss) as reported, under
 U.S. GAAP |  | $                       | 2,896 |                         | $ | (2,001 | )
|                                                |  |                         |       |                         |   |        |  
|Reconciling item for IFRS reporting:            |  |                         |       |                         |   |        |  
|Accrued severance pay                           |  |                         | 25    |                         |   | 618    |  
|                                                |  |                         |       |                         |   |        |  
|                                                |  |                         |       |                         |   |        |  
|Net income (loss) according to IFRS *)          |  | $                       | 2,921 |                         | $ | (1,383 | )
|                                                |  |                         |       |                         |   |        |  

| |  |    |                                                                                                                                                            
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | *) | Amounts in
 NIS presented in accordance with IFRS were translated into U.S. dollars
 according to the exchange rate at the end of the corresponding period.

|                                                                                    |  |                         |      |                         |   |       |  
|----------------------------------------------------------------------------------- |  | ----------------------- | ---- | ----------------------- | - | ----- | -
|                                                                                    |  | Year ended
 December 31 |      | Year ended
 December 31 |  
|                                                                                    |  | 2007                    |      | 2008                    |  
|                                                                                    |  |                         |      |                         |  
|                                                                                    |  |                         |      |                         |   |       |  
|Diluted net income (loss) attributed to
 shareholders
 as reported, under U.S. GAAP |  | $                       | 0.15 |                         | $ | (0.13 | )
|                                                                                    |  |                         |      |                         |   |       |  
|Reconciling item for IFRS
 reporting                                                |  |                         |     |                         |   | 0.04  |  
|                                                                                    |  |                         |      |                         |   |       |  
|                                                                                    |  |                         |      |                         |   |       |  
|Diluted net income (loss) attributed to
 shareholders
 according to IFRS *)         |  | $                       | 0.15 |                         | $ | (0.09 | )
|                                                                                    |  |                         |      |                         |   |       |  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | According to
 U.S. GAAP, under FAS 128 Earnings per Share, the number of incremental
 shares to be included in the denominator for year-to-date diluted EPS should
 be determined by computing a year-to-date weighted average of the number of
 incremental shares included in each quarterly diluted EPS computation
 (assuming all periods were profitable). According to IAS 33 Earnings per
 Share the incremental shares included in year-to-date diluted EPS weighted
 average would be computed using the average market price of shares for the
 year-to-date period. This item had no impact on the earning per share for the
 years ended December 31, 2007 and 2008.

F - 41

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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 15:- | RECONCILIATION TO IFRS (Cont.)
|          |                                |                                   
|          | b.                             | Shareholders
 equity differences:

|                                                   |  |             |        |             |   |        | 
|-------------------------------------------------- |  | ----------- | ------ | ----------- | - | ------ | 
|                                                   |  | December 31 |        | December 31 |  
|                                                   |  | 2007        |        | 2008        |  
|                                                   |  |             |        |             |  
|                                                   |  |             |        |             |   |        | 
|Shareholders equity as
 reported, under U.S. GAAP |  | $           | 33,436 |             | $ | 31,478 | 
|                                                   |  |             |        |             |   |        | 
|Reconciling item for IFRS
 reporting:              |  |             |        |             |   |        | 
|Accrued severance pay                              |  |             | 489    |             |   | 1,107  | 
|                                                   |  |             |        |             |   |        | 
|                                                   |  |             |        |             |   |        | 
|Shareholders equity
 according to IFRS *)         |  | $           | 33,925 |             | $ | 32,585 | 
|                                                   |  |             |        |             |   |        | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | *)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Amounts in
 NIS presented in accordance with IFRS were translated into U.S. dollars
 according to the exchange rate at the end of the corresponding period.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                            
| | c. | Material
 adjustments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                            
| |    | The
 abovementioned adjustments result primarily from the differences between U.S.
 GAAP and IFRS, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                            
| |    | According to
 U.S. GAAP, the cash surrendered value of such insurance policies should be
 presented in the balance sheet as long-term investments and the full
 severance pay liability should be presented in the balance sheet. According
 to IAS 19, Employee Benefits, the Companys benefit plan is considered a defined
 benefit plan, and therefore, the severance pay liability is required to be
 calculated on an actuarial basis. The actuarial calculation takes into
 consideration future salary increases, the rates of employee turnover, and
 the estimated timing of payments.

F - 42

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