---

---

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005

OR

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

For the transition period from ____________ to ____________

OR

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

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

Commission File Number 0-28986

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

Israel
(Jurisdiction of incorporation or organization)

7 Martin Gehl Street
Kiryat Aryeh, Petach Tikva 49512 Israel
972-3-926-9700
(Address of principal executive offices)

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

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

Ordinary Shares, par value NIS 0.5 per share
(Title of Class)

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

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

13,872,938 Ordinary Shares, par value NIS 0.5 per share
4,636,389 Series A Convertible Preferred Shares, par value NIS 0.5 per share



---

---



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

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  oAccelerated filer  o Non-accelerated filer  x

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

Item 17  o    Item 18   x

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

oYes  x No

2

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# TABLE OF CONTENTS

|                                                                | Page
|--------------------------------------------------------------- | ----
|
|
|
|
|PART I                                                          | 5   
|Item 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 5   
|Item 2.   OFFER STATISTICS AND EXPECTED TIMETABLE               | 5   
|Item 3.   KEY INFORMATION                                       | 5   
|A.   Selected Financial Data                                    | 5   
|B.   Capitalization and Indebtedness                            | 6   
|C.   Reasons for the Offer and Use of Proceeds                  | 6   
|D.   Risk Factors                                               | 6   
|Item 4.   INFORMATION ON THE COMPANY                            | 17  
|A.   History and Development of the Company                     | 17  
|B.   Business Overview                                          | 18  
|C.   Organizational Structure                                   | 27  
|D.   Property, Plants and Equipment                             | 27  
|Item 4A.   UNRESOLVED STAFF COMMENTS                            | 27  
|Item 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 28  
|A.   Operating Results                                          | 28  
|B.   Liquidity and Capital Resources                            | 38  
|C.   Research and Development, Patents and Licenses             | 39  
|D.   Trend Information                                          | 40  
|E.   Off-Balance Sheet Arrangements                             | 40  
|F.   Tabular Disclosure of Contractual Obligations              | 40  
|Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 40  
|A.   Directors and Senior Management                            | 40  
|B.   Compensation                                               | 43  
|C.   Board Practices                                            | 43  
|D.   Employees                                                  | 47  
|E.   Share Ownership                                            | 47  
|Item 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 49  
|A.   Major Shareholders                                         | 49  
|B.   Related Party Transactions                                 | 52  
|C.   Interests of Experts and Counsel                           | 54  
|Item 8.   FINANCIAL INFORMATION                                 | 54  
|A.   Consolidated Statements and Other Financial Information    | 54  
|B.   Significant Changes                                        | 55  
|Item 9.   THE OFFER AND LISTING                                 | 55  
|A.   Offer and Listing Details                                  | 55  
|B.   Plan of Distribution                                       | 55  
|C.   Markets                                                    | 56  
|D.   Selling Shareholders                                       | 56  
|E.   Dilution                                                   | 56  
|F.   Expenses of the Issue                                      | 56  

3

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|                                                                                        |   
|--------------------------------------------------------------------------------------- | --
|
|
|
|
|Item 10.   ADDITIONAL INFORMATION                                                       | 56
|A.   Share Capital                                                                      | 56
|B.   Memorandum and Articles of Association                                             | 56
|C.   Material Contracts                                                                 | 62
|D.   Exchange Controls                                                                  | 63
|E.   Taxation                                                                           | 63
|F.   Dividends and Paying Agents                                                        | 71
|G.   Statement by Experts                                                               | 71
|H.   Documents on Display                                                               | 71
|I.   Subsidiary Information                                                             | 71
|Item 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 71
|Item 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 71
|PART II                                                                                 | 71
|Item 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 71
|Item 14    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 72
|Item 15.   CONTROLS AND PROCEDURES                                                      | 72
|Item 16.   Reserved                                                                     | 72
|Item 16A.   AUDIT COMMITTEE FINANCIAL EXPERT                                            | 72
|Item 16B.   CODE OF ETHICS                                                              | 72
|Item 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 72
|Item 16D.   EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES                      | 73
|Item 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 73
|Item 17.    FINANCIAL STATEMENTS                                                        | 73
|Item 18.    FINANCIAL STATEMENTS                                                        | 73
|Item 19.    EXHIBITS                                                                    | 73

4

---

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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.

Our
consolidated financial statements are prepared in United States dollars and in accordance
with generally accepted accounting principles in the United States. All references to
dollars or $ in this annual report are to United States dollars,
and all references to Shekels or NIS are to New Israeli Shekels.
On March 24, 2006, the exchange rate between the NIS and the dollar, as quoted by the Bank
of Israel, was NIS 4.681 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 as well as our reports on Form 6-K
submitted to the Securities and Exchange Commission. Unless we are required to do so under
U.S. federal securities laws or other applicable laws, we do not intend to update or
revise any forward-looking statements.

# PART I

|Item 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- |  | -----------------------------------------------------

Not applicable.

|Item 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not applicable.

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

A. Selected Financial
Data.

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

We derived the selected consolidated
statements of operations data set forth below for the years ended December 31, 2003, 2004
and 2005, and the selected consolidated balance sheet data as of December 31, 2004 and
2005, from our audited consolidated financial statements, which are included elsewhere in
this annual report. These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(GAAP). We derived the consolidated statements of operations data for the
years ended December 31, 2001 and 2002 and the selected consolidated balance sheet data as
of December 31, 2001, 2002 and 2003 from audited consolidated financial statements that
are not included in this annual report.

5

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

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

B. Capitalization and
Indebtedness

Not applicable.

C.
          Reasons for Offer and Use of Proceeds

Not applicable.

D. Risk Factors

6

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# Risks Relating to Our
Business and Our Industry

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

Slowly recovering from the
telecommunications spending slowdown, global operational support system, or OSS, spending
is expected to grow in the coming years. Growth is built on the need for service providers
to support new services and network equipment. However, we are unable to predict the
duration of these trends or the extent of any impact that it may have on our results of
operations. If any of these trends reverses and the slow-down in capital expenditures
resumes, it would reduce our sales and could result in pressure on the price of our
products, each of which would have a material adverse effect on our operating results.

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

In addition, the OSS market is
undergoing a period of merger and acquisition deals. Events like the Watchmark (a.k.a
Vallent) acquisition of Metrica (end of 2004), the Micromuse acquisition of Quallaby (June
2005), the IBM acquisition of Micromuse (Dec 2005) and others. These competitors
consolidation could result in stronger competition with a larger installation base that
could threaten our market positioning and decrease our sales. In addition, the potential
for us to be a part of a merger and acquisition, whether friendly or not,( is also a valid
scenario that could affect our customers acceptance and financial performance.

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

A large portion of our revenues is
derived from substantial orders placed by a relatively small number of customers. Our
revenues from our five largest customers represented 40% of our total revenues in 2003,
43% of our total revenues in 2004 and 47% of our total revenues in 2005. Because of our
dependence on a small number of customers and large orders, if expected orders are not
received, or orders are postponed, reduced or cancelled, our revenues and profitability
will be significantly reduced.

Our profitability has been, and
may continue to be, volatile, which could adversely affect the price of our ordinary
shares.

We reported net losses attributed to
our ordinary shares of $30.1 million in 2003, $29.5 million in 2004 and $9.1 million in
2005. Although we have been profitable in the past, we may not be profitable or meet the
level of expectations of the investment community in the future, which could have a
material adverse impact on our share price. 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 may need additional capital in
the future and may not be able to secure adequate funds on terms acceptable to us.

In January 2005, we closed a private placement
transaction in which we raised approximately $14.6 million. Please see Item 4A
 History and Development of the Company for more information regarding this
transaction. Although we currently believe that we have sufficient capital to finance our
operations for the next twelve months, we may choose to raise additional capital. We have
recently incurred operating losses that resulted in negative cash flow from operations and
may do so in the future. 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.

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.

7

---

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Our products generally have long
sales cycles and implementation periods over which we may not have control.

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

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

The market for our products is
characterized by:

| |  | rapidly
changing technologies;
| | - | ------------------------------

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

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

| |  | frequent
new product introductions;
| | - | -----------------------------------

| |  | rapid
changes in communications service providers' requirements; and
| | - | --------------------------------------------------------------------

| |  | emergence
of new types of networks.
| | - | -----------------------------------

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
our existing products;
| | - | ------------------------------

| |  | develop
and introduce, on a timely and cost-effective basis, new products and product features
that keep pace with technological developments and emerging industry standards, including
next-generation and third-generation networks;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |  | develop
new interfaces between our products and complimentary products.
| | - | -----------------------------------------------------------------------

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

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

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

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

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

8

---

---



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

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

We depend on 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.

We rely on strategic relationships
with system integrators and hardware vendors such as Nortel, Siemens, and CMGLogica to
sell our products and services and these relationships may account for a larger portion of
our revenues in the future. These parties are not obligated to sell any of our products.
Any failure of these relationships to generate significant revenues for us, a termination
of any of these relationships, or if we are unable to form additional strategic alliances
in the future that will prove beneficial to us, could harm our operations and
profitability.

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

Our current customers are located in
more than 20 countries worldwide and we are seeking to expand into other markets. We
expect our revenues from international sales to continue to account for a large portion of
our total revenues in the future.

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

| |  | difficulty
in staffing and managing foreign operations generally, and time and costs spent on
staffing and managing operations in markets from which we do not derive substantial
revenue but still need to maintain a presence;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
impact of possible recessionary environments in certain economies;
| | - | ----------------------------------------------------------------------

| |  | changes
in regulatory requirements, including a slowdown in the rate of privatization of
           communications service providers;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | difficulties
in enforcing our rights in various jurisdictions;
| | - | --------------------------------------------------------------

| |  | reduced
protection for intellectual property rights in some countries;
| | - | ----------------------------------------------------------------------

| |  | tariffs
and other trade barriers;
| | - | ---------------------------------

| |  | adverse
tax consequences;
| | - | -------------------------

| |  | restrictions
on the conversion of currencies or the repatriation of earnings;
| | - | -----------------------------------------------------------------------------

| |  | the
burdens of complying with a wide variety of foreign laws and regulations; and
| | - | ---------------------------------------------------------------------------------

| |  | economic
and political instability.
| | - | -----------------------------------

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

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.

9

---

---



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

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

In order to continue to sell our
products despite the slow-down of expenditures by communications service providers, and
resulting increased competition, we have 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 actual
costs incurred by us up to the date of termination. Our performance often largely
comprises services and customized products which we cannot recover and resell. As a
result, if any of our customers terminate their agreements with us, we may have difficulty
recovering our costs up to the date of any termination, despite a customers
obligation to reimburse us. In such event, we may have reduced future revenues. Please see
the discussion regarding the termination of a contract with a major customer in Item
8A  Legal Proceedings.

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

The markets for our products are very
competitive, and we expect competition to increase in the future. Our current and
prospective competitors offer a variety of solutions to address the markets for network
management system, or NMS, operational support system, or OSS, and Business support
system, or BSS. Our current and potential competitors include:

| |  | organizations IT
departments that provide NMS, OSS and BSS applications for their particular internal
needs;
| | - | -------------------------------------------------------------------------------------------------------------

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

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

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

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

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.

We may compete with our
customers internal efforts to design NMS, OSS and BSS solutions.

Some of our customers continuously
evaluate whether to design and develop their own NMS, OSS and BSS solutions or purchase
them from outside vendors. As a result, we may lose customers and customer opportunities.

Currency fluctuations
could reduce our revenues and profitability.

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

10

---

---



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

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

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

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

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

In March 2005, Menahem Tirosh
resigned from his position as our Chief Executive Officer. Meir Lipshes served as our
acting Chief Executive Officer from March 2005 to November 2005. In December 2005, we
employed Reuven Markus as our new Chief Executive Officer. In addition, during 2004 and
2005, several other members of our senior management left the employment of the Company
and as a result, we employed several new high-level officers in 2005and at the
beginning of 2006. The difficulties inherent in selecting a suitable Chief Executive
Officer and other members of the management team, transitioning the Company under the
leadership of new management, including a new Chief Executive Officer, and assimilating
new management personnel into the Companys corporate culture could cause a reduction
in our efficiency and profitability, may harm perceptions of us in the investment
community and may cause our stock price to decline.

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

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

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

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

As of March 24, 2006, Shlomo
Eisenberg, the former chairman of our board of directors, beneficially owns 4,436,224
ordinary shares, which represents approximately 23.6% 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. For additional details,
see Item 7  Major Shareholders and Related Party Transactions. 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. For more information on the effect
such concentration of ownership could have on our share price, please see the risk factor
entitled Substantial future sales of our ordinary shares may depress 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.

We recently issued 6,636,389 Series A
Preferred Shares to the investors in the private placement transaction described elsewhere
in this annual report. These preferential rights include:

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

11

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

| |  | veto
rights over certain material actions taken by us, which could be exercised by the holders
of the Series A Preferred Shares in a manner detrimental to the interests of the holders
of our ordinary shares; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
right to nominate one member to our board of directors, which could result in such member
voting on matters brought before our board of directors in a manner detrimental to the
interests of the holders of our ordinary shares.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For more information on the private
placement transaction, see Item 10.C.  Private Placement of Series A Preferred
Shares.

As of March 24, 2006, 2,181,820
Series A Preferred Shares had been converted into ordinary shares and 4,454,571 remain
outstanding. In addition, 2,671,648 warrants are still outstanding out of 3,026,193
warrants granted to the investors in the private placement transaction.

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.

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 2005, 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.
For a discussion of the rules relating to PFIC and related tax consequences, please see
the section of this annual report entitled Taxation  United States Federal
Income Tax Considerations.

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

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

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

| |  | the
measures we have taken to protect our proprietary rights may not be adequate to prevent
others from misappropriating our technology or from independently developing or selling
technology or products with features based on or similar to ours;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
customers that are given access to our intellectual property rights under rare
circumstances, may infringe these rights;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | our
intellectual property rights may be challenged, invalidated, violated or circumvented and
may            not provide us with any competitive advantage;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
future litigation to protect our proprietary rights could result in substantial cost to
us,            even if we ultimately prevail; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

12

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

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

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

We rely on our proprietary software
technology 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; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | determination
against us in any such litigation could subject us to significant liabilities to other
parties and could prevent us from manufacturing, selling or using our products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Defects in our software products could
reduce our revenues and harm our reputation.

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

| |  | a
delay in recognition or loss of revenues;
| | - | -------------------------------------------

| |  | loss
of market share; and
| | - | -------------------------

| |  | failure
to achieve market acceptance (brand recognition).
| | - | ---------------------------------------------------------

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

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

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

13

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

In November 2002, we received a
letter from a major customer notifying us of the termination of an agreement for the
supply by us of a Manager of Managers system (MoM), and its intention to call
the 1 million pound performance bond issued by a bank on our behalf under the agreement.
We believe that the customer terminated the agreement unlawfully, and in violation of the
termination provisions set out in the agreement. We filed an application in an English
court on November 18, 2002, requesting an injunction to prevent the customer from calling
the bond. On January 23, 2003, an order was issued denying our request for the injunction
to continue, on a number of grounds, including that our submissions were fact-based and
related to the merits of the termination and not the procedural validity of the
termination or the conformity of the written notice with the requirements of the
agreement. Because we believe that the termination of the agreement was unlawful, court
proceedings were commenced (as part of the injunction proceedings) claiming damages for
the customers wrongful repudiation of the agreement.

Our management believes, in light of
the facts surrounding our relationship with this customer, and following consultations
with legal counsel, that we have reasonably good prospects of establishing that the
customer was not entitled to terminate the agreement and by its conduct repudiated the
agreement. We cannot currently quantify the amount of damages that we would receive if we
were to succeed in a lawsuit against the customer. The claim and particulars were served
on the customer in December 2005. On March 28, 2006, we were served with the defense and
counterclaim and it is currently under review. We cannot presently estimate the amount of
damages that could be sought by the customer in a potential counterclaim.

# 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. Such ongoing hostilities may hinder Israels
international trade relations and may limit the geographic markets where we can sell our
products. Furthermore, several countries restrict business with Israel and Israeli
companies, and additional companies may restrict doing business with Israel and Israeli
companies as the result of the recent increase in hostilities.

In January 2006, Hamas, an Islamic
movement responsible for many attacks against Israelis, won the majority of the seats in
the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported
candidates is expected to be a major obstacle to relations between Israel and the
Palestinian Authority, as well as to the stability in the Middle East as a whole.

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

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

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

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

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

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

14

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

The Israeli government may reduce or
eliminate in the future tax benefits available to approved enterprise programs. Our
approved enterprise program and the tax benefits thereunder may not continue in the future
at their current levels or at any level. The termination or reduction of these tax
benefits would likely increase our taxes. The amount, if any, by which our taxes would
increase will depend upon the rate of the tax increase, the amount of any tax benefit
reduction, and the amount of any taxable income that we may earn in the future.

We may be required to pay stamp
duty on agreements executed by it on or after June 1, 2003. This would increase the
Companys taxes.

The Israeli Stamp Duty on Documents
Law, 1961, or the Stamp Duty Law, provides that most documents signed by Israeli companies
are subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of
the subject matter of such document. De facto, it has been common practice in Israel not
to pay such stamp duty unless a document is filed with a governmental authority or with
the courts. As a result of an amendment to the Stamp Duty Law that came into effect on
June 1, 2003, the Israeli tax authorities have approached many companies in Israel,
including us, and have requested disclosure of all agreements signed by such companies
since June 1, 2003, with the aim of collecting stamp duty with respect to such agreements.
Based on advice from our Israeli counsel, we believe that we may only be required to pay
stamp duty on documents signed on or after August 2004. However, we cannot assure you that
the tax authorities or the courts will accept such view. Although at this stage it is not
yet possible to evaluate the effect, if any, on us of the amendment to the Stamp Duty Law,
the same could materially adversely affect our results of operations.

Under an order published in December
2005, the requirement to pay stamp duty was cancelled with respect to documents signed on
or after January 1, 2006.

The government programs in which
we have participated in the past require us to meet several conditions, which we may fail
to satisfy. Such grants may be reduced in the future, which would increase our costs.

We received grants and participated
in programs sponsored by the Office of the Chief Scientist of the Israeli Ministry of
Industry, Trade and Labor, the Israel-United States Binational Industrial Research and
Development Foundation, known as the BIRD Foundation and from the European Union. To
maintain our eligibility for these programs we must continue to meet several conditions
under these grant programs and the Law for the Encouragement of Research and Development
in the Industry, 1984, and the regulations promulgated thereunder, or the R&D Law. In
addition, some of these programs restrict our ability to manufacture particular products
or transfer particular technology outside of Israel, or require that we share with others
intellectual property rights that are the subject of such grants. If we fail to comply
with these conditions in the future we might be subject to certain sanctions such that,
the benefits received could be cancelled. We could also be required to refund any payment
previously received under these programs. Any non-Israeli who becomes a direct 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 in this
paragraph.

In addition, these programs may not
continue in the future at their current levels or at any level. From time to time, we may
submit requests for new grants from the Chief Scientist. These requests might not be
approved, particularly in light of the reduction in government spending in Israel. The
termination or reduction of these grants would require us to divert other funds to product
development and increase our other operational costs.

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

Most of our executive officers and
employees in Israel are obligated to perform annual military reserve duty. They may also
be further subject to being called to active duty at any time under emergency
circumstances and could be required to serve in the military for extended periods of time.
Our operations could be disrupted by the absence for a significant period of one or more
of our executive officers or key employees or a significant number of other employees
because of military service. The full impact on our workforce or business if some of our
executive officers and employees 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 us, our officers and directors or to assert U.S. securities law
claims in Israel.

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

15

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

| |  | adequate
service of process has been effected and the defendant has had a reasonable opportunity
to be heard;
| | - | -------------------------------------------------------------------------------------------------------------

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

| |  | the
judgment was obtained after due process before a court of competent jurisdiction
according to the rules of private international law prevailing in Israel;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |  | the
U.S. court is not prohibited from enforcing the judgments of Israeli courts.
| | - | --------------------------------------------------------------------------------

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

Provisions of Israeli corporate law
may have the effect of delaying, preventing or making more difficult a merger with, or
acquisition of, us. The Israeli Companies Law generally provides that a merger be approved
by the board of directors and a majority of the shares present and voting on the proposed
merger. For purposes of the shareholder vote, 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 shares or the right to appoint 25% or more of
the directors of the other party or its general manager) have voted against the merger.
Upon the request of any creditor of a party to the proposed merger, a court may delay or
prevent the merger if it concludes that there is a reasonable concern that, as a result of
the merger, the surviving company will be unable to satisfy the obligations of the
surviving company. Finally, a merger may generally not be completed unless at least (i) 50
days have passed since the filing of a merger proposal signed by both parties with the
Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved
by the shareholders of each of the parties to the merger. Also, in certain circumstances
an acquisition of shares in a public company must be made by means of a tender offer.
Lastly, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges
between an Israeli company and a foreign company, less favorable than U.S. tax laws. These
provisions of Israeli corporate and tax law may have the effect of delaying, preventing or
make more difficult an acquisition of or merger with us, which could depress our share
price.

We may not be successful in our
negotiations with the Israeli Tax Authorities relating to a tax assessment for the years
2000, 2001 and 2002.

In January 2006, we were notified by
the Israeli Tax Authorities of a tax assessment in the amount of approximately $3.8
million relating to our tax liabilities for the years ended December 31, 2000, 2001 and
2002. We are currently negotiating a settlement agreement with the Israeli Tax Authorities
as well as, in parallel, preparing an appeal to the assessment. We have, based on our
legal counsels opinion, increased our reserves to an aggregate amount of $1.6
million to account for such assessment. In the event we are required to pay more than the
reserved $1.6 million, it could have a materially adverse effect on our results of
operations and financial condition.

In addition, 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.

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

16

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| |  | general
market conditions, and changes in market conditions in our industry;
| | - | ----------------------------------------------------------------------------

| |  | the
general state of the securities market (particularly the technology sector); and
| | - | ------------------------------------------------------------------------------------

| |  | political,
economic and other developments in the State of Israel and worldwide.
| | - | --------------------------------------------------------------------------------

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

We have several shareholders who are
the beneficial owners of 5% or more of our ordinary and/or preferred shares. For
information on the share ownership of our majority shareholders, please see Item
7.A.  Major Shareholders.

On January 3, 2005, we completed a
private placement transaction in which we issued (i) 6,636,391 Series A Convertible
Preferred Shares, par value NIS 0.50 each, or the Series A Preferred Shares, at a purchase
price of $2.20 per share, resulting in aggregate proceeds (before expenses) of
approximately $14.6 million, before expenses of $1.2 million and (ii) warrants to purchase
up to 2,654,556 of our ordinary shares, pursuant to a Purchase Agreement dated as of
November 29, 2004. As of March 24, 2006, 2,181,820 Series A Preferred Shares had been
converted into Ordinary Shares and 4,454,571 remain outstanding. As of March 24, 2006,
354,545 warrants have been issued and 2,671,648 remain outstanding. In addition, as of
March 24, 2006, the exercise price of the warrants was lower than the market price. For
more information on the private placement transaction, see Item 10.C. 
Private Placement of Series A Preferred Shares. These ordinary shares and
warrants have since been registrered with the U.S. Securities and Exchange Commission.

Furthermore, certain of our major
shareholders have registration rights with respect to our ordinary shares. In August 2005,
we received a notice of exercise of certain of these registration rights with respect to
4,408,123 ordinary shares. The registration of the shares with the U.S. Securities and
Exchange Commission is currently in process. Upon completion and effectiveness of the
registration, these 4,408,123 ordinary shares will become freely tradeable. For more
information on the registration rights, see Item 7.B. Related Party Transactions
 Registration Rights.

If our shareholders sell substantial
amounts of our ordinary shares, including shares issued upon the exercise of outstanding
preferred shares, 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.

|Item 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

A.
          History and Development of the Company

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

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

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

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

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

In January 2005, we completed a
private placement transaction in which we issued (i) 6,636,391 Series A Convertible
Preferred Shares, par value NIS 0.5 each, or the Series A Preferred Shares, at a purchase
price of $2.20 per share, resulting in aggregate proceeds (before expenses) of
approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our ordinary
shares. For additional details about this transaction, see Item 10C 
Material Contracts  Private Placement of Series A Preferred Shares.

17

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During 2005, our capital expenditures
totaled approximately $1.2 million in 2005 (compared to $0.9 million during 2004 and $2.1
million during 2003), which was principally used for computers and peripheral equipment
(including software and development tools) and motor vehicles. Other than future capital
expenditures of the types and consistent with the amounts described above, we have no
significant capital expenditures in progress. All of the above expenditures were paid from
internally generated funds. During 2005, 2004 and 2003, we did not make any significant
divestitures nor are any such divestitures in progress.

B. Business Overview

We are a leading global provider of
Operations Support Systems (OSS) and Business Support Systems (BSS) for telecommunications
service providers. With 14 years of experience delivering our products and solutions to
industry leading companies in more than 20 countries, we have a proven track record
managing some of the worlds largest, most complex networks.

Our Netrac products deliver service
assurance, service fulfillment, and revenue assurance capabilities. Our Netrac software
speeds problem detection and resolution, streamlines work processes, improves quality of
service, and maximizes network uptime and availability. Our software solutions enable
communications service providers to maximize and leverage their investments in network
infrastructure and to automate, simplify and manage the complex process of delivering
multiple communications services over diverse networks. Our Netrac suite of products
supports multi-vendor voice and data architectures over wireline, wireless, Internet
Protocol, or IP, cable, digital subscriber line, or DSL and Voice Over IP, or VOIP,
networks, allowing our customers to streamline operations and efficiently and rapidly roll
out new services.

We have a significant installed base
of solutions with more than 55 customers, including some of the worlds largest
communications service providers, commonly referred to as tier 1 and tier 2 operators. We
have established working relationships with a number of leading network and communications
equipment providers which allow us to provide end-to-end integrated solutions as well as
stand-alone modules to meet our customers needs. Our Netrac products are based on
proven technology, which, when combined with our professional service offerings, including
customization, implementation and integration expertise and post-sales customer support,
make us an attractive turn-key solution provider. Our turn-key solution occasionally
incorporates third-party software and may incorporate services performed by third-party
integrators or subcontractors. Our software products are designed to work with a wide
range of network equipment manufacturers and varied technologies, thus increasing the
potential market for our systems.

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

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

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

# Industry Background;
Market Opportunity

The deregulation process of the U.S.
telecommunications market, including AT&Ts breakup in 1984 and the
Telecommunications Act of 1996, revamped the competitive landscape. New market entrants
were given access to incumbent networks, including, most significantly, the last
mile connection to subscribers homes and offices. Access to incumbent networks
and the funding of vibrant capital markets spurred intense competition and the emergence
of competitive local exchange carriers, or CLECs. Competition and funding encouraged
massive network build-outs as competitors sought to offer more services at lower costs.

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

18

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

In addition, the OSS market is
undergoing a period of merger and acquisition deals. Events like the Watchmark (a.k.a
Vallent) acquisition of Metrica (end of 2004), the Micromuse acquisition of Quallaby (June
2005), the IBM acquisition of Micromuse (Dec 2005) and others. These competitors
consolidation could result in stronger competition with a larger installation base that
could threaten our market positioning and decrease our sales. In addition, the potential
for us to be a part of a merger and acquisition, whether friendly or not,( is also a valid
scenario that could affect our customers acceptance and financial performance.

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

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

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

# Our Netrac Products

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 14 years of experience in developing and implementing software solutions for
diverse communications service providers around the world. We are currently leveraging
this expertise and continue to develop our 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 J2EE
based 3-tier architecture. J2EE is an industry recognized redevelopment environment and
the Power Builder is an industry recognized development tool.

Our Netrac products provide the
following advantages:

| |  | End-to-End
Integrated and Modular Product Offering.Our Netrac suite of products is
composed of products that may be used in any combination to suit a communications service
providers specific business needs and budget. Our Netrac modules integrate with one
another to provide either a comprehensive solution or address specific functions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Flexible
Platform. Our modular system provides our customers with an easy way to add new
functionality and services and adapt to new technologies, as well as a scalable system
that can accommodate the addition of network elements and growth in subscribers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Management
of Existing and Next-Generation Networks. Our Netrac suite of products is designed to
manage both legacy and next-generation networks via a unified management platform. As a
result, communication service providers will be able to manage heterogeneous networks
consisting of both legacy and next-generation technologies, protect investments in legacy
systems and facilitate the migration to next-generation architectures.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |  | Cost
Effectiveness and Maximizing Return on Investment.Our Netrac suite of
products streamlines operations, improves service restoration times and automates
time-consuming service provisioning and assurance processes, leading to significant cost
reductions. Netracs libraries and ability to communicate with various network
elements and technologies result in rapid deployment of network devices and services,
leading to faster time-to-revenue.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Professional
Services Enabling Turn-Key Solutions. We deliver end-to-end integrated turn-key
solutions to communications service providers which are tailored by our professional
services team to meet our customers specific requirements. Our professional
services include customization, implementation and integration of our products within a
communications service providers existing OSS environment, along with specific
functionality development according to customers requirements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rapidly
Deployable Solutions.Our Netrac suite of products is network equipment
vendor-independent and includes a pre-built set of modules and extensive libraries and
applications, which enables communications service providers to rapidly and cost
effectively deploy new network elements and services.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Strategy

Our goal is to solidify and improve
our position as a leading global provider of NMS, OSS and BSS solutions for wireline and
wireless networks. Our strategy to achieve this goal contains the following key elements:

| |  | Expand
and Enhance Product Offerings and Extend Technological Leadership. We intend to
continue to develop and introduce new products and product features that address the
increasingly sophisticated needs of communications service providers. We are committed to
keeping our products at the forefront of the industry by offering products that support
new functionality services and technologies, including next-generation architectures and
managed IP services. We intend to strive to build strong brand recognition for our
products.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Capitalize
on our Worldwide Customer Base.We intend to leverage our customer installed
base, including many industry-leading tier 1 and tier 2 operators, for additional sales.
We expect to leverage our relationships and proven track record to become their preferred
choice for next-generation network solutions. In addition, positive referrals from our
existing customers have historically resulted in new sales opportunities for us.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Leverage
Installation Base for additional sales.We seek to continue to solidify and improve
our existing relationships with tier 1 and tier 2 communications service providers
worldwide, as well as with tier 3 service providers via our recently launched
NetracXpress product. We will leverage our extensive installed base and new product
offerings to build on these relationships and to penetrate other large communications
service providers. By offering our products to a growing number of industry-leading
communications service providers, we increase acceptance and demand for our products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expand
and Develop Additional Strategic Alliances. Our strategic alliances with leading
software and hardware vendors and systems integrators enable us to leverage the marketing
strengths and customer base of our partners, thereby expanding our own installed base.
Some of these partners assist us in generating sales leads. We intend to strengthen our
existing strategic partnerships and to create new alliances as a means of identifying new
business opportunities and entering new markets.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Products and Services

Our Netrac products are capable of
service provisioning, activation and monitoring, and managing complex wireline and
wireless networks encompassing various domains.

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

Our quality management system for the
development, design, testing, support and sales of our NMS, OSS and BSS solutions has been
certified as meeting ISO 9001:2000 standards by the Standards Institution of Israel.

Mediation Products

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

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

Our Netrac mediation products include
the following:

| |  | Device
Expert (DvXpert) collects events, alarms, performance indicators, configuration
information and xDR records from the entire network and processes and transforms the raw
information and distributes it to Netrac and third party applications.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Netrac
Command Interface (NCI)serves as a platform for sending commands and controls to
network elements, supporting various elements command language and syntax.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Billing
Mediationcollects and assembles information from network elements into specific
records, which are then fed into billing systems.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

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

Service Assurance Products

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

Fault Management Products

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

Our Netrac fault management products
include the following:

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

| |  | Fault
Management (FaM)is a real-time alarm surveillance and management system that offers
network operations center, or NOC, personnel an all-inclusive, prioritized view of alarms
from various network domains and equipment. Fam also comes with alarm correlation
capabilities that help reduce the volume of alarms that personnel have to handle.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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| |  | Reporter
(FaM add-on module)is a Web based tool that provides insight into the networks
long-term behavior. Reporter produces informative reports and also 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 semi-automatic
mode, FaultPro generates 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 a single root-cause alarm, thus considerably shortening, Mean
Time To Repair, or MTTR and the number of alarms operators must handle .
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Netrac
Trouble Ticket (NeTkT)manages trouble tickets from creation through resolution.
NeTkT allows communications service providers to implement the desired workflow in the
problem resolution cycle and ensure the assignment of problems to the appropriate
personnel.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Performance Management
Products

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

Our Netrac performance management
product includes:

| |  | Performance
Management Module (PMM)which collects and analyzes performance measurements and xDR
records in order to provide an accurate picture of network health and utilization. The
PMM also presents traffic information to help network staff understand network and
service status and predict future network behavior.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

xDR Analysis Products

Our Netrac xDR analysis products
analyze quality of service in a network and assist service providers to maximize traffic
routing based on cost parameters.

Our Netrac xDR analysis products
include:

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

| |  | Best
Cost Routingwhich enables service providers to route traffic in the optimal way
based on cost considerations.
| | - | ------------------------------------------------------------------------------------------------------------------

Revenue Assurance Products

Our revenue assurance products
identify revenue leaks and fraudulent activity in the network, which allows service
providers to monitor and protect their revenues.

| |  | FraudDetectdetects fraudulent activity in the network by comparing suspicious usage patterns
with predefined profiles, and alerts users to suspicious behavior.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Billing
Verificationcollects and compares xDR records obtained from different network
sources such as switches, billing gateways, dialers and test devices. By comparing and
correlating between the different types of xDR records, the Billing Verification module
identifies and alerts network users to billing discrepancies.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Service Fulfillment
Products

Our Netrac service fulfillment
products, consisting of resource management and service 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 to developing our
fulfillment products, we are also exploring the possibility of cooperating with leading
resource management/inventory providers in order to broaden and enhance our service
fulfillment product offering.

Our Netrac service fulfillment
products include:

| |  | Resource
Managementwhich provides a physical and logical representation of the network, and
contains information on the interdependencies between entities in the network. Resource
management is capable of modeling physical elements, technologies and services, and the
relationships between them.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Syncsynchronizes an inventory database with the actual network and auto-discovers new
network elements. Sync produces discrepancy reports that detail any inconsistencies
between the inventory database and the actual network.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provisioning solution

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

Our Netrac provisioning products
include the following:

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

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

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

# 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, 2005, our
professional services personnel consisted of 158 people operating in North America,
Europe, Latin America and the Asia/Pacific region (including Australia). We provide a
comprehensive series of training courses to our customers, partners and employees to
provide and enhance the knowledge and skills necessary to deploy, use and maintain our
software solutions. Our training courses address the technical aspects of our products
while providing examples of customer best practices and operational efficiencies. We also
offer Train-the-Trainer programs to enable our customers to conduct their own
internal end-user training.

# Project Installation;
Maintenance and Customer Support

There are three distinct periods
which occur during the process of providing a solution to a customer: (i) a functional
specification period, (ii) an implementation period and (iii) a stabilization period. Each
period is divided into several phases; the number of phases is determined by the
complexity of the project. During the functional specification period, the Company defines
the specific requirements of the customer and becomes familiar with its network. During
the implementation period, the Company performs 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), the Company monitors the operation of the solution
using real data, and performs the work necessary to ensure that the solution is stabilized
and actually provides the functionality required by the particular customer. The
stabilization period typically lasts approximately one year, but can be longer or shorter
based on the particular solution. The project is considered completed when the
stabilization period is over.

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At the end of the warranty period
(i.e., the stabilization period), the customer may elect to enter into a maintenance
period with us for which we offer support contracts, typically based on a percentage of
the total license fee, but in some cases based on hourly rates. Our standard support
contract entitles the customer to unlimited telephone support, product updates and product
maintenance during the support period. We offer toll-free technical customer support
during business hours, which, for an additional fee, can be extended to 24 hours a day,
seven days a week. Support is provided via telephone, remote-access and e-mail. 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;
| | - | --------------------------------------------

| |  | CLECs;
| | - | ------

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

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

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

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

To date, we have more than 55
customers of our software solutions in more than 20 countries (many of them are tier 1 and
tier 2 communication service providers).

# Sales and Marketing

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

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

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

To date, we have been successful in
penetrating markets in North and South America, Europe, Israel, South Africa, the
Asia/Pacific and Australia. We have established offices in The Netherlands, South Africa,
Australia, Hong Kong, India, Sweden, Costa Rica and several locations in the United
States. In addition, we have sales representatives and sales consultants located in
Africa, Benelux countries, Bulgaria, Poland, Costa Rica, Cyprus, France, Greece, Taiwan,
Thailand, Philippines, Turkey and Finland.

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As of December 31, 2005, we employed
41 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 and jointly
market our products. We intend to strengthen our existing strategic relationships,
establish additional relationships and recruit additional sales representatives as a means
of identifying business opportunities and entering new markets.

# Research and Development

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

As of December 31, 2005, we employed
129 full-time employees in research and development. We have expertise derived from more
than a decade of developing software adapted to a variety of network hardware and software
configurations. Our core capabilities include our:

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

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

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

| |  | ability
to adapt our products to different kinds of existing and next-generation wireline and
           wireless networks; and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | expertise
in utilizing leading programming languages, operating systems and databases to create
user-friendly, distributed NMS, OSS and BSS solutions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

Gross research and development
expenses were approximately $10.5 million, or 22.9% of our revenues, for the year ended
December 31, 2003. Gross research and development expenses were approximately $11.3, or
30% of our revenues, for the year ended December 31, 2004. Gross research and development
expenses were approximately $9.2 million, or 21.2% of our revenues, for the year ended
December 31, 2005. We did not capitalize any amount invested for development in 2003, 2004
and 2005. 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, the BIRD Foundation
and the European Union. We have relied on these grants for the financing of a portion of
our product development expenditures. In the past, we recognized grants totaling $5.4
million from the Chief Scientist and the BIRD Foundation for the development of various
aspects of our products.

In 2003, we received a grant of
approximately $185,000 from the Chief Scientist, out of which $133,000 was provided to us
as part of our participation in a consortium of companies engaged in the development of a
management system for large networks (MAGNET program). In 2004, we received a grant of
approximately $331,000 from the Chief Scientist as part of our participation in the MAGNET
program. In 2005, we received a grant of approximately $537,000 from the Chief Scientist
as part of our participation in the MAGNET program. We are not required to repay the
MAGNET program grant nor are we required to pay any royalties in respect thereof.

During 2003, we received a grant of
approximately $52,000 from the European Union as part of our participation in a consortium
of companies engaged in the development of a platform for the management and control of IP
over optical networks (DWDM). During 2004 we received a grant of approximately $75,000
from the European Union as part of our participation in DWDM. We are not required to repay
this grant nor are we required to pay any royalties in respect thereof. We did not receive
any grants from the European Union in 2005.

As of December 31, 2005, 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.

25

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# Competition

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

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

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

| |  | organizations internal
IT departments that design and 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, Metasolv, IBM (Micromuse), Telecordia Technology, Infovista and
Watchmark;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

We believe that our product offerings
in all of these categories are generally competitive on price and features and have
certain advantages and disadvantages as compared to competitors products. In
particular, our extensive experience in software development, and the fact that our sole
focus is communication service providers, enables us to create products that meet their
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 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 no registered
patents and one patent application pending in the USA and one patent application pending
in Europe. If our pending patent applications will be rejected, our ability to protect the
proprietary information underlying such applications 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.

26

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

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

| |  | be
time-consuming;
| | - | ------------------

| |  | result
in costly litigation and diversion of technical and management personnel;
| | - | --------------------------------------------------------------------------------

| |  | cause
product shipment delays;
| | - | ------------------------------

| |  | require
us to develop non-infringing technology; or
| | - | ---------------------------------------------------

| |  | require
us to enter into royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to us or at all.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the event of a successful claim of product infringement against us and our failure or
inability to develop non-infringing technology or license the infringed or similar
technology, our business, financial condition and results of operations could be
seriously harmed.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We rely on certain software that we
license from third parties, including software that is 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, Intelije, Borland and ILOG.There can be no
assurance that these third party software licenses will continue to be available to us on
commercially reasonable terms or at all. In addition, to a certain extent we are dependent
upon such third parties ability to enhance their current products and develop new
products on a timely and cost-effective basis that will meet changing customer needs and
respond to emerging industry standards and other technological changes.

C. Organizational
Structure

Both our legal and commercial name is
TTI Team Telecom International Ltd. We were incorporated under the laws of the State of
Israel and we are domiciled in Israel. We operate under the laws of the State of Israel.
We commenced independent operations in September 1992, as a subsidiary of Team Computers
and Systems Ltd. In April 2005, Team Computers distributed most of the ordinary shares of
TTI held by it to Team Computers shareholders, and we ceased to be a subsidiary
thereof. For additional details about the distribution, see Item 7  Major
Shareholders and Related Party Transactions.

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

D. Property, Plants and
Equipment

We do not own any real property. Our
principal facilities, in which our corporate headquarters are located, comprise
approximately 50,100 square feet of office space, and are located in Petach Tikva, Israel.
These facilities are subleased from Team Computers, our former largest beneficial
shareholder. We also lease a facility in Yokneham, Israel, used primarily as a development
center, which occupies approximately 2,740 square feet.

We also lease the following
facilities, used primarily as marketing and sales offices: approximately 4,135 square feet
in Hoboken, New Jersey, USA; approximately 23,305 square feet in Atlanta, Georgia, USA;
approximately 3,270 square feet in Lenexa, Kansas, USA; approximately 800 square feet in
Sydney, Australia; approximately 1,000 square feet in San Jose, Costa Rica; approximately
1,680 square feet in South Africa and 430 square feet in Sweden. Our leasing expenses for
our facilities were approximately $1.7 million in 2005. We expect to pay total leasing
expenses for our facilities of approximately $1.4 million in 2006.

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.

27

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|Item 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

A. Operating Results.

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

# Overview

We commenced independent operations
in September 1992, as a subsidiary of Team Computers and Systems Ltd., after having
operated as a division of Team Computers since 1988. Team Computers is a publicly traded
company in Israel.

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

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

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

Sales effected through our strategic
relationships with IBM, Nortel, VocalTec, Siemens, Radcom and LogicaCMG accounted for
approximately 18% of our revenues in 2003, approximately 14% of our revenues in 2004 and
approximately 13% of our revenues in 2005. 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). In all of our arrangements
we do not provide price protection and/or return provisions. Our obligations, in any
event, are limited exclusively to our obligation towards our partner.

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

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

# Our Functional Currency

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

28

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# Critical Accounting
Policies

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

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

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

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

According to SOP 81-1, costs that are
incurred for a specific anticipated contract prior to the existence of a persuasive
evidence of an agreement are deferred, subject to evaluation of their probable
recoverability, and only if the costs can be directly associated with a specific
anticipated contract. Such deferred costs are recorded as unbilled contract costs, in
other accounts receivable and prepaid expenses. As of December 31, 2004 and 2005, 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. As of December 31, 2004 and 2005, no
such estimated losses were identified.

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

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

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

Goodwill.
          Under Statement of Financial Accounting Standard No. 142, Goodwill and
          Other Intangible Assets (SFAS No. 142) goodwill acquired in a
          business combination which closes on or after July 1, 2001 is deemed to have
          indefinite life and will not be amortized. SFAS No.142 requires goodwill to be
          tested for impairment on adoption and at least annually thereafter or between
          annual tests in certain circumstances, and written down when impaired, rather
          than being amortized as previous accounting standards required. Goodwill is
          tested for impairment by comparing the fair value of the reporting unit with its
          carrying value. Fair value is determined using market multiples and comparative
          analysis. Significant estimates used in the methodologies include estimates of
          market multiples for the reportable unit. We have performed impairment tests and
          determined that our goodwill in the amount of $1.1 million is not subject to an
          impairment charge as of December 31, 2002. On September 30, 2003, we performed
          impairment tests on our goodwill, which resulted in impairment of $1.1 million.
          As of December 31, 2004 and 2005, the value of our goodwill is zero.

29

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Marketable securities. We
account for investments in debt securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. We determine
the proper classification of investments in marketable securities at the time of purchase
and reevaluate such designations as of each balance sheet date. At December 31, 2005, all
securities were designated as available-for-sale. Accordingly, the available-for-sale
securities are stated at fair value, with unrealized gains and losses reported in a
separate component of shareholders equity, accumulated other comprehensive income.
However, in the case of an other than temporary decline in fair value, such decline will
be reflected in the financial statements. Amortization of premium and accretion of
discounts are included in financial income, net. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in the
consolidated statements of operations. In 2005, a decline in value that was considered
other than temporary of two of our available for sale securities resulted in reclassifying
the accumulated unrealized loss of $301 thousand relating to these investments. The amount
was classified as financial expenses in the consolidated statement of operation.

Capitalized software development
costs.Based on our product development process, technological feasibility is
established upon completion of a working model. Costs incurred by us between completion of
the working model and the point at which the product is ready for general release, are
capitalized in accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed (SFAS No. 86). Capitalized software costs are amortized by the
greater of the amount computed using the: (i) ratio that current gross revenues from sales
of the software to the total of the current and anticipated future gross revenues from
sales of that software, or (ii) the straight-line method over the estimated useful life of
the product (three to five years).No software development costs were capitalized
in 2003, 2004 and 2005.

The Company and its subsidiaries
assess the recoverability of capitalized software development costs in accordance with
SFAS No. 86 at each balance sheet date by determining whether the amount by which the
unamortized capitalized cost of a computer software product exceeds the net realizable
value. The net realizable value is the estimated future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that product,
including the cost of performing maintenance and customer support required to satisfy the
Companys responsibility set forth at the time of sale.

On September 30, 2003, the net
realizable value of the capitalized software development costs were periodically reviewed
by management, based on the estimated future gross revenues from such technologies reduced
by the estimated future costs for completing and disposing of each of them. This review
indicated that the net realizable value of the capitalized software development costs
exceed the unamortized capitalized costs. An amount of $5.9 million was reduced and
recorded as an impairment of capitalized software costs included in the cost of revenues.
On December 31, 2004, an additional amount of $3.6 million was reduced and recorded as an
impairment of capitalized software costs included in the cost of revenues. On December 31
2004, we recorded $281,000 in our balance sheet representing the then current value of the
capitalized software development cost. On December 31, 2005, $177,000 was reduced and
recorded as an impairment of capitalized software costs.

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

# Results of Operations

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

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

30

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

Comparison of 2003, 2004 and 2005

Revenues

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

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

The decrease in our product revenues
in 2004 and 2003 was primarily attributable to delays in some of our customers
network roll-outs, extension of customers sale cycles and difficulties in obtaining
new contracts and longer-lasting acceptance processes, all of which we believe was a
result of the overall decline in capital expenditures by customers in the
telecommunication industry. The decrease in product revenues was partially offset by a 34%
increase in our service revenues in 2004 and a 6% increase in our service revenues in
2003, which were primarily attributable to our entering into new maintenance contracts and
renewals of maintenance contracts with existing customers.

The increase in our product revenues
in 2005 in comparison with revenues in 2003 and 2004 was primarily attributable to an
increase in investment in expenditure by communication service providers during 2005,
succeeding in achieving new significant sales of our products and improvement and
optimization of our sales procedures.

31

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Cost of Revenues

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

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

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

We recorded charges during 2003, 2004
and 2005 in connection with the impairment of capitalized software development costs of
the following software products:

Netrac 2

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

ServiceView

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

The table below describes the
impairment charges attributed to each product during 2003, 2004 and 2005:

|U.S. Dollars in thousands | 2003 | 2004 | 2005
|------------------------- | ---- | ---- | ----
|
|
|
|
|Netrac 2                  |      |      |     
|                          |      |      |     
|Service View              |      |      |     
|                          |      |      |     
|Total                     |      |      |     

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

Regarding Netrac 2:

2003: The net realizable value of
Netrac 2 was lower than the unamortized capitalized cost because the estimated gross
margin for Netrac 2 sales declined due to: (1) a decline in our sales mainly resulting
from the difficult market situation at the time and strong competition and (2) an increase
in our operational expenses mainly resulting from further investment in development (using
other technologies) and the fact that the workforce has not been reduced significantly.

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

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

Regarding ServiceView:

2003: Difficulties in the
telecommunications market during this period caused a general decline in our sales and
adversely affected the future revenues of this product, resulting in a decline in its net
realizable value.

32

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

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

Estimate of Economic
Lives

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

A third party specialist performed
the evaluation tests under SFAS 86. The evaluation dates were December 31, 2003 and
December 31, 2004. In 2005, we have not performed evaluation tests as the amount of the
unamortized capitalized cost recorder is negligible. Instead, we have decided to rely on
managements evaluation.

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

Changes in Cost of Sales:

Compared to 2003, product sales and
cost of sales in 2004 declined, as part of our plan to reduce costs and increase
efficiency, consisting primarily of termination of employment of approximately 170
software and information technology specialists and administrative professionals from
December 31, 2003 through December 31, 2004. In addition, we closed some of our offices
abroad. During the second quarter of 2004, we undertook several major management changes
and replaced most of our senior management. At that time, we hired an external consultant
to help us focus our business efforts. We implemented other cost reduction measures,
including travel cuts and reductions in communication expenses, exhibitions and employee
benefits.

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

See also the discussion regarding
Gross Profit below.

Gross Profit

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

Gross profit as a percentage of revenues

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

Total gross profit increased to $7.8
million in 2004 from $4 million in 2003. The increase in gross profit resulted from the
decrease in product sales of 36%, while the cost of product sales decreased by 44%, and
the increase in service revenues by 34% while the cost of services increased by 51%. These
elements, together with a lower impairment of capitalized software development costs
resulted in a 21% increase in gross profit. The disproportionate decrease in cost of
product sales is the result of our restructuring activities. The disproportionate increase
in the cost of services is the result of more extensive requirements of our customers
relating to such services, and the different mixture of types of services rendered.

33

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

Operating Expenses

|                              | Year ended December 31, |  |  
|----------------------------- | ----------------------- |  | -
|
|
|
|
|Research and development, net |                         |  | $
|Selling and marketing         |                         |  |  
|Impairment of goodwill        |                         |  |  
|General and administrative    |                         |  |  
|Total operating expenses      |                         |  |  

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

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

Gross research and development
expenditures decreased 18.6% to $9.2 million in 2005, from $11.3 million in 2004, and were
offset by $0.1 million in grants recognized in 2005, compared to an offset of $0.6 million
in grants recognized in 2004. As a result, research and development expenses, net,
decreased 15% to $9.1 million in 2005 from $10.7 million in 2004.

The increases in research and
development net, in 2003 and 2004 were primarily due to improving infrastructure and
adding functionality to our products, which was partially offset by the increase in grants
recognized in 2004 compared to 2003. The decrease in research and development net,
in 2005 was primarily due to the termination of employment of approximately 44 employees
during 2005, and other steps that we have taken, including embedding third party software
in our products and improving our product development process.

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 27.8% of total revenues in
2005, 51% of total revenues in 2004 and 42% of total revenues in 2003. This level of
expenditures in 2003 and 2004 were primarily due to a decision to maintain the selling and
marketing infrastructure on a lower amount of revenues to allow us to preserve our market
presence, and to allow more aggressive marketing of our products in order to gain more
orders in the future. The decrease in selling and marketing expenses in 2005 is primarily
due to the steps taken by us including improvements in our sales process and focusing on
specific territories.

General and Administrative
Expenses.General and administrative expenses consist primarily of compensation for
finance, human resources, general management, networks and information systems, personnel,
as well as insurance, consultancy services expenses, and other expenses. General and
administrative expenses increased 6% to $6.6 million, or 17.5% of total revenues in 2004,
from 10% to $6.3 million, or 14% of total revenues in 2003. General and administrative
expenses decreased 4% to $6.3 million, or 14.6% of our total revenues in 2005, from $6.6
million, or 17.5% of total revenues in 2004. The reason general and administrative
expenses remained at the same level in the last three years is due to our decision to
maintain the critical mass necessary to manage and support our global business.

Goodwill write off. During
2003 we incurred a charge for impairment of goodwill in the amount of $1.1 million
relating to our investment in Axarte Limited. There was no comparable charge in 2004 and
2005.

34

---

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Financial Income, Net.Financial income consists primarily of interest derived from cash and cash
equivalents, short-term investments and foreign currency translation adjustments, off-set
by impairment of marketable securities, if any. Our financial income decreased to $0.2
million in 2005 from $1.3 million in 2004, due to impairment of marketable securities and
the devaluation of the Euro and British Pound against the US Dollar. Our financial income
decreased to $1.3 million in 2004, from $2.8 million in 2003, due to the decrease in our
liquid assets during the year 2004 and decrease of our exposure to Euro based assets.

Allowance for doubtful accounts
and bad debt write off. The allowance for doubtful accounts consists of the balance of
the unpaid sums under our agreements with two major customers. One of these agreements was
terminated by the customer, and the second was terminated by mutual agreement, and the
dispute thereunder was settled. Please see the information about these customers set forth
below under the heading Item 8A  Legal Proceedings. Allowance for
doubtful accounts expenses was in the aggregate amount of $177,000 in 2003. There was no
allowance for doubtful accounts expenses during the years 2004 and 2005.

# Research and Development

We conduct our research and
development operations in Israel. Our research and development efforts have been financed
through internal resources and grants from the Office of the Chief Scientist, the BIRD
Foundation and the European Union. The Chief Scientist and the European Union provided
grants of approximately $237,000 for the year ended December 31, 2003, approximately
$406,000 for the year ended December 31, 2004 and approximately $537,000 for the year
ended December 31, 2005. Of our total research and development expenses, these grants
accounted 2.3% in 2003, 3.6% in 2004 and 5.9% in 2005.

With respect to grants we received
from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and
Labor, we paid or accrued to the Israeli government approximately $110,000 for the year
ended December 31, 2003, approximately $4,000 for the year ended December 31, 2004 and
approximately $301,000 for the year ended December 31, 2005. See Item 5B 
Grants from the Office of the Chief Scientist.

We have also received royalty-bearing
grants from the BIRD Foundation to be repaid at the rate of 3.5% to 5% of sales of
products developed as a result of the research projects funded by the BIRD Foundation
until a maximum of 150% of the U.S. dollar amount we received, linked to the United States
consumer price index, is repaid. These royalty-bearing grants received for research and
development are offset against our gross research and development expenditures. We paid or
accrued to the BIRD Foundation approximately $9,000 for the year ended December 31, 2003,
approximately $6,000 for the year ended December 31, 2004 and approximately $9,000 for the
year ended December 31, 2005. We have not received grants from the BIRD Foundation since
1996.

We received grants of approximately
$185,000 in 2003, approximately $331,000 in 2004 and approximately $537,000 in 2005, from
the Chief Scientist, out of which approximately $133,000 in 2003, $331,000 in 2004 and
$537,000 in 2005 was provided to us as part of our participation in a consortium of
companies (MAGNET program) engaged in the development of a management system for large
networks. We are not required to repay these MAGNET program grants, nor are we required to
pay any royalties in respect thereof.

We received grants of approximately
$52,000 in 2003 and $75,000 in 2004 from the European Union as part of our participation
in a consortium of companies engaged in the development of a platform for the management
and control of IP over optical networks (DWDM). We have not received any grant from the
European Union in 2005. We are not required to repay these grants, nor are we required to
pay any royalties in respect thereof.

# Corporate Tax Rate

Israeli companies are generally
subject to Corporate Tax on their taxable income at the rate of 34% for the 2005 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: 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. Israeli companies are generally subject to capital gains tax at a rate of
25% for capital gains (other than gains deriving from the sale of listed securities
derived after January 1, 2003). However, our facilities in Petach Tikva have been granted
approved enterprise status under the Law for Encouragement of Capital Investments, 1959.
Consequently, these facilities are eligible for tax benefits. We have derived, and expect
to continue to derive, a substantial portion of our income from our approved enterprise
facilities.

Subject to compliance with applicable
requirements, the income derived from our approved enterprise facilities will be subject
through 2011 to a reduced tax rate of a maximum of 25%. The actual tax rate will depend
upon the percentage of non-Israeli holders of our share capital. The above benefits are
conditioned upon our fulfillment of conditions stipulated by the Law for the Encouragement
of Capital Investments, 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.

35

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Our effective tax rate was 25% in
2003, but since we incurred losses in that year, we were not required to pay taxes, and we
recorded deferred taxes expenses in the amount of $456,000. In 2004, we wrote off the
deferred tax reserved in our financial statement in the amount of $1.6 million because we
did not expect taxable income within the following 3 years. In 2005, we still carry on tax
losses, and therefore we do not expect to pay taxes in foreseeable years.

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

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

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

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

Because exchange rates between the
NIS and the dollar fluctuate continuously, albeit with a historically declining trend in
the value of the NIS, exchange rate fluctuations and especially larger periodic
devaluations will have an impact on our profitability and period-to-period comparisons of
our results. We believe that inflation in Israel and exchange rate fluctuations between
the NIS and the dollar have not had a material effect on our results of operations.

# Quarterly Results of
Operations

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

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

36

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|                                  | Quarters Ended
|--------------------------------- | --------------
|
|
|
|
|Revenues:                         |               
|Products                          |               
|Services                          |               
|                                  |               
|                                  |               
|Total revenues                    |               
|Cost of revenues:                 |               
|Products                          |               
|Services                          |               
|Impairment of capitalized         |               
|softwaredevelopment costs         |               
|                                  |               
|                                  |               
|Total cost of revenues            |               
|                                  |               
|                                  |               
|Gross profit                      |               
|Operating expenses:               |               
|Research and development, net     |               
|Selling and marketing             |               
|General and Administrative        |               
|Allowance for doubtful            |               
|accounts and                      |               
|bad debts write-off               |               
|                                  |               
|                                  |               
|Total operating expenses          |               
|                                  |               
|                                  |               
|Operating Income (loss)           |               
|Financial income, net             |               
|                                  |               
|                                  |               
|Income (loss) before Income taxes |               
|Income Taxes                      |               
|                                  |               
|                                  |               
|Net income (loss)                 |               
|Deemed dividend associated        |               
|with BCF                          |               
|Net Income (loss) attributed to   |               
|common shareholders               |               

37

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B. Liquidity and Capital
Resources

We had cash and cash equivalents,
marketable securities and bank deposits of $35 million at December 31, 2003, $20.4 million
at December 31, 2004 and $36.6 million at December 31, 2005.

Our operating activities provided
(used) cash of $(11.1) million for the year ended December 31, 2003, $(13.8) million for
the year ended December 31, 2004 and $4.2 million for the year ended December 31, 2005.

Our capital expenditures were
approximately $1.2 million in 2005, $0.9 million in 2004 and $2.1 million in 2003. Our
capital investments for improvements of leased premises were $0.2 million in 2003. We did
not invest in improvements of leased premises in 2004. Our capital investments for
improvements of leased premises were $0.6 million in 2005. We did not capitalize any
amount invested for development in 2003, 2004 and 2005.

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

In January 2005, we issued 6,636,391
Series A Convertible 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 2006 will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures for the
next twelve months.

# Market Risk

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

# Grants from the Office
of the Chief Scientist

The Government of Israel encourages
research and development projects through the Office of Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist, pursuant to
the Law for the Encouragement of Industrial Research and Development, 1984, and the
regulations promulgated thereunder, commonly referred to as the R&D Law. Grants
received under such programs are repaid through a mandatory royalty based on revenues from
products (and ancillary services) incorporating know-how developed with the grants. This
government support is condition upon our ability to comply with certain applicable
requirements and conditions specified in the Office of the Chief Scientists programs
and with the provisions of the R&D Law. In June 2005, an amendment to the R&D Law
came into effect, which intends to make the R&D Law more compatible with the global
business environment by, among other things, relaxing restrictions on the transfer of
manufacturing rights outside Israel and on the transfer of OCS-funded know-how outside of
Israel, as described below.

Under the R&D Law, research and
development programs that meet specified criteria and are approved by the research
committee of the Office of the Chief Scientist are eligible for grants of up to 50% of
certain approved expenditures of such programs, as determined by the research committee of
the Chief Scientist.

In exchange, the recipient of such
grants is required to pay the Office of the Chief Scientist royalties from the revenues
derived from products incorporating know-how developed within the framework of each such
program or derived from such program (including ancillary services in connection with such
program), usually up to an aggregate of 100% of the dollar-linked value of the total
grants received in respect of such program, plus interest. The royalty rates applicable to
our programs range from 3% to 3.5%.

38

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

The R&D Law generally requires
that the product developed under a program be manufactured in Israel. However, upon the
approval of the Chief Scientist, some of the manufacturing volume may be performed outside
of Israel, provided that the grant recipient pays royalties at an increased rate, which
may be substantial, and the aggregate repayment amount is increased up to 300% of the
grant, depending on the portion of the total manufacturing volume that is performed
outside of Israel. The recent amendment to the R&D Law further permits the OCS, among
other things, to approve the transfer of manufacturing rights outside Israel in exchange
for an import of different manufacturing into Israel as a substitute, in lieu of the
increased royalties. The R&D Law also allows for the approval of grants in cases in
which the applicant declares that part of the manufacturing will be performed outside of
Israel or by non-Israeli residents and the research committee is convinced that doing so
is essential for the execution of the program. This declaration will be a significant
factor in the determination of the Office of Chief Scientist whether to approve a program
and the amount and other terms of benefits to be granted. For example, the increased
royalty rate and repayment amount will be required in such cases.

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 research committee.
Such approval is not required for the sale or export of any products resulting from such
research or development. The R&D Law further provides that the know-how developed
under an approved research and development program may not be transferred to any third
parties outside Israel, except in certain circumstances and subject to prior approval. The
OCS may approve the transfer of OCS-funded know-how outside Israel in the following cases:
(a) the grant recipient pays to the OCS a portion of the sale price paid in consideration
for such OCS-funded know-how (according to certain formulas); or (b) the grant recipient
receives know-how from a third party in exchange for its OCS-funded know-how; or (c) such
transfer of OCS-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 Office of the Chief Scientist of any change in control of the
recipient or a change in the holdings of the means of control of the recipient that
results in a non-Israeli becoming an interested party directly in the recipient and
requires the new interested party to undertake to the Office of the Chief Scientist to
comply with the R&D Law. In addition, the rules of the Office 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 Office of 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 Office of 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 129 full-time
employees in research and development. Gross research and development expenses were
approximately $10.5 million, or 22.9% of our revenues, for the year ended December 31,
2003. Gross research and development expenses were approximately $11.3 million, or 30% of
our revenues, for the year ended December 31, 2004. Gross research and development
expenses were approximately $9.2 million, or 21.2% of our revenues, for the year ended
December 31, 2005. 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.

39

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Since we received grants from the
Office of the Chief Scientist, we are obligated to perform all manufacturing activities
for projects subject to the grants in Israel unless we receive an 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 Office 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 Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade, see Item 5B  Liquidity and Capital
Resources Grants from the Office of the Chief Scientist.

D. Trend Information

Slowly recovering from the
telecommunications spending slowdown, global OSS spending is expected to grow in the
coming years. Growth is built on the need for service providers to support new services
and network equipment.

However, we are unable to predict the
duration of these trends or the extent of any impact that it may have on our results of
operations. If any of these trends reverses and the slow-down in capital expenditures
resumes, it would reduce our sales and could result in pressure on the price of our
products, each of which would have a material adverse effect on our operating results.

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

In addition, the OSS market is
undergoing a period of merger and acquisition deals. Events like the Watchmark (a.k.a
Vallent) acquisition of Metrica (end of 2004), the Micromuse acquisition of Quallaby (June
2005), the IBM acquisition of Micromuse (Dec 2005) and others. These competitors
consolidation could result in stronger competition with a larger installation base that
could threaten our market positioning and decrease our sales. In addition, the potential
for us to be a part of a merger and acquisition, whether friendly or not,( is also a valid
scenario that could affect our customers acceptance and financial performance.

E. Off-Balance Sheet
Arrangements

We have no off-balance sheet
arrangements.

F. Tabular Disclosure of
Contractual Obligations

The following table sets forth, as of
December 31, 2005, our known contractual obligations by type of obligation and for the
periods indicated:

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

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 officers, as of
March 24, 2006, are as follows:

|Name              | Age | Position                                                    
|----------------- | --- | ------------------------------------------------------------
|
|
|
|
|Meir Lipshes      | 60  | Chairman of the Board                                       
|Meir Dvir         | 75  | Director                                                    
|Rami Zivony       | 54  | Director                                                    
|Doron Zinger      | 53  | Director                                                    
|Ilan Toker        | 36  | Director                                                    
|Lior Bregman      | 47  | Director                                                    
|Reuven Markus     | 52  | Chief Executive Officer                                     
|Israel Ofer       | 51  | Chief Financial Officer                                     
|Michael Halperin  | 59  | Vice President of International Sales                       
|Moshe Moran       | 40  | VP America Sales                                            
|Avner Amran       | 49  | Vice President of Marketing and Business Development        
|Hanun Dvey-Aharon | 59  | Vice President of Operation (Development and Delivery) Group
|Shahar Ebel       | 36  | Chief Technology Officer                                    

40

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Meir
Lipshes served as one of our directors since we commenced independent operations in
September 1992. On December 29, 2004, Mr. Lipshes became the Chairman of our board of
directors. 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 continues to be engaged by us in the capacity of Executive Director. Mr.
Lipshes was one of the founders and is a current shareholder of Team, our former principal
shareholder, served as Teams President from 1972 to May 1995 and as its Chief
Executive Officer from May 1995 until September 1996. Mr. Lipshes also served as acting
President of Omnitek-Eichut Ltd. from November 1994 until September 1996. Mr. Lipshes has
been a director of Team since 1972 and a director of Omnitek since 1979. From 1970 to
1972, he was employed in the electronics and engineering division at Motorola Israel,
where he was one of the founders of the computing department. He also served as a
development engineer for encoding equipment in the Signal Corps of the Israel Defense
Forces. Mr. Lipshes has a degree in electronics from the Technical School of the Israeli
Air Force.

Dr.
          Meir Dvir became a director in 1997. Since 1994, Dr. Dvir has served as
          President of Dea Shnia Ltd., a consulting company. Dr. Dvir additionally has
          held the following positions, among others: Board member of Bank Leumi Ltd.
from           1999 to 2005, Board member of TAT Technologies Ltd. since 1994, Executive
Vice           President of R&D and Business Development at Israel Aircraft
Industries from           1985 to 1994, Director of the Aircraft Division of Israel
Aircraft Industries           from 1987 to 1989, Chief Operating officer of Elscint Ltd.,
a publicly-held           Israeli high technology and defense company from 1984 to 1985,
and President of           Israeli Aircraft Industries from 1982 to 1983. Dr. Dvir holds
a Masters Degree           and a Ph.D. in physics from the Hebrew University, Israel.

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

Doron
Zinger became a director in 2004. Mr. Zinger currently operates Zinger Communications,
an independent communications consulting company, and is a venture partner
(Telecommunications) with Giza Venture Capital Fund, a member of the Board of Directors of
Vsecure Ltd. Effective May 31, 2005, he became 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 a member of the Advisory
Board of Iamba Technologies Limited until October 2004, member of the Advisory Board of
Main.net communications Ltd until June 2004 and a member of the Advisory Board of Cellot
until December 2004. From February through July 2000, Mr. Zinger served as Chief Executive
Officer of Lambda Crossing Ltd., a start-up company engaged in the development of electro
optic components for optical communications networks. From 1997 through 2000, Mr. Zinger
served as President and Chief Executive Officer of VocalTec Communications Ltd., a leading
company in the emerging IP telephony industry. From 1980 through 1997, Mr. Zinger held
various technical, marketing and management positions at ECI Telecom Ltd., a leading
provider of telecommunications equipment worldwide, including: Senior Vice President and
Chief Operating Officer from 1995 through 1997, Corporate Vice President and General
Manager DCME SBU from 1993 through 1995, and Director of Marketing and
SalesTelecommunications Products from 1991 through 1993. Mr. Zinger received a B.Sc.
Degree from The TechnionIsrael Institute of Technology in 1975, and an MBA from Tel
Aviv University in 1991. Mr. Zinger is a Major (Res.) in the Israeli Navy.

Ilan
Toker became a director in 2004. Mr. Toker is an executive of Arad Investments and
Industry Development Ltd. (a company the shares of which are publicly traded on the Tel
Aviv Stock Exchange), where he has served as the acting Chief Executive Officer since
2002, and as the Chief Financial Officer since 2000. Since 1997 , Mr. Toker is 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 the following
companies: Malam Systems Ltd., Comtec Ltd., Omnitech-Echut Ltd. and Hassin Esh Ceramic
Products Company (1990) Ltd. (a company the shares of which are publicly traded on the Tel
Aviv Stock Exchange). Mr. Toker holds a BA in accounting and economics and an MBA degree,
both from Tel Aviv University.

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

41

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Reuven
Markus joined us as Chief Executive Officer in December 2005. Before becoming Chief
Executive Officer, Mr. Markus was at ECI Telecom from 2003 to 2005, where he served as
Executive Vice President, Global Sales & Marketing and prior to that, Executive Vice
President, Global Sales & Strategy. He was also a member of the executive management
team at ECI. From 2001 to 2002, Mr. Markus was the Chief Executive Officer of Enavis, a
spin-off of ECIs Transport Networks Division. He held a variety of positions from
1995 to 2000 at Tadiran Telecom, which was later acquired by ECI. Mr. Markus holds an
M.B.A. and a B.S.C. in Engineering from Tel Aviv University.

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

Michael
Halperin joined us as Vice President of Sales in January 2006. He brings with him over
25 years of experience in the communications and telecom industries. Prior to joining us,
Mr. Halperin was employed as VP of Sales at ECI Telecom. Prior to ECI, Mr. Halperin served
as Senior VP of Global Marketing & Sales at Enavis (an ECI subsidiary), where he
increased sales volume to more than $150 million per year. From 1993 to 2001, he was VP of
Global Sales & Marketing at the Transport Systems Business Unit/Division at Tadiran
Telecom, which was later acquired by ECI. At Tadiran Telecom, Mr. Halperin was responsible
for more than $350 million in sales to Koreas KT. While working at Tadiran Telecom
in Nationwide Networks Design and Implementation, Mr. Halperin was responsible for the
network design of a country-wide military telecommunication system in Israel and
subsequently in the Far East. Mr. Halperin holds a BSc degree from the Technion in Haifa.

Moshe
Moran was promoted to Executive Vice President, Sales & Marketing for the Americas
in December 2005. Mr. Moran has successfully managed our sales in North America during the
last three years. Since joining us in 1993, Mr. Moran has held several senior key
leadership positions including product, project and customer support management, as well
as sales. Mr. Moran has over 15 years experience in the telecommunications and software
industry. Prior to joining us, Mr. Moran worked in management and development positions in
the software industry and in the Israeli military. Mr. Moran holds a Bachelor of Science
degree in Computer Engineering from the Technion Israel Institute of Technology.

Hanun
Dvey-Aharon,Vice President Development Group,joined us in March 2004. Hanun
Dvey-Aharon brings more than two decades of R&D management experience to the product
group. Prior to joining us, Dr. Dvey-Aharon served from September 2000 to January 2004 as
AVP Technology at Ofek, an NGN Telecom Professional Services group. Prior to that, he
worked at Telrad Networks as Director of Network Management Systems, and at Elbit Systems
as Technical and Software Development Director. Dr. Dvey-Aharon holds a BSc in Physics
from the Technion-Israel Institute of Technology and an MSc in Computer Science from Case
Western Reserve University.

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

Avner
Amran joined us as Vice President, Marketing and Business Development in January,
2006. He brings with him vast experience in the telecom industry, the majority of which is
in OSS. Prior to joining us, Mr. Amran was at ECI Telecom from 2003 to 2005, where he
served in a number of senior positions in charge of the marketing and product management
for the optical network division. Prior to ECI, Mr. Amran was the Vice President of
Business Development and Strategic Planning for Enavis Networks, a spin-off of ECIs
Transport Networks Division. From 1996 to 2001, he was Vice President of NMS at Tadiran
Telecom, which was later acquired by ECI. Prior to working at Tadiran Telecom, Mr. Amran
held a number of System and Software engineering positions at Advanced Technology Ltd
developing and deploying large scale OSS. Mr. Amran graduated from the Hebrew University
in Jerusalem with an MBA and a Bachelor of Science degree in Mathematics and Computer
Science.

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

42

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B. Compensation

Compensation to Directors:

In 2005, our directors, other than
Meir Lipshes, received annual compensation of approximately $19,300 each and approximately
$380 (approximately $190 per telephone meetings) per board meeting or per board committee
meeting in which they participate. We paid our directors, other than Meir Lipshes, the
aggregate amount of approximately $100,764 in 2005, out of which $86,465 was paid in
respect of their services in 2005. Our directors, other than Meir Lipshes, will continue
to receive the aforesaid compensation in 2006.

Total compensation paid to Meir
Lipshes during 2005 was $274,607. Total compensation paid to Shlomo Eisenberg and Meir
Lipshes during 2004 was $343,181, out of which approximately $84,050 was in respect of
amounts accrued during 2003. The total amount of the compensation paid during 2005
includes pension, retirement and similar benefits. We no longer pay management fees to
Shlomo Eisenberg. Since January 1, 2005, we pay Meir Lipshes a monthly management fee of
NIS 80,000 (approximately $17,380 according to the exchange rate prevailing on December
31, 2004) linked to the Consumer Price Index, or CPI, plus applicable social benefits.

In November 2004, our board of
directors authorized the grant of options to purchase up to an additional 75,000 ordinary
shares to Meir Lipshes, at an exercise price of $3 per share. On December 29, 2004, the
option grant to Meir Lipshes was approved by our shareholders. Of the options granted to
Meir Lipshes, 18,750 of these options vested immediately, 18,750 of these options vest on
July 1, 2005, 18,750 of these options vest on January 1, 2006 and 18,750 of these options
vest on July 1, 2006. The options expire on October 15, 2008.

Please see Item 7- Major
Shareholders and Related Party Transactions  Related Party Transactions 
Reimbursement of Withholding Tax for information on a tax matter involving Mr.
Shlomo Eisenberg relating to his exercise of our options.

Compensation to executive
officers:

Total compensation during 2005 to the
members of senior management amounted to approximately $1.5 million. This amount includes
special bonuses, pension, retirement and similar benefits amounting to approximately
$194,000. These figures for compensation include amounts paid in 2005 to members of senior
management whom we no longer employ.

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

In November 2001, certain of these
members of senior management (other than Shlomo Eisenberg and Meir Lipshes), were granted
options to purchase a total of up to 53,333 ordinary shares for an exercise price of
either $19 or $30 each. 15,000 of these options are currently outstanding and fully
exercisable. These options expired on November 9, 2005.

In May 12, 2004, certain of these
members of senior management (other than Shlomo Eisenberg and Meir Lipshes) were granted
options to purchase a total of up to 80,000 ordinary shares for an exercise price of
either $6 or the higher of $8 or the average of the market price in the 30 days prior to
the end 12 months from the date the option was granted (i.e., the period between April 12,
2005 and May 11, 2005). 40,000 of these options vest on May 12, 2005 and 40,000 of these
options vest on May 12, 2006. These options expire on September 30, 2009.

C. Board Practices.

We are subject to the provisions of
the Israeli Companies Law, 5759-1999, or the Israeli Companies Law, and the regulations
adopted thereunder. In addition, as a Nasdaq-listed company, we are also subject to
certain corporate governance standards adopted by Nasdaq.

# Board of Directors

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

43

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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, who hold office for three-year terms and may be re-elected by the shareholders
for an additional three-year term. We recently amended our Articles of Association to
provide that, notwithstanding the foregoing, for so long as at least 50% of the Series A
Preferred Shares issued under the Purchase Agreement dated November 29, 2004 remain
outstanding, the holders of a majority of the outstanding Series A Preferred Shares are
entitled to appoint, elect, remove and replace one director to our board of directors.

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 satisfies these requirements of 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, effective as of April 19, 2006, (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. These requirements will apply to us upon the election of one or more
external directors.

No person can serve as an external
director if the persons position or other business creates, or may create, conflict
of interests with the persons responsibilities as an external director. Until the
lapse of two years from termination of office, a company may not engage an external
director to serve as an office holder and cannot employ or receive services from that
person, either directly or indirectly, including through a corporation controlled by that
person.

Election of External
Directors

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

| |  | including
at least one third of the shares of non-controlling shareholders voted at the meeting in
favor of election; or
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares voted against the election of the external director does not
exceed one percent of the aggregate voting rights in the company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

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 Rami Zivony and Doron Zinger, our two external directors, and Meir
Dvir.

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

Compensation and
Nominating Committee

Effective July 31, 2005, the Nasdaq
rules require that director nominees be selected or recommended for the boards
selection either by a nominations committee composed solely of independent directors or by
a majority of independent directors, subject to certain exceptions. Similarly, the
compensation payable to a companys chief executive officer and other executive
officers must be approved either by a majority of the independent directors on the board
or a compensation committee comprised solely of independent directors, subject to certain
exceptions. Our compensation and nominating committee satisfies the requirements of the
new rules. On July 21, 2005, our board of directors approved the establishment of the
committee and on November 14, 2005, a written charter specifying the committees
duties and responsibilities was adopted by the committee and our board. The current
members of our compensation and nominating committee are Meir Dvir, Doron Zinger, Rami
Zivoni and Lior Bregman.

# Internal Auditor

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

45

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# Indemnification and
D&O Insurance

We have agreed to indemnify our
office holders to the fullest extent permitted under Israeli law, but up to a maximum
aggregate amount for all indemnified office holders equal to 25% of our total
shareholders equity at the time of actual indemnification. We currently maintain
directors and officers liability insurance for the benefit of our office holders. For more
details, see in Item 10C below under the caption Exculpation, Insurance and
Indemnification of Office Holders.

# Fiduciary Duties of
Office Holders

The Companies Law imposes a duty of
care and a duty of loyalty on all office holders of a company. The duty of care requires
an office holder to act with the level of care with which a reasonable office holder in
the same position would have acted under the same circumstances.

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

| |  | information
on the advisability of a given action brought for his approval or performed by him by
virtue of his position; and
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

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

| |  | refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from exploiting any business opportunity of the company to receive a personal gain for
           himself or others; and
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to a companys affairs which
the office holder has received due to his position as an office holder.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Related-Party
Transactions

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

| |  | the
office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the these people; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
corporation in which the office holder is a 5% or greater shareholder, director or
general manager or in which the office holder has the right to appoint at least one
director or the general manager.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under Israeli law, an extraordinary
transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | otherwise
than on market terms; or
| | - | ----------------------------------

| |  | that
is likely to have a material impact on the companys profitability, assets or
liabilities.
| | - | -----------------------------------------------------------------------------------------------

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

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

46

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D. Employees

As of December 31, 2005, we had 374
full-time employees, including 287 in research and development and project integration, 41
in sales and marketing and 46 in finance and administration. As of December 31,
2005, 254 employees were based in Israel, 91 employees were based in the United States, 13
employees were based in Europe, six employees were based in Asia, six employees were based
in Africa and four employees were based in Australia. In 2005, we terminated 95 employees
in an effort to reduce costs.

As of December 31, 2004, we had 470
full-time employees, including 332 in research and development and project integration, 82
in sales and marketing and 56 in finance and administration. As of December 31,
2004, 333 employees were based in Israel, 113 employees were based in the United States,
13 employees were based in Europe, five employees were based in Asia, two employees were
based in Africa and four employees were based in Australia.

As of December 31, 2003, we had 640
full-time employees, including 483 in research and development and project integration, 82
in sales and marketing and 75 in finance and administration. As of December 31,
2003, 426 employees were based in Israel, 170 employees were based in the United States,
21 employees were based in Europe, 15 employees were based in Asia, one employee was based
in Africa and seven employees were based in Australia.

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

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

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

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

Although not legally required, we
regularly contribute to a managers insurance fund on behalf of our employees. This
fund provides employees with a lump sum payment upon retirement or severance pay, if
legally entitled, upon termination of employment. Each employee who agrees to participate
in the managers insurance plan contributes an amount equal to 5.0% of such
employees salary and the employer contributes an average of approximately 5% to 6.1%
of such salary. We also allocate 8.3% of the employees salary for the benefit of
severance pay.

E. Share Ownership

# Security Ownership of
Our Directors and Executive Officers

The following table details as of
March 24, 2006the number of our ordinary shares owned (including the shares
underlying options or warrants held by such person that are exercisable within 60 days).

|Name and Address                                                    | Number of
Shares
Owned | Percent of
Shares
Outstanding
|------------------------------------------------------------------- | ---------------------- | -----------------------------
|
|
|
|
|Lior Bregman (1)                                                    |                        |                              
|Meir Lipshes (2) (3)                                                |                        |                              
|All other members of senior management, as a group (consisting of 7 |                        |                              
|persons, other than Lior Bergman and Meir Lipshes) (4)              |                        |                              

47

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

|(1) | Lior
Bregman, our director, is the beneficial owner of LB Capital Investments,           which
holds approximately 1.36% of our voting power, comprised of 181,818 of our
          ordinary, and warrants to purchase 72,727 of our ordinary shares which are
          exercisable within 60 days.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
number of shares owned includes 56,250 options exercisable into ordinary           shares
within 60 days. The options have exercise prices of $3 per share, and           expire on
October 15, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As
of March 31, 2006, Team Computers and its wholly-owned subsidiary, Team
          Software Industries Ltd., beneficially owned 693,688 of our ordinary shares,
          representing approximately 3.7% of our outstanding share capital and voting
          rights. As of March 24, 2006, Meir Lipshes, the Chairman of our board of
          directors and our former Chief Executive Officer, owned approximately 8.5% of
          Team Computers shares. Meir Lipshes is also a member of the board of
          directors of Team Software and Team Computers, and therefore, may be deemed to
          beneficially own the ordinary shares owned by Team Software in us. Mr. Lipshes
          disclaims any beneficial interest in the ordinary shares owned by Team Software
          or Team Computers in us.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The
number of shares owned consists solely of options exercisable into ordinary
          shares within 60 days. The options have exercise prices ranging from $3.5 per
          share to $8 per share, and expire between June 30, 2009 and January 10, 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Options to Purchase Our
Ordinary Shares

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

Old Plans

In November 1996, we adopted our
Share Option Plan, primarily designed for employees of TTI and its subsidiaries, and, from
time to time, we established and granted additional options under sub-plans. We refer to
such plan and sub-plans as the Old Plans because we do not intend to grant any additional
options under such plans.

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.

Under our old Plans, as of March 31,
2006, we have reserved 2,325,515 ordinary shares and had granted options to purchase an
aggregate of 2,457,533 ordinary shares to certain of our employees and directors, at
exercise prices ranging from $0.66 to $30.00 per ordinary share. As of March 31, 2006,
1,573,497 of such options had been exercised, 768,702 of these options were forfeited or
expired. On November 28, 2004, our board of directors approved the cancellation of the
pool of 420,910 ordinary shares available under our Old Plans (the number of options
remained available for issuance as of November 1, 2004), and approved, subject to the
approval of our shareholders, a new 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
December 2004, our shareholders approved the cancellation of the pool of 420,910 ordinary
shares available under our old plans and as such, the pool of 420,910 ordinary shares is
now void. We do not intend to grant any additional options 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 new pool of 1,000,000 ordinary shares for issuance thereunder. 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.

As of March 31, 2006, we had granted
859,500 options, including the 75,000 options granted to Meir Lipshes as described above.
As of March 31, 2006, 89,582 of these options are exercisable, none of these options have
been exercised, none of these options were forfeited or expired, and 140,500 of these
options remain available for grant.

The following table set forth, as of
March 31, 2006, the number of options outstanding under our Old Plans and 2004 Plan and
their respective expiration date:

48

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|Number of Options | exercise prices (range) | Expiration Date
|----------------- | ----------------------- | ---------------
|
|
|
|
|3333              |                         |                
|112,000           |                         |                
|75,000            |                         |                
|200,000           |                         |                
|245,000           |                         |                
|339,500           |                         |                
|Total: 974,833    |                         |                

|* | the
higher of $8 or the average of the market price in the 30 days prior to the end 12 months
from the date the option was granted (i.e., the period between April 12, 2005 and May 11,
2005).
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

A. Major Shareholders

# Ordinary Shares

Set forth below is information known
to us concerning our shareholders that are the beneficial owners of 5% or more of
outstanding ordinary shares as of March 24, 2006.

|Name of shareholder                          | Number of
ordinary
shares held | Percentage
of our
outstanding
ordinary
shares(1) | Percentage
of our
outstanding
share
capital*
|-------------------------------------------- | ------------------------------ | ------------------------------------------------ | --------------------------------------------
|
|
|
|
|Shlomo Eisenberg (2)(3)(4)                   |                                |                                                  |                                             
|Fidelity Management & Research Company (5)   |                                |                                                  |                                             
|Neuberger & Berman L.P. (6)                  |                                |                                                  |                                             
|Rima Management, LLC and Richard Mashaal (7) |                                |                                                  |                                             
|S Squared Technology, LLC (8)                |                                |                                                  |                                             

|* | Based
on an aggregate of 18,863,872 ordinary and preferred shares outstanding as of March 24,
2006.
|- | ---------------------------------------------------------------------------------------------------

|(1) | Based
on 14,409,301 ordinary shares outstanding as of March 24, 2006. Ordinary           shares
deemed beneficially owned by virtue of the right of any person or group           to
acquire such ordinary shares within 60 days are treated as outstanding only           for
purposes of determining the percent owned by such person or group.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Shlomo
Eisenberg holds 594,836 ordinary shares, and his wife, Tirza Eisenberg,           holds
188,912 ordinary shares. In addition, Mr. Eisenberg, directly and           indirectly
(through a wholly owned corporation), owns approximately 14.8% of           Team
Computers and Systems Ltd. and is also a member of the controlling group of
          shareholders of Arad Investments and Industrial Development Ltd. Therefore, Mr.
          Eisenberg may be deemed to beneficially own the ordinary shares held by Arad,
          Team Computers and Team Software Industries Ltd. (see below). Mr. Eisenberg
          disclaims any such beneficial ownership.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Arad,
directly and indirectly (through a wholly owned corporation), holds           2,958,788
ordinary shares. In addition, Arad owns 57.9% of Team Computers and,           therefore,
may be deemed to beneficially own the ordinary shares held by Team           Computers
and Team Software. Arad disclaims any such beneficial ownership. Arad           is an
Israeli company whose shares are publicly traded on the Tel Aviv Stock
          Exchange.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Team
Software holds 680,230 ordinary shares. Team Computers holds 13,458           ordinary
shares. Since Team Computers holds 100% of the issued and outstanding           shares of
Team Software, it may be deemed to beneficially own the ordinary           shares held by
Team Software. Team Computers, an Israeli company whose shares           are publicly
traded on the Tel Aviv Stock Exchange, is a large computer vendor           in Israel. In
addition, as of March 24, 2006, Meir Lipshes, the Chairman of our           board of
directors, owned approximately 8.5% of Team Computers shares.           Meir
Lipshes is also a director of each of Team Software, Team Computers and us,           and
therefore may be deemed to beneficially own the ordinary shares owned by           Team
Software and Team Computers. Mr. Lipshes disclaims any such beneficial
          ownership. As of March 24, 2006, Meir Lipshes owned approximately 2.2% of our
          outstanding shares directly.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | As
of December 21, 2004, based on a Schedule 13G/A filed by FMR Corp. with the
          U.S. Securities and Exchange Commission on February 14, 2005. Fidelity
          Management & Research Company, or Fidelity, is a wholly-owned subsidiary of
          FMR Corp., and acts as an investment adviser to various investment companies.
          The ownership of one investment company, Fidelity Low Priced Stock Fund,
          amounted to 1,172,000 of such shares or 6.2% of our outstanding shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49

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|(6) | As
of January 13, 2006, based on a Schedule 13D/A filed by Neuberger &          Berman
with the U.S. Securities and Exchange Commission on March 10, 2006.           Neuberger
& Berman L.P. is a registered broker-dealer that is deemed to be a
          beneficial owner for purpose of Rule 13(d) since it has shared power to make
          decisions whether to retain or dispose of the ordinary shares of many unrelated
          clients. Neuberger & Berman L.P. is affiliated with Neuberger Berman Asset
          Management LLC, the General Partner of LibertyView Special Opportunities Fund,
          LP and LibertyView Funds, LP. Neuberger Berman Asset Management LLC is the
          investment advisor for LibertyView Special Opportunities Fund, LP, LibertyView
          Funds, LP and Trust D for a Portion of the Assets of the Kodak Retirement
Income           Plan, which collectively hold 56.1% of our outstanding Series A
Preferred Shares           (representing 13.3% of our total outstanding share capital),
and 999,999           warrants to purchase ordinary shares which are exercisable within
60 days. For           further details, please see the table of holders of Series A
Preferred Shares           below.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | As
of August 8, 2005, based on a Schedule 13G filed by Rima Management, LLC and
          Richard Mashaal with the U.S. Securities and Exchange Commission on January 13,
          2006. The Schedule 13G indicates that Rima Management, LLC and Richard Mashaal
          share voting and dispositive power as to the 996,980 ordinary shares.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | As
of December 31, 2005, based on a Schedule 13G filed by S Squared Technology,
          LLC with the U.S. Securities and Exchange Commission on February 10, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Series A Preferred Shares

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. 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. Set forth
below is information known to us concerning our shareholders that are the beneficial
owners of 5% or more of outstanding preferred shares as of March 24, 2006.

|Name of shareholder       | Number of Series
A Convertible
Preferred Shares
held | Percentage of our
outstanding Series
A Preferred
Shares(1) | Percentage of our
outstanding
share capital*
|------------------------- | ---------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------
|
|
|
|
|LibertyView Funds(2)      |                                                      |                                                            |                                             
|Leaf Investment Funds (3) |                                                      |                                                            |                                             
|Close Finsbury Funds(4)   |                                                      |                                                            |                                             

|* | Based
on 18,863,872 ordinary and preferred shares outstanding as of March 24, 2006.
|- | -----------------------------------------------------------------------------------

|(1) | Based
on 4,454,571 Series A Preferred Shares outstanding as of March 24, 2006.
|--- | ------------------------------------------------------------------------------

|(2) | LibertyView
Special Opportunities Fund, LP 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. LibertyView
Funds, LP                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. Trust D for a Portion of the
Assets of the Kodak Retirement                Income Plan holds 227,273 Series A
Preferred Shares, and warrants to purchase                90,909 ordinary shares which
are exercisable within 60 days, with an exercise                price of $2.50 per share.
LibertyView Special Opportunities Fund, LP,                LibertyView Funds, LP and
Trust D for a Portion of the Assets of the Kodak                Retirement Income Plan
have a common investment advisor, Neuberger & Berman                LLC, that has
voting and dispositive power over the shares held by them, which                is
exercised by Richard A. Meckler. Since they have hired a common investment
               advisor, these entities are likely to vote together. Additionally, there
may be                common investors within the different accounts managed by the same
investment                advisor. The General Partner of LibertyView Special
Opportunities Fund, LP and                LibertyView Funds, LP is Neuberger Berman Asset
Management, LLC, which is                affiliated with Neuberger & Berman L.P., a
registered broker-dealer. The                shares were purchased for investment in the
ordinary course of business and at                the time of purchase, there were no
agreements or understandings, directly or                indirectly, with any person to
distribute the shares. Trust D for a Portion of                the Assets of the Kodak
Retirement Income Plan is not in any way affiliated with                a broker-dealer.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Leaf
Investment Partners, LP holds 708,059 Series A Preferred Shares, and
               warrants to purchase 283,224 ordinary shares which are exercisable within
60                days, with an exercise price of $2.50 per share. Leaf Offshore
Investment Fund,                Ltd. holds 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. Leaf Investment
Partners, LP and Leaf Offshore Investment Fund,                Ltd. have a common
investment advisor, Sy Goldblatt, who has voting and                dispositive power
over the shares held by them. Since they have hired a common                investment
advisor, these entities are likely to vote together. Additionally,                there
may be common investors within the different funds managed by the same
               investment advisor.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

---

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|(4) | Close
Finsbury Eurotech holds 45,455 Series A Preferred Shares, and warrants to
               purchase 18,182 ordinary shares which are exercisable within 60 days, with
an                exercise price of $2.50 per share. Close Finsbury Global Investment
Technology                Fund holds 6,818 Series A Preferred Shares, and warrants to
purchase 2,727                ordinary shares which are exercisable within 60 days, with
an exercise price of                $2.50 per share. Close Tech & General VCT holds
31,818 Series A Preferred                Shares, and warrants to purchase 12,727 ordinary
shares which are exercisable                within 60 days, with an exercise price of
$2.50 per share. Finsbury Technology                Trust holds 484,091 Series A
Preferred Shares, and warrants to purchase 193,636                ordinary shares which
are exercisable within 60 days, with an exercise price of                $2.50 per share.
Close Finsbury Eurotech, Close Finsbury Global Investment                 Technology
Fund, Consulta, Close Tech & General VCT and Finsbury                Technology Trust
have a common investment advisor, Reabourne Technology                Investment
Management Ltd., that has voting and dispositive power over the                shares
beneficially owned by them, which is exercised by Michael Bourne. Since
               they have hired a common investment advisor, these entities are likely to
vote                together. Additionally, there may be common investors within the
different funds                managed by the same investment advisor.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

On February 7, 2003, Team Software
commenced a tender offer to purchase 650,000 of our ordinary shares at the price of $6.00
per share. On March 17, 2003, Team Software accepted 650,000 ordinary shares under the
tender offer. Prior to the tender offer, Team Software held 5,312,550 of our ordinary
shares, representing 44.75% of our issued and outstanding ordinary shares. Following
completion of the tender offer, Team Software held 5,962,550 of our ordinary shares,
representing 50.22% of our issued and outstanding ordinary shares. On January 30, 2005,
Team Software transferred 5,200,000 of our ordinary shares held thereby to Team Computers
and Systems Ltd., its parent company, such that Team Computers held 5,200,020 or our
ordinary shares directly and 762,530 of our ordinary shares through Team Software.

On January 3, 2005, we completed a
private placement transaction in which we issued (i) 6,636,389 Series A Convertible
Preferred Shares, par value NIS 0.50 each, or the Series A Preferred Shares, at a purchase
price of $2.20 per share, resulting in aggregate proceeds (before expenses) of
approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our ordinary
shares, pursuant to a Purchase Agreement dated as of November 29, 2004. For more
information on the private placement transaction, see Item 10.C.  Private
Placement of Series A Preferred Shares.

On April 19, 2005, Team Computers and
Systems distributed to Team Computers shareholders 5,166,062 ordinary shares, such
that immediately following the distribution, Team Computers held 719,488 of our ordinary
shares, representing approximately 3.9% of our outstanding share capital. Of the 5,166,062
ordinary shares distributed by Team Computers, 3,714,435 was distributed to Team
Computers controlling shareholders (and will be subject, under the U.S. securities
laws, to a holding period of one year following the distribution, unless they are sold
pursuant to a registration statement declared effective by the SEC or the existence of an
available exemption from the registration requirements), including Arad Investments and
Industrial Development Ltd., Shlomo Eisenberg and Meir Lipshes (see the table above).

During fiscal year 2005, Neuberger
& Berman L.P., Rima Management, LLC and Richard Mashaal and S Squared Technology, LLC
became the beneficial owners of more than 5% of our ordinary shares.

# Voting Rights

The holders of our ordinary shares
and the holders of our Series A Preferred Shares each have one vote per share held.
However, the holders of our Series A Preferred Shares have special voting rights, as
follows: for so long as at least 65% of the Series A Preferred Shares issued shall be
outstanding, and no more than 35% of all Series A Preferred Shares issued shall have been
converted into ordinary shares, the approval of the holders of 50% or more of the then
outstanding Series A Preferred Shares shall be required prior to TTI taking any of the
following actions:

| |  | Amendment
of our Articles of Association which adversely affects the rights of the Series A
Preferred Shares or authorizes additional shares of the TTIs share capital;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Alter
or change the rights, preferences or privileges of the Series A Preferred Shares;
| | - | ---------------------------------------------------------------------------------------

| |  | Declare
or pay any dividends or make any distributions on any of our securities (other than on
the Series A Preferred Shares);
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | Redeem,
purchase or otherwise acquire any of the our securities ranking junior or pari passu with
the Series A Preferred Shares (except for (i) repurchases of ordinary shares from
employees upon termination of employment pursuant to arrangements approved by our board
of directors and (ii) redemptions of Series A Preferred Shares);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

---

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| |  | Authorize
or issue any equity securities having rights or preferences senior to or pari passu with
the Series A Preferred Shares with respect to voting, dividends redemption or
liquidation;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sale
of TTI by sale of all or substantially all of our issued and outstanding securities,
merger, consolidation, sale of assets or otherwise if sale is not a sale resulting in
consideration to the holders of Series A Preferred Shares of at least $6.00 per Series A
Preferred Share, as adjusted for share splits, consolidations, share dividends, bonus
share issuances and other recapitalizations of our shares;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sale
or transfer of all of substantially all of our intellectual property assets;
| | - | ---------------------------------------------------------------------------------

| |  | Voluntary
dissolution or cessation of our operations;
| | - | -----------------------------------------------------

| |  | Any
material change of the nature of our business;
| | - | --------------------------------------------------

| |  | Incur
indebtedness (including any guarantees other than guarantees in the normal course of
business, it being understood that such exclusion shall not include guarantees for
borrowed monies) exceeding an aggregate principal amount of $3,000,000 outstanding at any
time, except for bank debt which, when combined with other debt, may be incurred for up
to $10,000,000 outstanding at any time;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Create
or incur any material lien on our assets (other than liens for current taxes not yet
payable or liens pursuant to certain permitted indebtedness);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transaction
with any director, officer, employee or affiliate (other than customary employment
arrangements and benefit plans);
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Enter
into an agreement that would limit our ability to perform our obligations in respect of
the Series A Preferred Shares or the ordinary shares issued upon conversion of the Series
A Preferred Shares;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Any
other action, which pursuant to our Articles of Association or the Companies Law requires
the vote of the Series A Preferred Shares as a separate class or series;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Create
any subsidiary other than a wholly-owned subsidiary or permit any existing subsidiary to
issue equity securities to any person or entity other than TTI; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Take
any action relating to the above.
| | - | --------------------------------------

As of March 24, 2006, approximately
67.1% of the Series A Preferred Shares are outstanding, and 32.9% of all Series A
Preferred Share issued have been converted into ordinary shares.

# Record Holders

As of February 28, 2006, there were
approximately 38 record holders of our ordinary shares, of which 19 were record holders
with mailing addresses in the United States owning an aggregate of approximately 72.5% 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 72.4% of our outstanding ordinary shares as of said date).

As of February 28, 2006, there were
approximately13 record holders of our Series A Preferred Shares, of which 9 were record
holders with mailing addresses in the United States owning an aggregate of approximately,
or 93.5% of our outstanding Series A Preferred Shares.

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

# 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.

52

---

---



Recently, 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.

Based on advice from Israeli counsel,
we believe that we are entitled to demand reimbursement for such additional withholding
tax from Mr. Eisenberg and that the collection is probable. However, we cannot assure you
that the court will accept such view if this matter were brought before it. We intend to
demand reimbursement for the additional withholding tax from Mr. Eisenberg.

# Sale of Products;
Services

Since the commencement of our
operations in 1992, Team Computers, our former parent company, has from time to time paid
us commissions in respect of the sale by us of certain products represented and offered by
Team Computers. This relationship is reflected in an agreement between us and Team
Computers dated October 1996. Team Computers generally pays us a commission at the rate of
15% of the sales price of these products, up to a maximum of 50% of the amount received by
Team Computers from these sales less the cost to Team Computers. In connection with these
sales, we recorded commissions of approximately $157,000 in 2003, $249,000 in 2004 and
$93,000 in 2005.

In addition, Team Computers provides
us certain administrative services, including computer servicing, salary administration,
automotive fleet maintenance, legal counsel and basic insurance coverage, and we reimburse
Team Computers for the actual cost of such services. We recorded expenses for such
services of $503,000 in 2003, $208,000 in 2004 and $169,000 in 2005. We and Team Computers
have agreed to indemnify each other for liabilities resulting from the acts or omissions
of our respective employees constituting intellectual property violations. The agreement
is automatically renewed for successive terms of one year on each December 31, and can be
terminated by either party at the end of any such term upon at least 60 days prior
written notice.

Since 1992, we have also purchased
fixed assets, such as computer hardware, from Team Computers and Omnitek-Eichut Ltd.
(Omnitek-Eichut), a subsidiary of Team Computers. We pay Team Computers and
Omnitek-Eichut prices for these assets that are no less favorable to us than those we
could obtain from unrelated third parties. The payments made by us to Team Computers and
Omnitek-Eichut in respect of such asset purchases were, in the aggregate, approximately
$711,000 in 2003, $555,000 in 2004 and $398,000 in 2005.

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

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

# Registration Rights

Pursuant to a Registration Rights
Agreement (Registration Rights Agreement) between us and Team Software, dated
as of October 22, 1996, Team Software was entitled to registration rights with respect to
our ordinary shares held by it (currently 680,230 shares). 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.

53

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In June of 2005, Team Software
assigned certain of its rights under the Registration Rights Agreement. On August 2, 2005,
we received a notice of exercise of these registration rights from Arad Investment &
Industrial Development Ltd., one of the assignees under the assignment agreement. The
registration of the shares with the U.S. Securities and Exchange Commission is currently
in process.

# Leased Facilities

From February 1998 to July 2005, we
leased our principal facilities in Petach Tikva, Israel from Team Computers pursuant to a
lease agreement dated February 1, 1998. Aggregate payments under this lease, which amount
includes rent, maintenance and additional related expenses, were approximately $1.4
million during 2003, $1.4 million during 2004 and $1.4 during 2005. We exercised our
option to extend the lease until August 31, 2007.

Since we became a tenant of Team
Computers, Team Computers has performed various internal construction projects on our
behalf, adapting our premises to our requirements. These construction projects were
performed on a cost only basis. On September 2, 2002, we and Team Computers amended the
lease, such that, among other things, the space leased by us was expanded by an additional
2,800 square meters, for a total of approximately 5,830 square meters. The amendment was
approved by our shareholders on October 24, 2002. In order to reduce our expenses, on July
14, 2005, we entered into another written amendment to the lease agreement according to
which the space leased by us was reduced by 1,258 square meters, and we agreed to pay to
Team Computers a penalty of NIS 466,526 (approximately $104,000), which is equivalent to
one-third of the pro rated rental fee for the returned space for the remainder of the
lease term. The amendment was approved by our shareholders on December 27, 2005.

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

# Compensation to Directors

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

C. Interests of Experts
and Counsel

Not applicable.

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

A. Consolidated
Statements and Other Financial Information

# Financial Statements

See Item 18.

# Legal Proceedings

Dispute with a Former
Major Customer

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

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

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

54

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Because we believe that the
termination of the agreement was unlawful, court proceedings were commenced (as part of
the injunction proceedings) claiming damages for the customers wrongful repudiation
of the agreement. During the course of the hearings regarding our application for an
injunction (and subsequently), the customer indicated that it intends to bring a
substantial counterclaim (which, in the context of the agreement, could run to
several millions of British pounds) against us for our alleged failure to complete the
supply of the MoM. A draft defense and counterclaim was served by the customer which
denies liability and seeks to recover against us damages said to be in region of about 11
million British Pounds. On March 28, 2006, we were served with the defense and
counterclaim and it is currently under review.

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

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

In 2002, we recorded trade and
unbilled receivables in the amount of $10.3 million as due from these customers. Due
to the letter of termination received from the first customer and our managements
concerns about termination by the second customer, as described above, in 2002 we
classified the amount of $2.9 million as long-term trade and unbilled
receivables, which represents the amount whose collection is probable, in our
managements opinion. As of December 31, 2003, this amount was $3.1 million due to
the devaluation of the United States dollar against the British Pound. As of December 31,
2004, this amount was $3.3 million due to the devaluation of the United States dollar
against the British Pound. As of December 31, 2005, this amount was $2.9 million due to
the devaluation of the United States dollar against the British Pound. With respect to
this receivable, our management believes that the collection is probable (i.e., likely to
occur, as defined in SFAS 5) in light of (i) the solution delivered by us to the customer,
(ii) the approval by the customers users of the functionality of the solutions
delivered and (iii) the customers contractual obligations.

The balance, in the amount of $7.4
million was recorded in 2002 as allowance for doubtful accounts. Wehave not recorded any amount as allowance for doubtful accounts in 2004 and 2005.

Putative Shareholder
Class Action

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

Dividend Policy

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

B. Significant Changes

No significant change has occurred
since December 31, 2005, except as otherwise disclosed in this annual report.

|Item 9. |  | THE
OFFER AND LISTING
|------- |  | ---------------------

A. Offer and Listing
Details.

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

55

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|                       | High | Low
|---------------------- | ---- | ---
|
|
|
|
|2001:                  |      |    
|Full Year              |      |    
|2002:                  |      |    
|Full Year              |      |    
|2003:                  |      |    
|Full Year              |      |    
|2004:                  |      |    
|Full Year              |      |    
|First Quarter          |      |    
|Second Quarter         |      |    
|Third Quarter          |      |    
|Fourth Quarter         |      |    
|2005:                  |      |    
|Full Year              |      |    
|First Quarter          |      |    
|Second Quarter         |      |    
|Third Quarter          |      |    
|Fourth Quarter         |      |    
|                       |      |    
|Most Recent Six Months |      |    
|October 2005           |      |    
|November 2005          |      |    
|December 2005          |      |    
|January 2006           |      |    
|February 2006          |      |    
|March 2006             |      |    

On
April 7, 2006, the last reported sale price of our ordinary shares on the Nasdaq National
Market was $4.70 per share.

B. Plan of Distribution

Not applicable.

C. Markets

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

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

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

A. Share Capital

Not applicable.

B. Memorandum and
Articles of Association

Our memorandum of association and
articles of association were amended in October 2000 and on December 29, 2004 and our
articles of association were further amended on December 27, 2005. The following is a
summary description of certain provisions of our amended memorandum of association and
articles of association, and certain relevant provisions of the Israel Companies Law which
apply to us:

56

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

# Directors

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

# Election of Directors

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

Notwithstanding the above, for so
long as at least 50% of the Series A Preferred Shares issued under the Purchase Agreement
dated November 29, 2004 remain outstanding, the holders of a majority of the outstanding
Series A Preferred Shares are entitled at any time to appoint, elect, remove and replace
one director to our board of directors.

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.

# Ordinary Shares

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

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

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

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

# Series A Preferred Shares

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

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

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

| |  | for
so long as at least 50% of the Series A Preferred Shares issued under the Purchase
Agreement dated November 29, 2004 remain outstanding, the holders of a majority of the
outstanding Series A Preferred Shares are entitled at any time to appoint, elect, remove
and replace one director to our board of directors;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | one
vote at meetings of our shareholders in respect of each ordinary share held thereby,
however, the holders of our Series A Preferred Shares have special voting rights, as
follows: for so long as at least 65% of the Series A Preferred Shares issued shall be
outstanding, and no more than 35% of all Series A Preferred Shares issued shall have been
converted into ordinary shares, the approval of the holders of 50% of the then
outstanding Series A Preferred Shares shall be required prior to taking any of the
following actions:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Amendment
of our Articles of Association which adversely affects the rights of the Series A
Preferred Shares or authorizes additional shares of our share capital;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Alter
or change the rights, preferences or privileges of the Series A Preferred Shares;
| | - | ---------------------------------------------------------------------------------------

| |  | Declare
or pay any dividends or make any distributions on any of our securities (other than on
the Series A Preferred Shares);
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | Redeem,
purchase or otherwise acquire any of our securities ranking junior or pari passu with the
Series A Preferred Shares (except for (i) repurchases of ordinary shares from employees
upon termination of employment pursuant to arrangements approved by our board of
directors and (ii) redemptions of Series A Preferred Shares);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Authorize
or issue any equity securities having rights or preferences senior to or pari passu with
the Series A Preferred Shares with respect to voting, dividends redemption or liquidation;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sale
of our company by sale of all or substantially all of our issued and outstanding
securities, merger, consolidation, sale of assets or otherwise if sale is not a sale
resulting in consideration to the holders of Series A Preferred Shares of at least $6.00
per Series A Preferred Share, as adjusted for share splits, consolidations, share
dividends, bonus share issuances and other recapitalizations of our shares;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sale
or transfer of all of substantially all of our intellectual property assets;
| | - | ---------------------------------------------------------------------------------

| |  | Voluntary
dissolution or cessation of our operations;
| | - | -----------------------------------------------------

| |  | Any
material change of the nature of our business;
| | - | --------------------------------------------------

| |  | Incur
indebtedness (including any guarantees other than guarantees in the normal course of
business, it being understood that such exclusion shall not include guarantees for
borrowed monies) exceeding an aggregate principal amount of $3,000,000 outstanding at any
time, except for bank debt which, when combined with other debt, may be incurred for up
to $10,000,000 outstanding at any time;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Create
or incur any material lien on our assets (other than liens for current taxes not yet
payable or liens pursuant to permitted indebtedness);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transaction
with any director, officer, employee or affiliate (other than customary employment
arrangements and benefit plans);
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Enter
into an agreement that would limit the our ability to perform our obligations in respect
of the Series A Preferred Shares or the ordinary shares issued upon conversion of the
Series A Preferred Shares;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Any
other action, which pursuant to our Articles of Association or the Companies Law requires
the vote of the Series A Preferred Shares as a separate class or series;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Create
any subsidiary other than a wholly-owned subsidiary or permit any existing subsidiary to
issue equity securities to any person or entity other than TTI; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Take
any action relating to the above.
| | - | --------------------------------------

58

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

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

| |  | payment
of liquidated damages if a registration statement on Form F-3 is not declared effective
within the timeframe specified in our agreements with the investors following the closing
of the private placement transaction; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | rights
of first offer in the event we propose to offer or sell any of our ordinary shares in one
or more transactions not including a public offering prior to the first anniversary of
the date upon which the registration statement filed in connection with the private
placement in which the Series A Preferred Shares were issued is declared effective by the
SEC (which has not occurred as of yet).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Dividends

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

# Redeemable Shares

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

# Changing the Rights
Attached to Shares

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

# Shareholders Meetings

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

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

# Duties of Shareholders

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

59

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

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

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

Exculpation, Insurance
and Indemnification of Office Holders

# Exculpation of Office
Holders

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

# Insurance of Office
Holders

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

| |  | a
breach of his duty of care to us or to another person;
| | - | --------------------------------------------------------

| |  | a
breach of his fiduciary duty 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

60

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Limitations on
Exculpation, Insurance and Indemnification

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

| |  | a
breach by the office holder of his duty of loyalty, unless, with respect to insurance
coverage or indemnification, the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the Companys interests;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
breach by the office holder of his duty of care if the breach was done intentionally or
recklessly;
| | - | -----------------------------------------------------------------------------------------------------

| |  | any
act or omission done with the intent to derive an illegal personal benefit; or
| | - | ----------------------------------------------------------------------------------

| |  | any
fine levied against the office holder.
| | - | ------------------------------------------

In addition, under the Companies Law,
indemnification of, and procurement of insurance coverage for, our office holders must be
approved by our audit committee and board of directors and, if the beneficiary is a
director, by our shareholders. We have obtained such approvals for the procurement of
liability insurance covering our officers and directors and for the grant of
indemnification letters to our officers and directors.

We have agreed to indemnify our
office holders to the fullest extent permitted under Israeli law, but up to a maximum
aggregate amount for all indemnified office holders equal to 25% of our total
shareholders equity at the time of actual indemnification. We currently maintain
directors and officers liability insurance for the benefit of our office holders.

# Mergers and Acquisitions
under Israeli Law

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

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C. Material Contracts

Private Placement of
Series A Preferred Shares

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

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

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

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

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

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

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

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

In addition, the purchasers of our
Series A Preferred Shares have rights of first offer in the event we propose to offer or
sell any of our ordinary shares in one or more transactions not including a public
offering prior to the first anniversary of the date upon which the registration statement
filed in connection with the private placement is declared effective by the SEC (which has
not occurred as of yet). Finally, 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 SEC conducts a review) following the closing
of the private placement transaction. We did not obtain effectiveness of the registration
statement within the timeframe set forth in our agreements with the investors. Therefore,
from May 4, 2005 to May 24 2005, the date on which the Form F-3 was declared effective, we
accrued liquidated damages in the aggregate amount of approximately $200,000, which was at
a rate equal to 2% of each investors investment in the Company for each 30 day
period, or pro rata for any portion thereof, during the period for which the registration
statement was not declared effective. This amount was paid to the investors in June 2005.

Pursuant to a Registration Rights
Agreement dated as of November 29, 2004, we agreed with the purchasers of our Series A
Preferred Shares and warrants to register for public resale 9,954,584 ordinary shares for
issuance upon conversion of the Series A Preferred Shares, representing 150% of the
initial number of issued Series A Preferred Shares issued to them in the private
placement, and the 2,654,556 ordinary shares issuable to them upon exercise of the
warrants.

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

As of March 31, 2006, 2,181,818
Series A Preferred Shares had been converted into Ordinary Shares and 4,454,571 remain
outstanding. As of March 31, 2006, 263,636 warrants have been issued and 2,762,557 remain
outstanding.

Agreements with Team
Computers

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

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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.

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

E. Taxation

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

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

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

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

# Distributions on
Ordinary Shares

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

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. A U.S. holder will be denied a foreign tax credit with respect
to Israeli income tax withheld from dividends received with respect to the ordinary shares
if such U.S. holder has not held the ordinary shares for at least 16 days out of the
30-day period beginning on the date that is 15 days before the ex-dividend date or to the
extent that such U.S. holder is under an obligation to make certain related payments with
respect to substantially similar or related property. Any day during which a U.S. holder
has substantially diminished its risk of loss with respect to the ordinary shares will not
count toward meeting the 16-day holding period referred to above. A U.S. holder may also
be denied a foreign tax credit if the U.S. holder holds ordinary shares in an arrangement
in which the U.S. holders reasonably expected economic profit is insubstantial
compared to the foreign taxes expected to be paid or accrued. The rules relating to the
determination of the foreign tax credit are complex, and U.S. holders should consult their
own tax advisors to determine whether and to what extent they would be entitled to such
credit. U.S. holders that do not elect to claim a foreign tax credit may instead claim a
deduction for Israeli income tax withheld, provided such holders itemize their deductions.

# Disposition of Shares

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

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

# Passive Foreign
Investment Companies

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

| |  | 75%
or more of our gross income, including the pro rata share of our gross income for any
company, United States or foreign, in which we are considered to own 25% or more of the
shares by value, in a taxable year is passive income; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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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
2005 and will not be a PFIC in 2006. 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.

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.

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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.

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 34% for the 2005 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: 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. Israeli companies are generally subject to Capital Gains Tax at a rate of
25% for capital gains, other than gains deriving from the sale of listed securities,
derived after January 1, 2003. However, the effective tax rate payable by a company that
derives income from an approved enterprise (as defined below) may be considerably less, as
further discussed below.

# Stamp Duty

The Israeli Stamp Duty on Documents
Law, 1961, or the Stamp Duty Law, provides that any document (or part thereof) that is
signed in Israel or that is signed outside of Israel and refers to an asset or other thing
in Israel or to an action that is executed or will be executed in Israel, is subject to a
stamp duty, generally at a rate of between 0.4% and 1% of the value of the subject matter
of such document. De facto, it has been common practice in Israel not to pay such stamp
duty unless a document is filed with a governmental authority. An amendment to the Stamp
Duty Law, that came into effect on June 1, 2003, determines the party liable for payment
of stamp duty with respect to each type of document subject to such law. Following such
amendment, Section 15(5) of the Stamp Duty Law generally provides that stamp duty on most
agreements shall be paid by the parties that signed such agreement, jointly or severally,
or by the party that undertook under such agreement to pay the stamp duty.

As a result of the aforementioned
amendment to the Stamp Duty Law, the Israeli tax authorities have approached many
companies in Israel, including us, and required disclosure of all agreements signed by
such companies since June 1, 2003, with the aim of collecting stamp duty with respect to
such agreements. Based on advice from our Israeli counsel, we believe that we may only be
required to pay stamp duty on documents signed on or after August 2004. However, we cannot
assure you that the tax authorities or the courts will accept such view. Although at this
stage it is not yet possible to evaluate the effect, if any, on us of the amendment to the
Stamp Duty Law, the same could materially adversely affect our results of operations.

Under an order published in December
2005, the said requirement to pay stamp duty was cancelled with respect to documents
signed on or after January 1, 2006.

# 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.

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# Law for the
Encouragement of Capital Investments, 1959

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

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

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

Taxable income of a company derived
from an approved enterprise is subject to company tax at the rate of 25%, rather than
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.

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

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

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

67

---

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

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

Amendment to the
Investments Law

On April 1, 2005, an amendment to the
Investments Law came into force. Pursuant to the amendment, a companys facility will
be granted the status of Approved Enterprise only if it is proven to be an
industrial facility (as defined in the Investments Law) that contributes to the economic
independence of the Israeli economy and is a competitive facility that contributes to the
Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and
not the Investment Center will be responsible for an Approved Enterprise under the
alternative package of benefits, referred to as a Benefiting Enterprise. A company wishing
to receive the tax benefits afforded to a Benefiting 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 Benefiting 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 Benefiting Enterprise and having completed a cooling-off
period of no less than two to four years from the companys previous year of
commencement of benefits under the Investments Law.

Pursuant to the amendment, a company
with a Benefiting Enterprise is entitled, in each tax year, to accelerated depreciation
for the manufacturing assets used by the Benefiting 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
Benefiting Factory are determined according one of the following new tax routes:

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

| |  | A
special tax route that provides a full exemption from corporate tax and from tax with
respect to dividends for companies with an annual income of at least NIS 13-20 billion
that have invested a total of between NIS 600900 million in facilities in certain
geographical locations in Israel.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 will take effect retroactively from 2003.

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

68

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# Taxation under
Inflationary Conditions

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

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

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

| | (a) | A
special tax adjustment for the preservation of equity whereby certain
               corporate assets are classified broadly into fixed (inflation immune)
assets and                non-fixed assets. Where a companys equity, as defined in
such law, exceeds                the depreciated cost of fixed assets, a deduction from
taxable income that takes                into account the effect of the applicable annual
rate of inflation on such                excess is allowed, up to a ceiling of 70% of
taxable income in any single tax                year, with the unused portion permitted
to be carried forward, linked to the                increase in the consumer price index.
If the depreciated cost of fixed assets                exceeds a companys equity,
then such excess multiplied by the applicable                annual rate of inflation is
added to taxable income.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Subject
to certain limitation set forth in the Inflationary Adjustments Law,
               depreciation deductions on fixed assets and losses carried forward are
adjusted                for inflation based on the increase in the Israel consumer price
index.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Gains
on the sale of certain listed securities which are taxed at a reduced rate
               with respect to individuals are taxable at a company tax rate in certain
               circumstances. However, dealers in securities are subject to the regular
tax                rules applicable to business income in Israel. As of January 1, 2006,
the                relevant provisions governing taxation of companies on capital gains
derived                from the sale of traded securities are included in the Tax
Ordinance, and the                Adjustments Law no longer includes provisions in this
regard.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | (a) | Deduction
of purchases of know-how and patents over an eight-year period for tax
               purposes.
| | --- | ---------------------------------------------------------------------------------------------------------

| | (b) | Deduction
over a three-year period of expenses involved with the issuance and
               listing of shares on the Tel Aviv Stock Exchange or, on or after January
1,                2003, on a recognized stock market outside of Israel.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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 both residents and non-residents of Israel, unless a specific
exemption is available or unless a tax treaty between Israel and the shareholders
country of residence provides otherwise. The law distinguishes between the real gain and
the inflationary surplus. The real gain is the excess of the total capital gain over the
inflationary surplus, computed on the basis of the increase in the Israel consumer price
index between the date of purchase and the date of sale.

69

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Generally, up until the 2006 tax
year, capital gains tax was imposed on Israeli resident individuals at a rate of 15% on
real gains derived on or after January 1, 2003 from the sale of shares in, among others,
Israeli companies publicly traded on Nasdaq or on a recognized stock exchange or regulated
market in a country that has a treaty for the prevention of double taxation with Israel
(such as our company). This tax rate was contingent upon the shareholder not claiming a
deduction for financing expenses in connection with such shares (in which case the gain
will be taxed at a rate of 25%), and did not apply to: (i) the sale of shares to a
relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by
dealers in securities; (iii) the sale of shares by shareholders that report in accordance
with the Inflationary Adjustment Law (that will be taxed at corporate tax rates for
corporations and at marginal rates for individuals); or (iv) the sale of shares by
shareholders who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement).

As of January 1, 2006, the 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
shares, unless such companies were not subject to the Adjustments Law (or certain
regulations) at the time of publication of the aforementioned amendment to the Tax
Ordinance, in which case the applicable tax rate is 25%. However, the different tax rates
will not apply to dealers in securities and shareholders who acquired their shares prior
to an initial public offering.

The tax basis of shares acquired
prior to January 1, 2003 will be determined in accordance with the average closing share
price in the three trading days preceding January 1, 2003. However, a request may be made
to the tax authorities to consider the actual adjusted cost of the shares as the tax basis
if it is higher than such average price.

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 Adjustment Law and that
such shareholders did not acquire their shares prior to the issuers initial public
offering. However, non-Israeli corporations will not be entitled to such exemption, if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or
profits of such non-Israeli corporation, whether directly or indirectly.

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

# U.S.-Israel Tax Treaty

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

# Tax on Dividends

Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends other than bonus
shares or stock dividends, income tax is withheld at the source at the following rates:
(i) for dividends distributed prior to January 1, 2006  25%; and (ii) for dividends
distributed on or after January 1, 2006  20%, or 25% for a shareholder that is
considered a significant shareholder at any time during the 12-month period preceding such
distribution; 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. However, under the U.S.-Israel Tax Treaty and the Investments Law, dividends
generated by an Approved Enterprise (or Benefiting Enterprise) are taxed at the rate of
15%.

70

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F. Dividends and Paying
Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign
private issuers and fulfill the obligations with respect to such requirements by filing
reports with the Securities and Exchange Commission. You may read and copy any document we
file with the Securities and Exchange Commission without charge at the Securities and
Exchange Commissions public reference room at 100 F Street, N.E., Washington, D.C.
20549. Copies of such material may be obtained by mail from the Public Reference Branch of
the Securities and Exchange Commission at such address, at prescribed rates. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the
public reference room.

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

I. Subsidiary Information

Not applicable.

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

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

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

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

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

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

Not applicable.

# PART II

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

None.

71

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

# Modification of Rights

In December 2004, our shareholders
approved a private placement transaction in which the Company issued 6,636,391 shares of a
new class of Series A Convertible Preferred Shares (as described elsewhere in this annual
report) and approved related amendments to our Articles of Association to give effect to
such transaction, as described in Items 4 and 5 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. For additional details regarding the Series A Preferred Shares, see Item
10B.

# Use of Proceeds

Not applicable.

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

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

We carried out an evaluation, under
the supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2005. 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.

In addition, there were no changes in
the Companys internal control over financial reporting that occurred during the year
ended December 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

|Item 16. |  | RESERVED
|-------- |  | --------

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

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

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

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

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

Audit Fees

For 2004 and 2005, our principal
accountant, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, billed
us aggregate amounts of approximately $118,500 and $144,700, respectively, for the audit
of our annual financial statements, review of our quarterly financial results,
consultations on various accounting issues and performance of local statutory audits.

Audit Related Fees

For 2005, our principal accountant
billed us an aggregate amount of approximately $25,000 for services relating to the
Section 404 of the Sarbanes-Oxley Act of 2002 compliance process we have begun. There were
no such fees for 2004.

Tax Fees

For 2004 and 2005, our principal
accountant billed us aggregate amounts of approximately $17,800 and $55,650, respectively,
for services relating to tax compliance, tax advice and tax planning.

All Other Fees

Not applicable.

72

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Pre-approval Policies and
Procedures

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

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

Not applicable.

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

None.

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

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

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

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

|Item 19. |  | EXHIBITS
|-------- |  | --------

The exhibits list required by this
Item is incorporated by reference to the Exhibit Index which appears before the first
exhibit filed with this document.

73

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# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that
it meets all of the requirements for filing on Form 20-F and has duly caused this annual
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Petach Tikva, Israel on the 11th day of April, 2006.

| |  | TTI TEAM TELECOM INTERNATIONAL LTD.BY: /S/ REUVEN MARKUS
Reuven MarkusChief Executive Officer
| |  | -----------------------------------------------------------------------------------------------------------

# EXHIBIT INDEX

|(a) | Financial
Statements
|--- | --------------------

| | 1. | Report
of Independent Auditors
| | -- | ------------------------------

| | 2. | Consolidated
Balance Sheets
| | -- | ---------------------------

| | 3. | Consolidated
Statements of Income
| | -- | ---------------------------------

| | 4. | Statements
of Changes in Shareholders Equity
| | -- | ---------------------------------------------

| | 5. | Consolidated
Statements of Cash Flows
| | -- | -------------------------------------

| | 6. | Notes
to Consolidated Financial Statements
| | -- | ------------------------------------------

|(b) | Exhibits
|--- | --------

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

|1.1 |  | Second
Amended and Restated Articles of Association of Registrant, as amended through
          December 27, 2005.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|1.2(1) |  | Memorandum
of Association of Registrant, as amended through December 29, 2004.
|------ |  | ------------------------------------------------------------------------------

|4.6(2) |  | The
Registrants Share Option Plan, dated November 15, 1996.
|------ |  | ------------------------------------------------------------

|4.8(1) |  | 2004
Employee Share Option Plan, adopted December 29, 2004
|------ |  | ----------------------------------------------------------

|4.9(3) |  | Agreement,
dated October 9, 1996, between the Registrant and Team.
|------ |  | ------------------------------------------------------------------

|4.10(3) |  | Registration
Rights Agreement, dated October 22, 1996, between the Registrant           and TSIL.
|------- |  | -------------------------------------------------------------------------------------------------

|4.12(4) |  | Lease,
dated February 1, 1998, between the Registrant and Team.
|------- |  | ---------------------------------------------------------------

|4.13(5) |  | Amendment
to Lease Agreement dated September 2, 2002.
|------- |  | -----------------------------------------------------

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

|4.15(6) |  | Purchase
Agreement, dated November 29, 2004.
|------- |  | --------------------------------------------

|4.16(6) |  | Form
of Registration Rights Agreement, dated November 29, 2004.
|------- |  | ---------------------------------------------------------------

|4.17(6) |  | Form
of Warrant issued on January 3, 2005.
|------- |  | ------------------------------------------

|4.18(6) |  | Specimen
Certificate for Series A Convertible Preferred Shares.
|------- |  | ---------------------------------------------------------------

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

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

|11(7) |  | Code
of Ethics and Business Conduct
|----- |  | -----------------------------------

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

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

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

74

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

|(1) | Previously
filed on TTIs Form 20-F for the year ended December 31, 2004,
                    and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

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

|(3) | Previously
filed as an exhibit to TTIs Registration Statement on Form F-1
                    (Registration No. 333-5902), and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(6) | Previously
filed as an exhibit to TTIs Registration Statement on Form F-3,
                    and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously
filed on TTIs Form 20-F for the year ended December 31, 2003,
                    and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

75

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TTI TEAM
TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2005

IN U.S.
DOLLARS

INDEX

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

---

---



(ERNST & YOUNG LOGO)

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
Shareholders of

TTI TEAM
TELECOM INTERNATIONAL LTD.

We
have audited the accompanying consolidated balance sheets of TTI Team Telecom
International Ltd. (the Company) and its subsidiaries as of December 31, 2004
and 2005 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, 2005. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting.
Our audits include consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at December 31, 2004 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.

|                   |                                   
|------------------ | ----------------------------------
|Tel-Aviv,
  Israel | /s/ KOST FORER
  GABBAY & KASIERER
|March 29,
  2006   | 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, |       
|                                                                                                  |  |              |       
|                                                                                                  |  | 2004         |        | 2005 |  
|                                                                                                  |  |              |        |      |  
|ASSETS                                                                                            |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|CURRENT ASSETS:                                                                                   |  |              |        |      |   |        | 
|Cash and cash equivalents                                                                         |  | $            | 5,472  |      | $ | 18,034 | 
|Short-term bank deposits                                                                          |  |              | 2,372  |      |   | 1,973  | 
|Marketable securities (Note
  3)                                                                  |  |              | 12,626 |      |   | 15,713 | 
|Trade receivables (net of allowance for
  doubtful accounts - $ 8,020 in 2004 and 2005) (Note 1c) |  |              | 6,755  |      |   | 3,900  | 
|Unbilled receivables                                                                              |  |              | 1,491  |      |   | 964    | 
|Related parties (Note 13)                                                                         |  |              | 150    |      |   | 367    | 
|Other accounts receivable
  and prepaid expenses (Note 4)                                         |  |              | 3,265  |      |   | 2,218  | 
|                                                                                                  |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|Total current assets                                                                              |  |              | 32,131 |      |   | 43,169 | 
|                                                                                                  |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|LONG-TERM INVESTMENTS AND
  RECEIVABLES:                                                          |  |              |        |      |   |        | 
|Long-term bank deposits                                                                           |  |              | 923    |      |   | 881    | 
|Investment in a company                                                                           |  |              | 165    |      |   | 165    | 
|Severance pay fund                                                                                |  |              | 3,855  |      |   | 2,970  | 
|Long-term trade and
  unbilled receivables (Note 5)                                               |  |              | 3,268  |      |   | 3,937  | 
|                                                                                                  |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|Total long-term investments and receivables                                                       |  |              | 8,211  |      |   | 7,953  | 
|                                                                                                  |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|PROPERTY AND EQUIPMENT, NET
  (Note 6)                                                            |  |              | 5,874  |      |   | 4,729  | 
|                                                                                                  |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|INTANGIBLE ASSETS, NET
  (Note 7)                                                                 |  |              | 281    |      |   | -      | 
|                                                                                                  |  |              |        |      |   |        | 
|                                                                                                  |  |              |        |      |   |        | 
|Total assets                                                                                      |  | $            | 46,497 |      | $ | 55,851 | 
|                                                                                                  |  |              |        |      |   |        | 

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, |        
|                                                                                                                                                                                                                                                                                        |  |                |        
|                                                                                                                                                                                                                                                                                        |  | 2004           |         | 2005 |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |  
|LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                                                                                                                                                                                    |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                                                                    |  |                |         |      |   |         |  
|Short-term bank credit (Note
8)                                                                                                                                                                                                                                                         |  | $              | 967     |      | $ | -       |  
|Trade payables                                                                                                                                                                                                                                                                          |  |                | 3,545   |      |   | 1,867   |  
|Deferred revenues                                                                                                                                                                                                                                                                       |  |                | 4,642   |      |   | 10,226  |  
|Other accounts payable and
accrued expenses
  (Note 9)                                                                                                                                                                                                                                  |  |                | 6,171   |      |   | 7,463   |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|Total current
  liabilities                                                                                                                                                                                                                                                             |  |                | 15,325  |      |   | 19,556  |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|ACCRUED SEVERANCE PAY                                                                                                                                                                                                                                                                   |  |                | 4,879   |      |   | 3,852   |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|COMMITMENTS AND CONTINGENT LIABILITIES
  (Note 10)                                                                                                                                                                                                                                      |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|SHAREHOLDERS EQUITY (Note 12):                                                                                                                                                                                                                                                         |  |                |         |      |   |         |  
|Share capital:                                                                                                                                                                                                                                                                          |  |                |         |      |   |         |  
|Ordinary shares of NIS 0.5 par
value -                                                                                                                                                                                                                                                  |  |                |         |      |   |         |  
|Authorized: 30,000,000 shares
at December
  31, 2004 and 2005; Issued and outstanding: 11,872,941 and 13,872,941 shares
  at December 31, 2004 and 2005, respectively                                                                                                                   |  |                | -       |      |   | 2,022   |  
|Preferred A shares of NIS 0.5
par value                                                                                                                                                                                                                                                |  |                |         |      |   |         |  
|Authorized: 0 and 6,636,391
shares at
  December 31, 2004 and 2005, respectively: Issued and outstanding: 0 and
  4,636,391 shares at December 31, 2004 and 2005, respectively: Aggregate
  liquidation preference of $14,600 and $10,200 at December 31, 2004 and 2005,
  respectively |  |                | 1,794   |      |   | 526     |  
|Additional paid-in
capital                                                                                                                                                                                                                                                              |  |                | 58,881  |      |   | 73,446  |  
|Accumulated other comprehensive
loss                                                                                                                                                                                                                                                    |  |                | (226    | )    |   | (336    | )
|Accumulated deficit                                                                                                                                                                                                                                                                     |  |                | (34,156 | )    |   | (43,215 | )
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|Total
  shareholders equity                                                                                                                                                                                                                                                            |  |                | 26,293  |      |   | 32,443  |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  
|Total liabilities
  and shareholders equity                                                                                                                                                                                                                                            |  | $              | 46,497  |      | $ | 55,851  |  
|                                                                                                                                                                                                                                                                                        |  |                |         |      |   |         |  

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, |           
|                                                                                                                                  |  |                         |           
|                                                                                                                                  |  | 2003                    |            | 2004 |   | 2005       |  
|                                                                                                                                  |  |                         |            |      |   |            |  
|Revenues (Note 14):                                                                                                               |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                          |  | $                       | 33,831     |      | $ | 21,670     |   | $ | 25,317     |  
|Services                                                                                                                          |  |                         | 12,036     |      |   | 16,128     |   |   | 17,909     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Total revenues                                                                                                                    |  |                         | 45,867     |      |   | 37,798     |   |   | 43,226     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Cost of revenues:                                                                                                                 |  |                         |            |      |   |            |   |   |            |  
|Products                                                                                                                          |  |                         | 29,619     |      |   | 16,645     |   |   | 13,015     |  
|Services                                                                                                                          |  |                         | 6,368      |      |   | 9,719      |   |   | 9,203      |  
|Impairment of capitalized software
  development costs (Note 7)                                                                   |  |                         | 5,864      |      |   | 3,597      |   |   | 177        |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Total cost of
  revenues                                                                                                          |  |                         | 41,851     |      |   | 29,961     |   |   | 22,395     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Gross profit                                                                                                                      |  |                         | 4,016      |      |   | 7,837      |   |   | 20,831     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Operating expenses:                                                                                                               |  |                         |            |      |   |            |   |   |            |  
|Research and development, net (Note 15a)                                                                                          |  |                         | 10,318     |      |   | 10,744     |   |   | 9,136      |  
|Selling and marketing                                                                                                             |  |                         | 19,465     |      |   | 19,220     |   |   | 11,977     |  
|General and administrative                                                                                                        |  |                         | 6,510      |      |   | 6,586      |   |   | 6,325      |  
|Impairment of goodwill                                                                                                            |  |                         | 1,052      |      |   | -          |   |   | -          |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Total operating
  expenses                                                                                                        |  |                         | 37,345     |      |   | 36,550     |   |   | 27,438     |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Operating loss                                                                                                                    |  |                         | (33,329    | )    |   | (28,713    | ) |   | (6,607     | )
|Financial income, net (Note 15b)                                                                                                  |  |                         | 2,793      |      |   | 1,326      |   |   | 153        |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Loss before income taxes                                                                                                          |  |                         | (30,536    | )    |   | (27,387    | ) |   | (6,454     | )
|Income taxes (Note 11)                                                                                                            |  |                         | (456       | )    |   | 2,107      |   |   | 624        |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Net loss                                                                                                                          |  | $                       | (30,080    | )    | $ | (29,494    | ) | $ | (7,078     | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Deemed dividend associated with beneficial
  conversion feature of Preferred shares                                               |  |                         | -          |      |   | -          |   |   | (1,981     | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Net loss attributable to Ordinary shares                                                                                          |  | $                       | (30,080    | )    | $ | (29,494    | ) | $ | (9,059     | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Basic and diluted net loss per share
  attributed to Ordinary shareholders                                                        |  | $                       | (2.53      | )    | $ | (2.48      | ) | $ | (0.72      | )
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  
|Weighted average number of shares used for
  computing basic And diluted net loss per share attributed
  to Ordinary shareholders |  |                         | 11,872,052 |      |   | 11,872,941 |   |   | 12,577,392 |  
|                                                                                                                                  |  |                         |            |      |   |            |   |   |            |  

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

F-5

---

---



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

|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ---------- | ----------------- |  | ------------------------------ |  | -------------------------------------------------------- | ---- | --------------------------------------------- | - | ---------------------------- |  | --------------------------- | ------ |  | - | ---- | - | - | ------- | - | - | ------- | - | - | ------- | -
|                                                                                                                           |  |                      |            |                   |  |                                |  | Accumulated
  other
  comprehensive
  income
  (loss)**) |      | Retained
  earnings
  (accumulated
  deficit) |   | Total
  comprehensive
  loss |  | Total
  shareholdersequity |       
|                                                                                                                           |  | Number of            |            | Share
  capital   |  | Additional
  paid-in
  capital |  |                                                          |      |                                               |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                              
|                                                                                                                           |  | Preferred
  A shares |            | Ordinary
  shares |  | Preferred
  A shares           |  | Ordinary
  shares                                        |      |                                               |   |                              |  |                            
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of January 1, 2003                                                                                              |  |                      | -          |                   |  | 11,872,052                     |  | $                                                        | -    |                                               | $ | 1,794                        |  | $                           | 58,871 |  | $ | 185  |   | $ | 25,418  |   |   |         |   | $ | 86,268  |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Comprehensive loss:                                                                                                        |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Other comprehensive loss - unrealized losses on
available-for-sale
  marketable securities                                 |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | -      |  |   | (399 | ) |   | -       |   | $ | (399    | ) |   | (399    | )
|Net loss                                                                                                                   |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | -      |  |   | -    |   |   | (30,080 | ) |   | (30,080 | ) |   | (30,080 | )
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                                   |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   | $ | (30,479 | ) |   |         |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2003                                                                                            |  |                      | -          |                   |  | 11,872,052                     |  |                                                          | -    |                                               |   | 1,794                        |  |                             | 58,871 |  |   | (214 | ) |   | (4,662  | ) |   |         |   |   | 55,789  |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Exercise of stock options                                                                                                  |  |                      | -          |                   |  | 889                            |  |                                                          | -    |                                               |   | *)-                          |  |                             | 10     |  |   | -    |   |   | -       |   |   |         |   |   | 10      |  
|Comprehensive loss:                                                                                                        |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Other comprehensive loss - unrealized losses on
available-for-sale
  marketable securities                                 |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | -      |  |   | (12  | ) |   | -       |   | $ | (12     | ) |   | (12     | )
|Net loss                                                                                                                   |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | -      |  |   | -    |   |   | (29,494 | ) |   | (29,494 | ) |   | (29,494 | )
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                                   |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   | $ | (29,506 | ) |   |         |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2004                                                                                            |  |                      | --         |                   |  | 11,872,941                     |  |                                                          | -    |                                               |   | 1,794                        |  |                             | 58,881 |  |   | (226 | ) |   | (34,156 | ) |   |         |   |   | 26,293  |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Issuance of Convertible Preferred A shares and warrants,
net                                                               |  |                      | 6,636,391  |                   |  |                                |  |                                                          | 754  |                                               |   | -                            |  |                             | 12,584 |  |   | -    |   |   | -       |   |   |         |   |   | 13,338  |  
|Deemed dividend associated with
  beneficial Conversion feature of Preferred A shares                                      |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | 1,981  |  |   | -    |   |   | (1,981  | ) |   |         |   |   | -       |  
|conversion of Convertible Preferred A shares                                                                               |  |                      | (2,000,000 | )                 |  | 2,000,000                      |  |                                                          | (228 | )                                             |   | 228                          |  |                             | -      |  |   | -    |   |   | -       |   |   |         |   |   | -       |  
|Comprehensive loss:                                                                                                        |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Other comprehensive loss - unrealized losses on
available-for-sale
  marketable securities, net of impairment (See Note 3) |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | -      |  |   | (110 | ) |   | -       |   | $ | (110    | ) |   | (110    | )
|Net loss                                                                                                                   |  |                      | -          |                   |  | -                              |  |                                                          | -    |                                               |   | -                            |  |                             | -      |  |   | -    |   |   | (7,078  | ) |   | (7,078  | ) |   | (7,078  | )
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                                                   |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   | $ | (7,188  | ) |   |         |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  
|Balance as of December 31, 2005                                                                                            |  |                      | 4,636,391  |                   |  | 13,872,941                     |  | $                                                        | 526  |                                               | $ | 2,022                        |  | $                           | 73,446 |  | $ | (336 | ) | $ | (43,215 | ) |   |         |   | $ | 32,443  |  
|                                                                                                                           |  |                      |            |                   |  |                                |  |                                                          |      |                                               |   |                              |  |                             |        |  |   |      |   |   |         |   |   |         |   |   |         |  

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

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

F-6

---

---



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

|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                             |  | Year ended
  December 31, |        
|                                                                                                             |  |                           |        
|                                                                                                             |  | 2003                      |         | 2004 |   | 2005    |  
|                                                                                                             |  |                           |         |      |   |         |  
|Cash flows from operating activities:                                                                        |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Net loss                                                                                                     |  | $                         | (30,080 | )    | $ | (29,494 | ) | $ | (7,078  | )
|Adjustments required to reconcile net loss to net
cash provided by
  (used in) operating activities:         |  |                           |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                                                |  |                           | 5,821   |      |   | 3,530   |   |   | 2,258   |  
|Impairment of capitalized software development
costs                                                         |  |                           | 5,864   |      |   | 3,597   |   |   | 177     |  
|Impairment of goodwill                                                                                       |  |                           | 1,052   |      |   | -       |   |   | -       |  
|Loss (gain) from sale of property and
equipment                                                              |  |                           | 232     |      |   | (5      | ) |   | (157    | )
|Amortization of premium and accretion of accrued
interest on available-for-sale
  marketable debt securities |  |                           | (432    | )    |   | (87     | ) |   | 411     |  
|Accrued interest on short-term bank
deposits                                                                 |  |                           | 15      |      |   | 36      |   |   | 27      |  
|Accrued severance pay, net                                                                                   |  |                           | 25      |      |   | (199    | ) |   | (142    | )
|Deferred tax assets, net                                                                                     |  |                           | (459    | )    |   | 1,647   |   |   | -       |  
|Decrease (increase) in trade receivables,
net                                                                |  |                           | (940    | )    |   | 3,983   |   |   | 2,855   |  
|Decrease in unbilled receivables                                                                             |  |                           | 3,867   |      |   | 5,099   |   |   | 527     |  
|Increase (decrease) in balance with related
parties                                                          |  |                           | 463     |      |   | (1,326  | ) |   | (217    | )
|Decrease (increase) in other accounts receivable
and prepaid expenses                                        |  |                           | 2,084   |      |   | (327    | ) |   | 1,047   |  
|Increase in long-term trade and unbilled
receivables                                                         |  |                           | (183    | )    |   | (230    | ) |   | (669    | )
|Increase (decrease) in trade payables                                                                        |  |                           | 1,130   |      |   | (1,043  | ) |   | (1,678  | )
|Increase in deferred revenues                                                                                |  |                           | 2,326   |      |   | 1,051   |   |   | 5,584   |  
|Increase (decrease) in other accounts payable and
accrued expenses                                           |  |                           | (1,970  | )    |   | 7       |   |   | 1,792   |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Net cash provided by (used in) operating activities                                                          |  |                           | (11,185 | )    |   | (13,761 | ) |   | 4,737   |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                                        |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Investment in short-term and long-term bank
deposits                                                         |  |                           | (5,706  | )    |   | (2,801  | ) |   | (2,487  | )
|Proceeds from short-term bank deposits                                                                       |  |                           | 1,582   |      |   | 2,754   |   |   | 2,901   |  
|Investment in available-for-sale marketable
securities                                                       |  |                           | (11,610 | )    |   | (1,096  | ) |   | (19,148 | )
|Proceeds from sale of available-for-sale marketable
securities                                               |  |                           | 8,765   |      |   | 6,366   |   |   | 15,540  |  
|Purchase of property and equipment                                                                           |  |                           | (2,080  | )    |   | (925    | ) |   | (1,145  | )
|Proceeds from sale of property and
equipment                                                                 |  |                           | 163     |      |   | 67      |   |   | 293     |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Net cash provided by (used in) investing activities                                                          |  |                           | (8,886  | )    |   | 4,365   |   |   | (4,046  | )
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Cash flows from financing activities:                                                                        |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Short-term bank credit                                                                                       |  |                           | -       |      |   | 967     |   |   | (967    | )
|Proceeds from issuance of Convertible Preferred A
shares and warrants,
  net                                 |  |                           | -       |      |   | -       |   |   | 12,838  |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Net cash provided by financing activities                                                                    |  |                           | -       |      |   | 967     |   |   | 11,871  |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Increase (decrease) in cash and cash equivalents                                                             |  |                           | (20,071 | )    |   | (8,429  | ) |   | 12,562  |  
|Cash and cash equivalents at the beginning of the year                                                       |  |                           | 33,972  |      |   | 13,901  |   |   | 5,472   |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Cash and cash equivalents at the end of the year                                                             |  | $                         | 13,901  |      | $ | 5,472   |   | $ | 18,034  |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Supplemental disclosure of cash flows information:                                                           |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Cash paid during the year for:                                                                               |  |                           |         |      |   |         |   |   |         |  
|Taxes                                                                                                        |  | $                         | 1,269   |      | $ | 289     |   | $ | 171     |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Non-cash activities:                                                                                         |  |                           |         |      |   |         |   |   |         |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  
|Reclassification of receivables on account of Convertible Preferred A
  shares                               |  | $                         | -       |      | $ | -       |   | $ | 500     |  
|                                                                                                             |  |                           |         |      |   |         |   |   |         |  

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

F-7

---

---



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

|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:   | GENERAL
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | a.      | TTI Team
  Telecom International Ltd. (TTI or the Company), an Israeli corporation,
  was incorporated in 1990 and commenced its operations in September 1992.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | The Company
  designs, develops, markets and supports network management and operations
  support system software for the communications industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | The
  Companys Netrac family of products performs and manages functions critical
  to the operations of telecommunications service providers, such as fault
  management - monitoring equipment performance to detect and analyze failures,
  performance management - providing traffic analysis and quality of statistics
  service, configuration management - managing physical and logical
  connectivity within the network and security management - controlling and
  protecting access to data and applications.                                                                                                                                                                                        
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | The Company
  has wholly-owned subsidiaries in the U.S., the Netherlands, the U.K., India,
  Malta, Costa-Rica, Australia and Hong-Kong.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | As to
  principal markets and customers, see Note 14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | b.      | On April 19,
  2005, Team Software Industries Ltd., a wholly-owned subsidiary of Team
  Computers and System Ltd. (Team), a public company listed for trade on the
  Tel-Aviv Stock exchange (also refer to Note 15), 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, 2005, Team holds 3.75% of the Companys outstanding share
  capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | c.      | Termination
  of agreements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | On November
  13, 2002, the Company received a letter of termination from a major customer,
  regarding an agreement signed on January 30, 2002. The customer also
  obtained, after a court hearing, the payment of a performance bond issued by
  a bank on the Companys behalf under the agreement. On January 23, 2003, the
  bond in the amount of approximately £ 1 million, was paid to the
  customer.                                                                                                                                                                                                                                                                                                   
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | The Company
  believes that this customer terminated the agreement unlawfully, and in
  violation of the termination provisions set out in the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |         | The
  Companys management believes, in light of the facts surrounding its
  relationship with this customer, and based on consultations with and opinions
  of its legal counsel, that the Company has reasonably good prospects of
  establishing that the customer was not entitled to terminate the agreement
  and by its conduct repudiated the agreement.
  The Company cannot currently quantify the amount of damages that it
  would receive if it were to succeed in a lawsuit against the customer. The claim
  and particulars were served on the customer by the Company in December
  2005.  A defense and expected
  counterclaim are due to be served by the customer by the end of March
  2006.

F-8

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:   | GENERAL (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | The Company cannot presently
  estimate the amount of damages that could be sought by the customer in a
  potential counterclaim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | In 2002, the
  Company also signed an agreement for a similar project with an affiliate of
  the customer referred to above. Following a dispute that arose between the
  Company and such affiliate in 2002, the parties signed a settlement agreement
  at the beginning of 2004, pursuant to which the parties agreed to terminate
  the agreement, the Company repaid an amount of £ 0.1 million to the customer
  and the parties waived all claims against each other.                                                                                                                                                                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | In 2002, the
  Company recorded trade and unbilled receivables in the amount of £ 7.3
  million ($10,311), as due from these customers. Due to the letter of
  termination received from the first customer and managements concerns about
  termination by the second customer, as described above, the Company
  classified the receivables in an amount of £ 1.7 million (as of December 31,
  2005 - $2,923) as long-term trade and unbilled receivables, which
  represents the amount whose collection is probable, in managements opinion.
  The remaining balance was expensed in 2002 to doubtful accounts in the
  statement of operations.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | The
  consolidated financial statements have been prepared according to United
  States generally accepted accounting principles (U.S. GAAP), applied on a
  consistent basis, as follows:                                                                                                                                                                                                                                                                                                      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the amounts reported in the financial statements and accompanying
  notes. Actual results could differ from these estimates.                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Financial statements in United States dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | A majority
  of the revenues of the Company and its subsidiaries is generated in United
  States dollars (dollar). In addition, a substantial portion of the costs of
  the Company and its subsidiaries is incurred in dollars. The Companys
  management believes that the dollar is the primary currency of the economic
  environment in which the Company and its subsidiaries operate. Thus, the
  functional and reporting currency of the Company and its subsidiaries is the
  dollar.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Accordingly,
  monetary accounts maintained in currencies other than the dollar are
  remeasured into U.S. dollars in accordance with Statement of Financial
  Accounting Standards (SFAS) No. 52, Foreign Currency Translation. All
  transaction gains and losses of the remeasured monetary balance sheet items
  are reflected in the statement of operations as financial income or expenses,
  as appropriate.                                                                          

F-9

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Principles of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | The
  consolidated financial statements include the accounts of the Company and its
  wholly-owned subsidiaries. Intercompany transactions and balances have been
  eliminated upon consolidation.                                                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Cash and Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Cash and
  cash equivalents include short-term, highly liquid investments that are
  readily convertible to cash with maturities of three months or less at
  acquisition.                                                                                                                                                                                                                                                      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Short-term and long-term bank deposits:                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Short-term
  bank deposits are deposits with maturities of more than three months but less
  than one year. The deposits are in U.S. dollars and bear interest at an
  average rate of 2.19% and 3.18% for 2004 and 2005, respectively. The
  short-term deposits are presented at their cost, including accrued interest.                                                                                                      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Long-term
  bank deposits are deposits with maturities of more than one year, are
  included in long-term investments and presented at their cost. The deposits
  are in U.S. dollars and bear interest at an average rate of 1.14% and 3.82%
  for 2004 and 2005, respectively.                                                                                                                                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Marketable securities:                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Management
  determines the appropriate classification of its investments in corporate
  marketable debt securities at the time of purchase and reevaluates such
  determinations at each balance sheet date. At December 31, 2004 and 2005, all
  marketable securities covered by SFAS No. 115, Accounting for Certain
  Investments in Debt and Equity Securities (SFAS No. 115) were designated
  as available-for-sale.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | Accordingly,
  these securities are stated at fair value, with unrealized gains and losses
  reported in accumulated other comprehensive income (loss), a separate
  component of shareholders equity. Realized gains and losses on sales of
  investments, as determined on a specific identification basis, are included
  in the consolidated statement of operations.                                                      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | According to
  the SECs Staff Accounting Bulletin No. 59 (SAB No. 59), management is
  required to evaluate in each period whether the decline in value for a
  security is other than temporary (also please refer to impact of recently
  issued accounting standards at the end of this note).                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | The Company
  accounts for its structured notes in accordance with the provisions of FASB
  Emerging Issues Task Force (EITF) Issue No. 96-12, Recognition of Interest
  Income and Balance Sheet Classification of Structured Notes, according to
  which the Company uses the retrospective interest method to recognize
  interest income (expenses).                                                                  

F-10

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | Investment in another company:                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | The
  investment in this company is stated at cost since the Company does not have
  the ability to exercise significant influence over operating and financial
  policies of the investee.                                                                                                                                                                                                                                                                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | The
  Companys investment in the other company is reviewed for impairment whenever
  events or changes in circumstances indicate that the carrying amount of an
  investment may not be recoverable, in accordance with Accounting Principle
  Board Opinion No. 18, The Equity Method of Accounting for Investments in
  Common Stock (APB No. 18). As of December 31, 2005, based on
  managements most recent analysis, no impairment losses have been identified.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | Property and equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | Property and
  equipment are stated at cost, net of accumulated depreciation. Depreciation
  is calculated by the straight-line method over the estimated useful lives of
  the assets, at the following annual rates:                                                                                                                                                                                                                                                     

| |                                      |  |  |                                                                                                              | 
| | ------------------------------------ |  |  | ------------------------------------------------------------------------------------------------------------ | 
| |                                      |  |  | %                                                                                                            | 
| |                                      |  |  |                                                                                                              | 
| |                                      |  |  |                                                                                                              | 
| | Computers
  and peripheral equipment |  |  | 33                                                                                                           | 
| | Office
  furniture and equipment     |  |  | 6 - 20                                                                                                       | 
| | Motor
  vehicles                     |  |  | 15                                                                                                           | 
| | Leasehold
  improvements             |  |  | Over the shorter of the term of the lease
  (including renewal options-currently 10 years 
  or useful life) | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Impairment of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The
  long-lived assets of the Company and its subsidiaries are reviewed for
  impairment in accordance with SFAS No. 144, Accounting for the Impairment
  for Disposal of Long-Lived Assets whenever events or changes in
  circumstances indicate that the carrying amount of an asset may not be
  recoverable. Recoverability of assets to be held and used is measured by a
  comparison of the carrying amount of an asset to the future undiscounted cash
  flows expected to be generated by the assets. If such assets are considered
  to be impaired, the impairment to be recognized is measured by the amount by
  which the carrying amount of the assets exceeds the fair value of the assets.
  During 2004 and 2005, no impairment was recorded.                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Goodwill
  represents the excess of the costs over the fair value of net assets of
  businesses acquired. Under SFAS No. 142, Goodwill and Other Intangible Assets
  (SFAS No. 142), goodwill is not amortized. However, SFAS No. 142 requires
  goodwill to be tested for impairment on adoption and at least annually
  thereafter or between annual tests in certain circumstances, and written down
  when impaired. Goodwill is tested for impairment by comparing the fair value
  of the reporting unit with its carrying value. Fair value is determined using
  discounted cash flows, market multiples and market capitalization.
  Significant estimates used in such methodology include estimates of future
  cash flows, future short-term and long-term growth rates, weighted average
  cost of capital and estimates of market multiples.

F-11

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | During 2003,
  the sharp downturn in capital spending in the Companys major markets
  continued to negatively impact the Companys core business, resulting in
  substantially lower revenues than expected and additional operating losses.
  The Companys management believed that the above mentioned indications would
  reduce the fair value of the Company below its carrying value. As a result,
  the Company performed an interim test during the year 2003 for goodwill
  impairment and, as a result, recorded a $1,052 write-off of the remaining
  goodwill.                                                                                                                                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | 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, 2005, a full valuation allowance was provided by the Company.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | The Company
  and its subsidiaries market their products to telecommunications service
  providers both directly and through alliances with leading vendors of
  computer hardware, telecommunications equipment, test systems, and probes.
  The Companys products have been licensed to various types of
  telecommunications operators. The Companys software licenses require
  significant customization, integration, installation and development
  services. The Company also generates revenues from maintenance and customer
  support services.                                                                                                                                                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | Revenues are
  recognized based on Statement of Position No. 81-1, Accounting for
  Performance of Construction - Type and Certain Production - Type Contracts
  (SOP 81-1), using contract accounting on a percentage of completion method
  based on the relationship of actual labor days incurred to total labor days
  estimated to be incurred over the duration of the 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-12

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 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, 2004 and 2005, 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, 2004 and 2005, no such estimated losses
  were identified.                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | Service
  revenues primarily consist of fees from maintenance and customer support.
  Revenues from maintenance and support contracts are recognized ratably over
  the life of the agreement, which is typically one year, or at the time when
  services are rendered.                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | Estimated
  gross profit or loss from long-term contracts may change due to changes in
  estimates resulting from differences between actual performance and original
  forecasts. Such changes in estimated gross profit are recorded in results of
  operations when they are reasonably determinable by management, on a
  cumulative catch-up basis.                                                                                                                                                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | Deferred
  revenues include unearned amounts received under maintenance and support
  contracts and amounts received from customers but not yet recognized as
  revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 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. Significant
  costs incurred by the Company, between completion of the working model and
  the point at which the product is ready for general release, have been
  capitalized during the years 2001 and 2002. No software development costs
  were capitalized in 2003, 2004 and 2005.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | Capitalized
  software costs are amortized by the greater of the amount computed using the:
  (i) ratio that current gross revenues from sales of the software to the total
  of the current and anticipated future gross revenues from sales of that
  software, or (ii) the straight-line method over the estimated useful life of
  the product (three to five years).                                                                                                                                                                                                                                                                                                             

F-13

---

---



|                                   
|-----------------------------------
|TTI TEAM TELECOM INTERNATIONAL LTD.
|AND ITS SUBSIDIARIES               

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|           |                                        
|---------- | ---------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  and its subsidiaries assess the recoverability of capitalized software
  development costs in accordance with SFAS No. 86 at each balance sheet date
  by determining whether the amount by which the unamortized capitalized cost
  of a computer software product exceeds the net realizable value. The net
  realizable value is the estimated future gross revenues from that product
  reduced by the estimated future costs of completing and disposing of that
  product, including the cost of performing maintenance and customer support required
  to satisfy the Companys responsibility set forth at the time of sale. Based
  on most recent analyses (as of the end 2005), the entire balance of
  capitalized cost was written-off.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Royalty and non-royalty bearing grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Royalty-bearing
  grants from the Government of Israel and others for the funding of approved
  research and development projects are recognized at the time the Company is
  entitled to such grants on the basis of the related costs incurred and
  recorded as a reduction in research and development costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | During 2002,
  the Company received non-royalty-bearing grants from the European Union as
  part of participation in a consortium of companies engaged in the development
  of a platform for the management and control of IP over optical networks
  (DWDM). In addition, during 2002 and 2003, the Company also received
  non-royalty-bearing grants for its participation in the MAGNET project
  financed by the Government of Israel. Grants from the European Union and
  MAGNET projects are not required to be repaid and are recognized at the
  time the Company is entitled to such grants on the basis of the related costs
  incurred and recorded as a reduction in research and development costs.                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Concentrations of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Financial
  instruments that potentially subject the Company and its subsidiaries to
  concentrations of credit risk consist principally of cash and cash
  equivalents, short-term and long-term bank deposits, trade and unbilled
  receivables, long-term trade receivables and unbilled receivables and
  investments in marketable securities.                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  Companys and its subsidiaries cash and cash equivalents, short-term and
  long-term bank deposits are invested in U.S. dollar deposits with major
  Israeli and U.S. banks. Such deposits in the United States may be in excess
  of insured limits and are not insured in other jurisdictions. Management
  believes that the financial institutions that hold the Companys and its
  subsidiaries investments are financially sound, and accordingly, minimal credit
  risk exists with respect to these investments.                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  Companys marketable securities include investments in corporate debentures
  that are considered by management to be financially sound. Minimal credit
  risk exists with respect to these marketable securities, since management
  believes that the portfolio is well diversified and the institutions that
  issued the Companys investments are well established.                                                                                                                                                                                                                                                                                                                                                                                    

F-14

---

---



|                                   
|-----------------------------------
|TTI TEAM TELECOM INTERNATIONAL LTD.
|AND ITS SUBSIDIARIES               

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|           |                                        
|---------- | ---------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  Companys revenue is generated primarily in the United States and Europe. To
  a lesser extent, revenue is generated in Israel, South Africa and South
  America. Most customers are among the largest telecommunications companies in
  the world. Concentration of credit risk with respect to short-term and
  long-term trade and unbilled receivables is limited by ongoing credit
  evaluation and account monitoring procedures. The Company evaluates accounts
  receivables to determine if they will ultimately be collected. In performing
  this evaluation, significant judgments and estimates are involved, such as
  past experience, credit quality of the customer, age of the receivable and
  current economic conditions that may affect a customers ability to pay. An
  allowance for doubtful accounts is determined with respect to those specific
  amounts that the Company and its subsidiaries have determined to be doubtful
  of collection.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
  and its subsidiaries have no off-balance-sheet concentration of credit risk
  such as foreign exchange contracts, option contracts or other foreign hedging
  arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Basic and diluted net loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Basic net
  loss per share is computed based on the weighted average number of Ordinary
  shares outstanding during each year. Diluted net loss per share is computed
  based on the weighted average number of Ordinary shares outstanding during each
  year, plus dilutive potential of Ordinary shares considered outstanding
  during the year, in accordance with SFAS No. 128, Earnings Per Share (SFAS
  No. 128).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | All
  outstanding stock options have been excluded from the calculation of the
  diluted net loss per share since all such securities had an anti-dilutive
  effect for all years presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The total
  weighted average number of shares related to the outstanding options excluded
  from the calculations of diluted net loss per share were 0 for the years
  ended December 31, 2003, 2004 and 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Accounting for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
  has elected to follow Accounting Principles Board Statement No. 25,
  Accounting for Stock Options Issued to Employees (APB No. 25) and FASB
  Interpretation No. 44, Accounting for Certain Transactions Involving Stock
  Compensation (FIN No. 44) in accounting for its employee stock option
  plans. Under APB No. 25, when the exercise price of an employee stock option
  is equivalent to or is above the market price of the underlying stock on the
  date of grant, no compensation expense is recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
  adopted the disclosure provisions of Financial SFAS No. 148, Accounting for
  Stock-Based Compensation - Transition and Disclosure (SFAS No. 148), which
  amended certain provisions of SFAS No. 123, Accounting for Stock-Based
  Compensation and continues to apply the provisions of APB No. 25, in
  accounting for stock-based compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Pro forma
  information regarding the Companys net loss and net loss per share is
  required by SFAS No. 123 and has been determined as if the Company had
  accounted for its employee stock options under the fair value method
  prescribed by SFAS No. 123.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-15

---

---



|                                   
|-----------------------------------
|TTI TEAM TELECOM INTERNATIONAL LTD.
|AND ITS SUBSIDIARIES               

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|           |                                        
|---------- | ---------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair
  value for options granted in 2004 and 2005 (no options were granted to
  employees in 2003) is amortized over their vesting period and is estimated at
  the date of grant using a Black-Scholes options pricing model with the
  following weighted average assumptions:

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

| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  following table illustrates the effect on net loss and net loss per share,
  assuming that the Company had applied the fair value recognition provision of
  SFAS No. 123 on its stock-based employee compensation:

| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| | ----------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | - | - | ------ | -
| |                                                                               |  | Year ended
  December 31, |        
| |                                                                               |  |                           |        
| |                                                                               |  | 2003                      |         | 2004 |   | 2005    |  
| |                                                                               |  |                           |         |      |   |         |  
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| | Net loss, as reported                                                         |  | $                         | (30,080 | )    | $ | (29,494 | ) | $ | (9,059 | )
| | Add: Stock-based employee compensation
  intrinsic value                      |  | $                         | -       |      | $ | -       |   | $ | -      |  
| | Deduct: Stock-based compensation expense
  determined under fair value method |  |                           | (262    | )    |   | (88     | ) |   | (81    | )
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| | Pro forma net loss                                                            |  | $                         | (30,342 | )    | $ | (29,582 | ) | $ | (9,140 | )
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| | Basic and diluted net loss per share, as
  reported                           |  | $                         | (2.53   | )    | $ | (2.48   | ) | $ | (0.72  | )
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| |                                                                               |  |                           |         |      |   |         |   |   |        |  
| | Basic and diluted net loss per share, pro
  forma                             |  | $                         | (2.56   | )    | $ | (2.49   | ) | $ | (0.73  | )
| |                                                                               |  |                           |         |      |   |         |   |   |        |  

| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Fair value of financial instruments:                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                         
| | The
  following methods and assumptions were used by the Company and its
  subsidiaries in estimating their fair value disclosures for financial
  instruments:                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                         
| | The carrying
  amount reported in the balance sheet for cash and cash equivalents,
  short-term bank credit, short-term bank deposits, trade receivables, unbilled
  receivables, trade payables and related parties approximates their fair value
  due to the short-term maturities of such instruments.              
| |                                                                                                                                                                                                                                                                                                                         
| | The carrying
  amount of the Companys long-term bank deposits is estimated by discounting
  the future cash flows using the current interest rates for long-term bank
  deposit of similar terms and maturities. The carrying amount of the long-term
  bank deposit does not significantly differ from its fair value.
| |                                                                                                                                                                                                                                                                                                                         
| | The carrying
  amounts and the fair value of marketable securities are based on their quoted
  market prices.                                                                                                                                                                                                           

F-16

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | The
  Companys liability for severance pay is calculated pursuant to Israels
  Severance Pay Law based on the most recent salary of the employees multiplied
  by the number of years of employment, as of the balance sheet date. Employees
  are entitled to one months salary for each year of employment or a portion
  thereof. The Companys liability for all of its employees is fully provided
  by monthly deposits with insurance policies and by an accrual.                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | The
  deposited funds include profits accumulated up to the balance sheet date. The
  deposited funds may be withdrawn only upon the fulfillment of the obligation
  pursuant to Israels Severance Pay Law or labor agreements. The value of the
  deposited funds is based on the cash surrendered value of these policies, and
  includes immaterial profits.                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Severance
  pay expenses for the years ended December 31, 2003, 2004 and 2005 were
  $1,196, $1,381 and $961, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Advertising
  expenses are charged to the statements of operations as incurred. Advertising
  expenses for the years ended December 31, 2003, 2004 and 2005 were $186, $125
  and $18, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Certain
  reclassifications have been made in the prior years consolidated financial
  statements and related note disclosures to conform to the current years
  presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | Comprehensive income (loss):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | The Company
  accounts for comprehensive income in accordance with SFAS No. 130, Reporting
  Comprehensive Income. This Statement establishes standards for the reporting
  and display of comprehensive income and its components in a full set of
  general purpose financial statements. Comprehensive income generally
  represents all changes in shareholders equity during the period except those
  resulting from investments by, or distributions to, shareholders. The Company
  determined that their only item of comprehensive income relates to unrealized
  losses on available-for-sale marketable securities.

F-17

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | Impact of recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | On December
  16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
  Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
  of FASB Statement No. 123, Accounting for Stock-Based Compensation.
  Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
  to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
  Generally, the approach in Statement 123(R) is similar to the approach
  described in Statement 123. However, Statement 123(R) requires all
  share-based payments to employees, including grants of employee stock
  options, to be recognized in the statement of operations based on their fair
  values. Pro forma disclosure is no longer an alternative. Early adoption will
  be permitted in periods in which financial statements have not yet been
  issued. The Company will adopt Statement 123(R) effective January 1, 2006.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | Statement
  123(R) permits public companies to adopt its requirements using one of two
  methods:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | A modified
  prospective method in which compensation cost is recognized beginning with
  the effective date (a) based on the requirements of Statement 123(R) for all
  share-based payments granted after the effective date and (b) based on the
  requirements of Statement 123 for all awards granted to employees prior to
  the effective date of Statement 123(R) that remain unvested on the effective
  date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | A modified
  retrospective method which includes the requirements of the modified
  prospective method described above, but also permits entities to restate
  based on the amounts previously recognized under Statement 123 for purposes
  of pro forma disclosures either (a) all prior periods presented or (b) prior
  interim periods of the year of adoption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | The Company
  plans to adopt Statement 123(R) using the modified Prospective method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | As permitted
  by Statement 123, the Company currently accounts for share-based payments to
  employees using Opinion 25s intrinsic value method and, as such, generally
  recognizes no compensation cost for employee stock options. The impact of
  adoption of Statement 123(R) cannot be predicted at this time because it will
  depend on levels of share-based payments granted in the future. However, had
  the Company adopted Statement 123(R) in prior periods, the impact of that                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | Standard
  would have approximated the impact of Statement 123 as described in the
  disclosure of pro forma net loss and net loss per share above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | In March
  2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share Based
  Payment (SAB 107). SAB 107 provides the SECs staff position regarding the
  application of Statement 123(R) and contains interpretive guidance relating
  to the interaction between Statement 123(R) and certain SEC rules and
  regulations, and also provides the SEC staffs view regarding the valuation
  of share-based payment arrangements for public companies. SAB 107 highlights
  the importance of disclosures made relating to the accounting for share-based
  payment transactions. The Company is currently reviewing the effect of SAB
  107; however it does not believe that SAB 107 will have a material effect on
  its financial position, results of operations or cash flows.                                                                                                                                                

F-18

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:   | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | In November
  2005, the FASB issued FSP FAS 115-1. The FSP addresses the determination as
  to when an investment is considered impaired, whether that impairment is
  other than temporary, and the measurement of an impairment loss. The FSP also
  includes accounting considerations subsequent to the recognition of other
  than temporary impairment and requires certain disclosures about unrealized
  losses that have not been recognized as other than temporary impairments. The
  guidance in this FSP amends FASB Statements No. 115, Accounting for Certain
  Investments in Debt and Equity. The FSP replaces the impairment evaluation
  guidance of EITF Issue No. 03-1, The Meaning of Other Than Temporary
  Impairment and Its Application to Certain Investments, with references to
  the existing other than temporary impairment guidance. The FSP clarifies that
  an investor should recognize an impairment loss no later than when the
  impairment is deemed other than temporary, even if a decision to sell an
  impaired security has not been made. The guidance in this FSP is to be
  applied to reporting periods beginning after December 15, 2005. The Company
  expects that the adoption of the FSP will not have a material effect on its
  financial position or results of operations since the Company regularly
  reviews investments accounted for according to FAS 115 under the provisions
  of SAB 59, and records impairments as deemed necessary.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|NOTE 3:   | MARKETABLE SECURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | The
  following is a summary of available-for-sale marketable securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                               |  |                  |        |                            |  |                             |  |                                   |      |                  |  |                            |  |                             |        |                           |  |                                   |  |  |     |  |  |     |  |  |        | 
| | --------------------------------------------- |  | ---------------- | ------ | -------------------------- |  | --------------------------- |  | --------------------------------- | ---- | ---------------- |  | -------------------------- |  | --------------------------- | ------ | ------------------------- |  | --------------------------------- |  |  | --- |  |  | --- |  |  | ------ | 
| |                                               |  | December 31,     |       
| |                                               |  |                  |       
| |                                               |  | 2004             |        | 2005                       | 
| |                                               |  |                  |        |                            | 
| |                                               |  | Amortized
  cost |        | Gross
  unrealized
  gains |  | Gross
  unrealized
  losses |  | Estimated
  fair
  market
  value |      | Amortized
  cost |  | Gross
  unrealized
  gains |  | Gross
  unrealized
  losses |        | Gross
  realized
  losses |  | Estimated
  fair
  market
  value | 
| |                                               |  |                  |        |                            |  |                             |  |                                   |      |                  |  |                            |  |                             |        |                           |  |                                   |  |  |     |  |  |     |  |  |        | 
| | Available-for-sale: Corporate   debentures *) |  |                  | 12,852 |                            |  | 85                          |  |                                   | (311 | )                |  | 12,626                     |  |                             | 16,350 |                           |  | -                                 |  |  | 336 |  |  | 301 |  |  | 15,713 | 
| |                                               |  |                  |        |                            |  |                             |  |                                   |      |                  |  |                            |  |                             |        |                           |  |                                   |  |  |     |  |  |     |  |  |        | 

| |                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *)                                                                                                                                                                                                                                                                                    | Included in
  the Companys portfolio investments are structured notes with an estimated
  fair value of approximately $3,505 as of December 31, 2005. Such investments
  are used by management to enhance yields, diversify the portfolio
  investments, and manage the Companys exposure to interest rate fluctuations.
  The notes were acquired from several banks and were categorized as
  available-for-sale. The notes bear interest based upon the rate of the LIBOR.
  For each day on which the six months dollar Libor is below an agreed annual
  fixed rate, the investment bears coupon interest at the rate of 8%, 7% and
  5%-12% per annum. On all other days, the investments do not bear any interest
  at all.
| |                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The net
  adjustment to unrealized holding losses on available-for-sale marketable
  securities included as a separate component of shareholders equity,
  accumulated other comprehensive income (loss) amounted to $ 399, $ 12
  and $ 110 in 2003, 2004 and 2005, respectively.

F-19

---

---



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

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3:   | MARKETABLE SECURITIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | According to
  Staff Accounting Bulletin No. 59 (SAB No. 59) and EITF 03-1, The Meaning
  of Other-Than-Temporary Impairment and Its Application to Certain
  Investments, for any marketable securities whose value declined during the
  period, management is required to evaluate whether the decline is other than
  temporary. Under SAB No. 59, fair value below cost for two consecutive
  quarters is considered to be other than a temporary impairment. In 2005, a
  decline in value that was considered other than temporary of two of the
  Companys available-for-sale securities resulted in reversing the accumulated
  unrealized loss of $ 301 relating to these investments. The amount was
  classified as financial expenses in the consolidated statements of
  operations.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           | Aggregate
  maturities of available-for-sale securities for years subsequent to December
  31, 2005 are:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |      |  |                  |        |                                 |   |        | 
| | ---- |  | ---------------- | ------ | ------------------------------- | - | ------ | 
| |      |  | Amortized
  cost |        | Estimated
  fair market
  value |  
| |      |  |                  |        |                                 |  
| |      |  |                  |        |                                 |   |        | 
| | 2006 |  | $                | 3,800  |                                 | $ | 3,769  | 
| | 2015 |  |                  | 4,710  |                                 |   | 4,431  | 
| | 2018 |  |                  | 2,890  |                                 |   | 2,611  | 
| | 2032 |  |                  | 1,600  |                                 |   | 1,602  | 
| | 2033 |  |                  | 1,150  |                                 |   | 1,100  | 
| | 2034 |  |                  | 1,000  |                                 |   | 1,000  | 
| | 2043 |  |                  | 1,200  |                                 |   | 1,200  | 
| |      |  |                  |        |                                 |   |        | 
| |      |  |                  |        |                                 |   |        | 
| |      |  | $                | 16,350 |                                 | $ | 15,713 | 
| |      |  |                  |        |                                 |   |        | 

|           |                                               
|---------- | ----------------------------------------------
|NOTE 4:   | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

| |                                 |  |                |       |      |   |       | 
| | ------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
| |                                 |  | December
  31, |      
| |                                 |  |                |      
| |                                 |  | 2004           |       | 2005 |  
| |                                 |  |                |       |      |  
| |                                 |  |                |       |      |   |       | 
| | Prepaid expenses                |  | $              | 1,688 |      | $ | 1,461 | 
| | Office of
  the Chief Scientist |  |                | 442   |      |   | -     | 
| | Loans to
  employees            |  |                | 426   |      |   | 269   | 
| | Others                          |  |                | 709   |      |   | 826   | 
| |                                 |  |                |       |      |   |       | 
| |                                 |  |                |       |      |   |       | 
| |                                 |  | $              | 3,265 |      | $ | 2,556 | 
| |                                 |  |                |       |      |   |       | 

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

| |                                                                                              |  |   |       |  |   |       | 
| | -------------------------------------------------------------------------------------------- |  | - | ----- |  | - | ----- | 
| | Long-term unbilled and trade receivables
  related to termination of agreement  See note 1c |  | $ | 3,268 |  | $ | 2,923 | 
| | Other long-term trade receivable *)                                                          |  |   | -     |  |   | 1,014 | 
| |                                                                                              |  |   |       |  |   |       | 
| |                                                                                              |  |   |       |  |   |       | 
| |                                                                                              |  | $ | 3,268 |  | $ | 3,937 | 
| |                                                                                              |  |   |       |  |   |       | 
| |                                                                                              |  |   |       |  |   |       | 
| | *) Another
  long-term trade receivable matures in 2008.                                     |  |   |       |  |   |       | 

F-20

---

---



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

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

| |                                    |  |                |        |      |   |        | 
| | ---------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
| |                                    |  | December
  31, |       
| |                                    |  |                |       
| |                                    |  | 2004           |        | 2005 |  
| |                                    |  |                |        |      |  
| | Cost:                              |  |                |        |      |   |        | 
| | Computers and peripheral equipment |  | $              | 12,873 |      | $ | 13,394 | 
| | Office furniture and equipment     |  |                | 1,208  |      |   | 1,181  | 
| | Motor vehicles                     |  |                | 4,982  |      |   | 4,232  | 
| | Leasehold improvements             |  |                | 3,522  |      |   | 3,453  | 
| |                                    |  |                |        |      |   |        | 
| |                                    |  |                |        |      |   |        | 
| |                                    |  |                | 22,585 |      |   | 22,260 | 
| |                                    |  |                |        |      |   |        | 
| | Accumulated
  depreciation:        |  |                |        |      |   |        | 
| | Computers and peripheral equipment |  |                | 11,039 |      |   | 12,034 | 
| | Office furniture and equipment     |  |                | 744    |      |   | 818    | 
| | Motor vehicles                     |  |                | 3,087  |      |   | 2,566  | 
| | Leasehold improvements             |  |                | 1,841  |      |   | 2,113  | 
| |                                    |  |                |        |      |   |        | 
| |                                    |  |                |        |      |   |        | 
| |                                    |  |                | 16,711 |      |   | 17,531 | 
| |                                    |  |                |        |      |   |        | 
| |                                    |  |                |        |      |   |        | 
| | Depreciated
  cost                 |  | $              | 5,874  |      | $ | 4,729  | 
| |                                    |  |                |        |      |   |        | 

|           |                                                                                                                                 |             
|---------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------
|           | Depreciation
  expenses for the years ended December 31, 2003, 2004 and 2005 were $ 3,299,
  $ 2,827 and $ 2,154, respectively.
|           |                                                                                                                                
|NOTE 7:   | INTANGIBLE ASSETS, NET                                                                                                         
|           |                                                                                                                                
|           | a.                                                                                                                              | Composition:

| |                                                    |  |                |        |      |   |        | 
| | -------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
| |                                                    |  | December
  31, |       
| |                                                    |  |                |       
| |                                                    |  | 2004           |        | 2005 |  
| |                                                    |  |                |        |      |  
| | Original
  amounts:                                |  |                |        |      |   |        | 
| | Capitalized software development costs             |  | $              | 11,242 |      | $ | 11,242 | 
| | Acquired technology                                |  |                | 4,119  |      |   | 4,119  | 
| |                                                    |  |                |        |      |   |        | 
| |                                                    |  |                |        |      |   |        | 
| |                                                    |  |                | 15,361 |      |   | 15,361 | 
| |                                                    |  |                |        |      |   |        | 
| | Accumulated
  amortization and impairment:         |  |                |        |      |   |        | 
| | Capitalized software development costs *)          |  |                | 10,961 |      |   | 11,242 | 
| | Acquired technology                                |  |                | 4,119  |      |   | 4,119  | 
| |                                                    |  |                |        |      |   |        | 
| |                                                    |  |                |        |      |   |        | 
| |                                                    |  |                | 15,080 |      |   | 15,361 | 
| |                                                    |  |                |        |      |   |        | 
| |                                                    |  |                |        |      |   |        | 
| | Amortized
  cost                                   |  | $              | 281    |      | $ | -      | 
| |                                                    |  |                |        |      |   |        | 
| |                                                    |  |                |        |      |   |        | 
| | *) Including
  an impairment charge (See b below). |  |                |        |      |   |        | 

F-21

---

---



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

|           |                              
|---------- | -----------------------------
|NOTE 7:   | INTANGIBLE ASSETS, NET(Cont.)

|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | During 2001,
  in the context of the acquisition of Axarte Limited the Company purchased
  technology. In addition, the Company capitalized software development costs.
  The technology purchased and the capitalized software development costs
  amounted to $ 13,361 (the Netrac2 Technology).                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The Netrac2
  Technology has been amortized since January 1, 2002, using the straight-line
  method over the estimated economic life of the technology, which is six
  years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | During the
  first quarter of 2002, the Company developed a new technology (ServiceView
  Technology) in respect of which the Company capitalized software development
  costs in the amount of $ 2,000. On October 1, 2002, the Company began to
  amortize the ServiceView Technology using the straight-line method over the
  estimated economic life of the technology, which was three years. No
  software development costs were capitalized in 2003 and 2004.                                                                                                                                                                                                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The
  evaluation of the net realizable value of the abovementioned capitalized
  software development costs that was preformed by management during the years
  ended December 31, 2003, 2004 and 2005, indicated that the net realizable
  values of the Netrac2 Technology and the ServiceView Technology exceed the
  unamortized capitalized costs. The evaluation was based on the estimated
  future gross revenues from such technologies reduced by the estimated future
  costs for completing and disposing each of them. In 2003, 2004 and 2005, the
  amounts of $ 5,864, $ 3,597 and $ 177, respectively, have been recorded as an
  impairment of capitalized software costs included in the cost of revenues.
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Amortization expenses for the years ended
  December 31, 2003, 2004 and 2005 amounted to $ 3,783, $ 703 and $ 104,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE 8:   | SHORT-TERM BANK CREDIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           | As of December 31, 2004, the Company
  utilized all of the short-term bank credit line in the amount of $ 232, and
  in addition the Company utilized an amount of $ 735 of short-term bank credit
  in excess of its short-term bank credit line. The weighted average interest
  rate of the short-term bank credit line and of the borrowing in excess of the
  credit line for the year ended December 31, 2004 was approximately 8.2% and
  11.7%, respectively. The short-term bank credit line and the borrowing in
  excess of the credit line were fully repaid at the beginning of the year
  2005.

F-22

---

---



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

|           |                                            
|---------- | -------------------------------------------
|NOTE 9:   | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

| |                                  |  |              |       |      |   |       | 
| | -------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                  |  | December 31, |      
| |                                  |  |              |      
| |                                  |  | 2004         |       | 2005 |  
| |                                  |  |              |       |      |  
| |                                  |  |              |       |      |   |       | 
| | Employees
  and payroll accruals |  | $            | 3,327 |      | $ | 3,724 | 
| | Accrued
  expenses               |  |              | 962   |      |   | 1,364 | 
| | Government
  authorities         |  |              | 1,192 |      |   | 2,180 | 
| | Others                           |  |              | 690   |      |   | 195   | 
| |                                  |  |              |       |      |   |       | 
| |                                  |  |              |       |      |   |       | 
| |                                  |  | $            | 6,171 |      | $ | 7,463 | 
| |                                  |  |              |       |      |   |       | 

|           |                                       
|---------- | --------------------------------------
|NOTE 10:  | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Lease
  commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In April
  1998, the Company entered into an agreement with Team according to which the
  Company will lease its facilities in Israel from Team for a period of five
  years, effective February 1, 1998. In 2003, the Company exercised its
  renewal option for an additional four and a half years up until August 2007.
  The Company and its subsidiaries rent their facilities and motor vehicles
  under various operating lease agreements, which expire on various dates, the
  latest of which is in 2008.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Aggregate
  minimum rental commitments under non-cancelable leases at December 31, 2005
  are as follows:                                                                                                                                                                                                                                                                                                                                                                                                           

| |                         |  |            |       |                  |   |       |  |   |       | 
| | ----------------------- |  | ---------- | ----- | ---------------- | - | ----- |  | - | ----- | 
| | Year ended December 31, |  | Facilities |       | Motor
  vehicles |   | Total | 
| |                         |  |            |       |                  |   |       | 
| |                         |  |            |       |                  |   |       |  |   |       | 
| | 2006                    |  | $          | 1,319 |                  | $ | 61    |  | $ | 1,380 | 
| | 2007                    |  |            | 722   |                  |   | 31    |  |   | 753   | 
| | 2008                    |  |            | 173   |                  |   | 16    |  |   | 189   | 
| |                         |  |            |       |                  |   |       |  |   |       | 
| |                         |  |            |       |                  |   |       |  |   |       | 
| |                         |  | $          | 2,214 |                  | $ | 108   |  | $ | 2,322 | 
| |                         |  |            |       |                  |   |       |  |   |       | 

| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Facility
  lease expenses for the years ended December 31, 2003, 2004 and 2005 were
  $ 1,689, $ 1,702 and $ 1,657, respectively.             
| |                                                                                                                                               
| | Motor
  vehicle lease expenses for the years ended December 31, 2003, 2004 and 2005
  were approximately $ 435, $ 211 and $ 122, respectively.

F-23

---

---



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

|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- | -------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10:  | COMMITMENTS AND CONTINGENT LIABILITIES
|           |                                       
|           | b.                                     | Royalty
  commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                        | Under the
  Companys research and development agreements with the Office of the Chief
  Scientist (OCS) and the Binational Industrial Research and Development
  Foundation (BIRD-F), and pursuant to applicable laws, the Company is
  required to pay royalties at the rate of 3%-5% of sales of products developed
  with funds provided by the OCS and BIRD-F, up to an amount equal to 100%-150%
  of the research and development grants (dollar-linked) received from the OCS
  and BIRD-F. The obligation to pay these royalties is contingent on actual
  sales of the products and, in the absence of such sales, no payment is
  required. Royalties payable with respect to grants received under programs
  approved by the OCS after January 1, 1999, are subject to interest on the
  U.S. dollar-linked value of the total grants received at the annual rate of
  LIBOR applicable to U.S. dollar deposits. Royalties payable with respect to
  grants received from BIRD-F are linked to the Consumer Price Index in the
  United States.
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                        | The Company
  has paid or accrued royalties relating to the repayment of such grants in the
  amount of $ 223, $ 10 and $ 305 for the years ended December 31, 2003, 2004 and
  2005, respectively. The amounts were recorded in the cost of revenues. As of
  December 31, 2005, the Company has an outstanding contingent obligation to
  pay royalties in the amount of approximately $ 2,691 in respect of these
  grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | c.                                     | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                        | The Company
  has obtained performance guarantees in favor of certain customers from
  several banks in Israel and in the U.S. amounting to $ 2,896 and $ 2,354 for
  the years ended December 31, 2004 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | d.                                     | Litigation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                        | Securities
  class action:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                        | A
  shareholders class action lawsuit was filed in September 2004 against the
  Company, Team Software Industries Ltd. and certain of the Companys executive
  officers. The lawsuit purports to be a class action filed on behalf of
  persons who held the Companys shares during the period between February 6,
  2002 and November 14, 2002. The complaint alleges that material misrepresentations
  and omissions concerning the Companys operations and performance
  artificially inflated the Companys stock price, causing damages to
  investors. Based on the Companys initial review of the recently-filed
  amended complaint, the Company believes that the claims are without merit and
  intends to vigorously defend itself against the actions. However, this class
  action is at an early stage, and the Companys management cannot predict the
  outcome of this dispute.                                                                                                                                                          
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | e.                                     | Termination
  of agreement, See Note 1c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-24

---

---



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

|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                           
|---------- | ------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:  | INCOME TAXES
|           |             
|           | a.           | Measurement
  of results for tax purposes under the Income Tax (Inflationary Adjustments
  Law), 1985.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |              | Results for
  tax purposes in Israel are measured in terms of earnings in NIS after certain
  adjustments for changes in Israels Consumer Price Index (CPI). As
  explained in Note 2, the financial statements are presented in U.S. dollars.
  The difference between the annual change in the CPI and in the NIS\dollar
  exchange rate causes a difference between taxable income and the income
  before taxes shown in the financial statements.                                                                                 
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |              | In
  accordance with paragraph 9(f) of SFAS No. 109, the Company has not recorded
  deferred taxes on the difference between the reporting currency and the tax
  bases of assets and liabilities.                                                                                                                                                                                                                                                                                                                                        
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           | b.           | Corporate
  tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |              | Taxable
  income of Israeli companies is subject to tax at the rate of 34% in 2005, 31%
  in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
  thereafter.                                                                                                                                                                                                                                                                                                                                                                
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           | c.           | Tax benefits
  under the Law for the Encouragement of Capital Investments, 1959 (the law):                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |              | Most of the
  Companys production facilities 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 a 10-year period of benefits. Income
  derived from the Companys investment programs, is tax-exempt for the first
  two to four years and is entitled to a reduced tax rate of 10% to 25%, during
  the remaining benefit period of six to eight years (subject to the percentage
  of foreign ownership in each tax year).
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |              | The primary tax benefits available in respect of the approved
  enterprises are:                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |              | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | As of December 31, 2005, the benefits from the first program have
  expired.                                                                                                              
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                           
|           |              | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Income derived from the Companys second approved enterprise was tax
  exempt for four years (1996-1999) after which it is taxable at the rate of
  20%-25% for six years ended in 2005.  
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                           
|           |              | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Income derived from the Companys third approved enterprise was tax
  exempt for two years (1998-1999) after which it is taxable at the rate of
  20%-25% for eight years ending in 2007. 
|           |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                           
|           |              | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Income derived from the Companys fourth approved enterprise was tax
  exempt for two years (2000-2001) after which it is taxable at the rate of
  20%-25% for eight years ending in 2009.

F-25

---

---



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

|           |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                           
|---------- | -------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:  | INCOME TAXES (Cont.)
|           |                     
|           |                      | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Income derived from the Companys fifth approved enterprise is tax
  exempt for two years (which has not commenced yet) after which it is taxable
  at the rate of 20%-25% for eight years ending 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, 2005, management believes that the Company is meeting
  all of the aforementioned conditions.                                                                                                            
|           |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                      | Income from
  sources other than the approved enterprise will be subject to the statutory
  Israeli corporate tax rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                      | On April 1,
  2005, an amendment to the Investment Law came into effect (the Amendment)
  and has significantly changed the provisions of the Investment Law. The
  Amendment limits the scope of enterprises which may be approved by the law by setting criteria for the approval of a
  facility as a beneficiary enterprise, such as provisions generally requiring
  that at least 25% of the beneficiary enterprises income will be derived from
  export. Additionally, the Amendment enacted major changes in the manner in
  which tax benefits are awarded under the Investment Law so that companies no
  longer require Investment Center approval in order to qualify for tax
  benefits.
|           |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                      | However, the Investment Law provides that terms and benefits included
  in any certificate of approval already granted will remain subject to the
  provisions of the law as they were on the date of such approval. Therefore
  the Companys existing approved enterprise will generally not be subject to
  the provisions of the Amendment. As a result of the Amendment, tax-exempt
  income generated under the provisions of the new law, will subject the
  Company to taxes upon distribution or liquidation and the Company may be
  required to record deferred tax liability with respect to such tax-exempt
  income.                                                                     
|           |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | d.                   | Tax benefits
  under the Law for the Encouragement of Industry (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                      | The Company
  is an industrial company under the above law and, as such, is entitled to
  certain tax benefits including accelerated depreciation rates and deduction
  of public offering expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-26

---

---



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

|           |                      |                                                                                                                                                                                                                                                                                                                      
|---------- | -------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:  | 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, |        
| |                                                        |  |                |        
| |                                                        |  | 2004           |         | 2005 |  
| |                                                        |  |                |         |      |  
| |                                                        |  |                |         |      |   |         |  
| | Reserves
  and allowances                              |  | $              | 542     |      | $ | 475     |  
| | Net
  operating loss carryforward - foreign            |  |                | 8,651   |      |   | 8,565   |  
| | Net
  operating loss carryforward - domestic           |  |                | 9,941   |      |   | 10,800  |  
| |                                                        |  |                |         |      |   |         |  
| |                                                        |  |                |         |      |   |         |  
| | Total
  deferred tax assets before valuation allowance |  |                | 19,134  |      |   | 19,840  |  
| | Valuation
  allowance                                  |  |                | (19,134 | )    |   | (19,840 | )
| |                                                        |  |                |         |      |   |         |  
| |                                                        |  |                |         |      |   |         |  
| | Deferred
  tax asset                                   |  | $              | -       |      | $ | -       |  
| |                                                        |  |                |         |      |   |         |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A valuation
  allowance for the entire balance was recorded due to the uncertainty of the
  future realization of the tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | As of
  December 31, 2003, the Companys management believed that it was more likely
  than not that the remaining net deferred tax assets of $1,647 related to the
  Companys carryforward tax losses would be realized, principally based upon
  the Companys earning history and forecasted income. In 2004, several
  developments were considered in determining the need for an increase in the
  valuation allowance, including a continuing market decline, increasing
  uncertainty and a decrease of visibility in the market as a whole, a
  significant decrease in sequential quarterly revenue levels and the failure
  to achieve managements forecasted results for 2004. As a result of
  managements assessment, the Company increased the valuation allowance on the
  deferred tax asset and recorded a valuation allowance on the entire amount.

F-27

---

---



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

|           |                     
|---------- | --------------------
|NOTE 11:  | 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, |        
| |                                                                                  |  |                         |        
| |                                                                                  |  | 2003                    |         | 2004 |   | 2005    |  
| |                                                                                  |  |                         |         |      |   |         |  
| |                                                                                  |  |                         |         |      |   |         |   |   |        |  
| | Loss before taxes, as
  reported in the consolidated statements of operations    |  | $                       | (30,536 | )    | $ | (27,387 | ) | $ | (6,454 | )
| |                                                                                  |  |                         |         |      |   |         |   |   |        |  
| |                                                                                  |  |                         |        
| | Statutory tax rate                                                               |  |                         | 36      | %    |   | 35      | % |   | 34     | %
| |                                                                                  |  |                         |         |      |   |         |   |   |        |  
| |                                                                                  |  |                         |        
| | Theoretical tax benefit on
  the above amount at the Israeli statutory tax rate: |  | $                       | (10,993 | )    | $ | (9,585  | ) | $ | (2,194 | )
| | Tax adjustment in respect
  of foreign subsidiaries different tax rates          |  |                         | 1,150   |      |   | 489     |   |   | 123    |  
| | Valuation allowance                                                              |  |                         | -       |      |   | 1,647   |   |   | -      |  
| | Deferred taxes on losses
  for which a valuation allowance was provided          |  |                         | 10,089  |      |   | 8,090   |   |   | 1,855  |  
| | Taxes in respect of prior
  years                                                |  |                         | (141    | )    |   | 460     |   |   | 624    |  
| | Other                                                                            |  |                         | (561    | )    |   | 1,006   |   |   | 216    |  
| |                                                                                  |  |                         |         |      |   |         |   |   |        |  
| |                                                                                  |  |                         |         |      |   |         |   |   |        |  
| | Income taxes (tax benefit),
  as reported in the statements of operations        |  | $                       | (456    | )    | $ | 2,107   |   | $ | 624    |  
| |                                                                                  |  |                         |         |      |   |         |   |   |        |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|g. | In January
  2006, the Company was notified by the Israeli Tax authorities of a tax
  assessment in the amount of approximately $ 3,800 relating to its tax liabilities
  for the years ended December 31, 2000, 2001 and 2002. The Company is
  currently negotiating a settlement agreement with the Israeli Tax authorities
  as well as, in parallel, preparing an appeal to the assessment. The Company,
  based on its legal counsel opinion, has recorded an accrual of approximately
  $ 1,590 in respect with such assessment.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company
  has assessed that a tax exposure contingency may exist with regard to
  relocation expenses of certain of its subsidiaries employees and former
  employees. The Companys management can not reasonably estimate the relating
  amount of the loss, if any, for the tax contingency. Accordingly, and based
  on its legal counsel opinion, the Company has not recorded an accrual for the
  said tax contingency.                                                                                                    

F-28

---

---



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

|           |                     
|---------- | --------------------
|NOTE 11:  | INCOME TAXES (Cont.)

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

| |                                 |  |                         |      |      |   |       |  |   |      |  
| | ------------------------------- |  | ----------------------- | ---- | ---- | - | ----- |  | - | ---- | -
| |                                 |  | Year ended December 31, |     
| |                                 |  |                         |     
| |                                 |  | 2003                    |      | 2004 |   | 2005  | 
| |                                 |  |                         |      |      |   |       | 
| |                                 |  |                         |      |      |   |       | 
| | Current taxes                   |  | $                       | 42   |      | $ | -     |  | $ | -    |  
| | Taxes in respect of prior years |  |                         | (141 | )    |   | 460   |  |   | 624  |  
| | Deferred income taxes (benefit) |  |                         | (357 | )    |   | 1,647 |  |   | -    |  
| |                                 |  |                         |      |      |   |       |  |   |      |  
| |                                 |  |                         |      |      |   |       | 
| |                                 |  | $                       | (456 | )    | $ | 2,107 |  | $ | 624  |  
| |                                 |  |                         |      |      |   |       |  |   |      |  
| |                                 |  |                         |      |      |   |       | 
| | Domestic                        |  | $                       | (720 | )    | $ | 2,107 |  | $ | 754  |  
| | Foreign                         |  |                         | 264  |      |   | -     |  |   | (130 | )
| |                                 |  |                         |      |      |   |       |  |   |      |  
| |                                 |  |                         |      |      |   |       | 
| |                                 |  | $                       | (456 | )    | $ | 2,107 |  | $ | 624  |  
| |                                 |  |                         |      |      |   |       |  |   |      |  

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

| |          |  |                         |         |      |   |         |   |   |        |  
| | -------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------ | -
| |          |  | Year ended December 31, |        
| |          |  |                         |        
| |          |  | 2003                    |         | 2004 |   | 2005    |  
| |          |  |                         |         |      |   |         |  
| |          |  |                         |         |      |   |         |  
| | Domestic |  | $                       | (11,371 | )    | $ | (17,605 | ) | $ | (5,455 | )
| | Foreign  |  |                         | (19,165 | )    |   | (9,782  | ) |   | (999   | )
| |          |  |                         |         |      |   |         |   |   |        |  
| |          |  |                         |         |      |   |         |  
| |          |  | $                       | (30,536 | )    | $ | (27,387 | ) | $ | (6,454 | )
| |          |  |                         |         |      |   |         |   |   |        |  

|           |                     
|---------- | --------------------
|NOTE 12:  | SHAREHOLDERS EQUITY

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | The
  Companys Ordinary shares have been listed for trade on the NASDAQ National
  Market since TTIs initial public offering (IPO) on December 4, 1996, under
  the symbol TTIL.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In 1999 and
  2000, the Company effected two additional secondary offerings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Ordinary
  shares confer upon their holders the right to receive notice to participate
  and vote in the Companys general meeting and the right to receive dividends,
  if declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | On November
  29, 2004, the Company entered into definitive agreements (the Agreements)
  to obtain $ 14,600 in equity financing, through the sale of 6,636,391 of
  Series A Convertible Preferred shares in a private placement to institutional
  investors (the Preferred shares). The Preferred shares are convertible into
  6,636,391 Ordinary shares. In addition, holders of the Preferred shares were
  granted one warrant to purchase 0.4 Ordinary shares at an exercise price of
  $ 2.50 per share for each Preferred share owned at any time until January 2011
  (the Warrants). The closing of the investment took place on January 3,
  2005.

F-29

---

---



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

|           |                             
|---------- | ----------------------------
|NOTE 12:  | SHAREHOLDERS EQUITY (Cont.)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------
| | The rights
  of the holders of the Preferred shares include, among other things, the
  following rights that are subject to certain limitations as described in the
  TTIs articles:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Weighted-average
  anti-dilution protection;                           
| | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Preference
  in the event of liquidation of the Company;               
| | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Veto rights
  over certain material actions by the Company;            
| | 4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The right to
  nominate one member of the Companys Board of Directors.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                        
| | As part of
  the Agreement, the placement agent of the investment was granted with
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In the event
  that the closing bid price of the Companys Ordinary shares (as defined in
  the warrant certificate) equals or exceeds two times the exercise price then
  in effect for twenty consecutive trading days (as defined in the warrant
  certificate) (the Trading Period) and the average trading volume of the
  Ordinary shares is at least 100,000 shares during the Trading Period, the
  Company, upon thirty days prior written notice (the Notice Period) given to
  the warrant holder within one business day immediately following the end of
  such Trading Period, may call the Warrants, at a redemption price equal to
  $ 0.01 per Ordinary share then purchasable. Notwithstanding any such notice by
  the Company, the warrant holder shall have the right to exercise the Warrants
  prior to the end of the Notice Period.                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In
  connection with the issuance of the Preferred shares and the Warrants, the
  Company has applied EITF 00-27, Application of Issue No. 98-5 to Certain
  Convertible Instruments, (EITF 00-27) which resulted in the recognition of
  $ 1,981 related to the beneficial conversion feature on the Preferred shares.
  The Company accounted for the beneficial conversion feature as a deemed
  dividend to the preferred shareholders of $ 1,981 and a credit to additional
  paid-in capital.                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | According to
  the Agreements, the
  investors have the right to receive payment for liquidated damages if a
  registration statement on Form F-3 is not declared effective within 90 days
  (or 120 days in the event the U.S. Securities and Exchange Commission conducts a review) following the closing of
  the private placement transaction. The Company obtained effectiveness of the
  registration statement on May 24, 2005. Therefore, since May 4, 2005, the
  Company has been accruing liquidated damages at a rate equal to 2% of each
  investors investment in the Company for each 30 day period, or pro rata for
  any portion thereof, during the period for which the registration statement
  was not declared effective. The Company paid liquidated damages at a total
  amount of $ 194, which was recorded in the second quarter of 2005 as general
  and administrative expenses.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | During the reported period, 2,000,000 Preferred shares were converted
  into the same number of the Companys Ordinary shares. Subsequent to balance
  sheet date, 2,181,181 Preferred shares were converted into the same number of
  the Companys Ordinary shares and 263,636 Warrants had been exercised into
  263,636 Ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-30

---

---



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

|           |                             
|---------- | ----------------------------
|NOTE 12:  | SHAREHOLDERS EQUITY (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Share
  options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Employee
  Share Option Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | During 1995, 1996, 1999, 2000 and 2001, the Board of Directors of the
  Company adopted share option plans (as amended the Old Plans) pursuant to
  which 2,325,515 Ordinary shares were reserved for issuance upon the exercise
  of options to be granted to certain directors and key employees of the
  Company and its subsidiaries. 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 Plans 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 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, 2005, an aggregate of 725,000 options of the
  Company are still available for future grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Each option
  granted under the Plans to employees expires no later than five years from
  the date of the grant. Any options which are canceled or forfeited before
  expiration become available for future grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | A summary of
  the stock option activities in 2003, 2004 and 2005 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     |  |  |          |   |   |       | 
| | ---------------------------------------- |  | ----------------------- | ------- | ----------------------------------- | - | ------------------- |  | ----------------------------------- | -------- | ------------------- | - | ----------------------------------- |  |  | -------- | - | - | ----- | 
| |                                          |  | Year ended December 31, |        
| |                                          |  |                         |        
| |                                          |  | 2003                    |         | 2004                                |   | 2005                | 
| |                                          |  |                         |         |                                     |   |                     | 
| |                                          |  | Amount of
  options     |         | Weighted average
  exercise
  price |   | Amount of
  options |  | Weighted average
  exercise
  price |          | Amount of
  options |   | Weighted average
  exercise
  price | 
| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     | 
| |                                          | 
| | Outstanding at the beginning of the year |  |                         | 612,426 |                                     | $ | 17.76               |  |                                     | 470,178  |                     | $ | 18.72                               |  |  | 374,133  |   | $ | 10.13 | 
| | Granted                                  |  |                         | -       |                                     | $ | -                   |  |                                     | 321,000  |                     | $ | 6.07                                |  |  | 200,000  |   | $ | 3.50  | 
| | Exercised                                |  |                         | -       |                                     | $ | -                   |  |                                     | (889     | )                   | $ | 11.69                               |  |  | -        |   | $ | -     | 
| | Forfeited                                |  |                         | (87,414 | )                                   | $ | 11.45               |  |                                     | (167,311 | )                   | $ | 10.69                               |  |  | (82,000  | ) | $ | 7.00  | 
| | Expired                                  |  |                         | (54,834 | )                                   | $ | 19.60               |  |                                     | (248,845 | )                   | $ | 9.77                                |  |  | (101,800 | ) | $ | 21.02 | 
| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     |  |  |          |   |   |       | 
| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     |  |  |          |   |   |       | 
| | Outstanding at the end of the year       |  |                         | 470,178 |                                     | $ | 18.72               |  |                                     | 374,133  |                     | $ | 10.13                               |  |  | 390,333  |   | $ | 4.55  | 
| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     |  |  |          |   |   |       | 
| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     |  |  |          |   |   |       | 
| | Options exercisable at the end of year   |  |                         | 464,178 |                                     | $ | 18.71               |  |                                     | 123,883  |                     | $ | 18.27                               |  |  | 113,499  |   | $ | 5.05  | 
| |                                          |  |                         |         |                                     |   |                     |  |                                     |          |                     |   |                                     |  |  |          |   |   |       | 

F-31

---

---



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

|           |                             
|---------- | ----------------------------
|NOTE 12:  | SHAREHOLDERS EQUITY
(Cont.)

| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | The options
  outstanding as of December 31, 2005 have been separated
into exercise prices,
  as follows:

| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                |  |  |         |  |   |      | 
| | ---------------- | ----------- | --------------------------------------------------- |  | --------------------------------------------------- |  | ------------------------------------- | ---- | --------------------------------------------------- | - | -------------------------------------------------------------- |  |  | ------- |  | - | ---- | 
| | Exercise
  price |             | Options
  outstanding
  as of
  December 31,
  2005 |  | Weighted
  average
  remaining
  contractual
  life |  | Weighted
  average
  exercise
  price |      | Options
  exercisable
  as of
  December 31,
  2005 |   | Weighted
  average exercise
  price of
  exercisable
  options | 
| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                | 
| |                  |             |                                                     |  | years                                               |  |                                       |      |                                                     |   |                                                                | 
| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                | 
| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                | 
| | $                | 3.0         |                                                     |  | 75,000                                              |  |                                       | 3.0  |                                                     |   | 3.0                                                            |  |  | 37,500  |  |   | 3.0  | 
| | $                | 3.5         |                                                     |  | 200,000                                             |  |                                       | 3.5  |                                                     |   | 3.5                                                            |  |  | 16,666  |  |   | 3.5  | 
| | $                | 6.0
  - 8.0 |                                                     |  | 112,000                                             |  |                                       | 7.0  |                                                     |   | 7.0                                                            |  |  | 56,000  |  |   | 7.0  | 
| | $                | 20.0        |                                                     |  | 3,333                                               |  |                                       | 20.0 |                                                     |   | 20.0                                                           |  |  | 3,333   |  |   | 20.0 | 
| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                |  |  |         |  |  
| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                |  |  |         |  |   |      | 
| |                  |             |                                                     |  | 390,333                                             |  |                                       | 4.11 |                                                     | $ | 4.55                                                           |  |  | 113,499 |  | $ | 5.55 | 
| |                  |             |                                                     |  |                                                     |  |                                       |      |                                                     |   |                                                                |  |  |        

| |    |                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Weighted-average
  fair values and exercise prices of options, whose
exercise price equals or is
  below the market price of the shares on the date of
grant are $ 0.
| |    |                                                                                                                                                                      
| |    | Weighted-average
  fair values and exercise prices of options, whose
exercise price exceeds the
  market price of the shares on the date of grant are
$ 0.9.         
| |    |                                                                                                                                                                      
| | e. | Dividends:                                                                                                                                                           
| |    |                                                                                                                                                                      
| |    | In the event
  that cash dividends are declared in the future, such
dividends will be paid
  in NIS or in foreign currency subject to any statutory
limitations.     

|           |                                          
|---------- | -----------------------------------------
|NOTE 13:  | RELATED PARTIES TRANSACTIONS AND
BALANCES

| |             
| | ------------
| | Composition:

| |                                                        |  |              |     |      |   |     | 
| | ------------------------------------------------------ |  | ------------ | --- | ---- | - | --- | 
| |                                                        |  | December 31, |    
| |                                                        |  |              |    
| |                                                        |  | 2004         |     | 2005 |  
| |                                                        |  |              |     |      |  
| |                                                        |  |              |     |      |   |     | 
| | Balances
  between Team and the Company (see 1 below)  |  | $            | 150 |      | $ | 29  | 
| | Balance with
  related party shareholder (see 2 below) |  |              | -   |      |   | 338 | 
| |                                                        |  |              |     |      |   |     | 
| | Total                                                  |  | $            | 150 |      | $ | 367 | 
| |                                                        |  |              |     |      |   |     | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Transactions
  and balances with Team:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 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.

F-32

---



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

|           |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:  | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)
|           |                                                  
|           |                                                   | In addition,
  Team provides to the Company certain administrative services, including
  computer servicing, salary administration, automotive fleet maintenance and
  basic insurance coverage, and the Company reimburses Team for the actual cost
  of such services. The Company and Team have agreed to indemnify each other
  for liabilities resulting from acts or omissions of their respective
  employees constituting intellectual property violations. The Agreement is
  automatically renewed for a successive terms of one year on each December 31,
  and can be terminated by either party at the end of any such term upon at
  least 60 days prior written notice. Regarding the rent commitment with Team,
  see also Note 10a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                   | Since 1992,
  the Company has also purchased property and equipment, such as computer
  hardware, from Team and Omnitek-Eichut Ltd. (Omnitek-Eichut), a subsidiary
  of Team. The Company pays Team and Omnitek-Eichut prices for these assets
  that are no less favorable to the Company than those it could obtain from
  unrelated third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                   | In addition,
  Team supplies the Company with hardware, related software and support
  services for such hardware for the Companys projects, in accordance with the
  agreement referred to above. Under the agreement between the Company and
  Team, the Company is required to pay for such hardware, related software and
  support services when it receives payment from its customers. In 2002, a
  disagreement arose between the Company and Team regarding whether the Company
  is required to pay Team for hardware and related software that it supplied to
  three of the Companys major customers as part of projects for which the
  Company receives payments based on milestones which do not allocate specific
  amounts for hardware and related software. Following negotiations to achieve
  a compromise with Team on this issue, the Company agreed to pay Team the
  amount of $ 1,047 in respect of hardware and related software supplied by Team
  as part of the Companys projects for these customers. Once the Company
  receives additional payments for these projects, it will be required to pay
  Team an additional payment based on Teams pro rata share of the project. The
  aggregate additional amount that the Company may have to pay Team for all of
  these projects is $ 563.
|           |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                   | In 2003, the
  Company paid Team $ 272 in respect of the above mentioned projects and
  executed a written agreement with Team.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                   | Transactions
  between Team and its affiliates and the Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                                                         |  |                           |       |      |   |       |  |   |       | 
| | ------------------------------------------------------- |  | ------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
| |                                                         |  | Year ended
  December 31, |      
| |                                                         |  |                           |      
| |                                                         |  | 2003                      |       | 2004 |   | 2005  | 
| |                                                         |  |                           |       |      |   |       | 
| | Revenues:                                               |  |                           |       |      |   |       |  |   |       | 
| | Commissions on product sales
and payment
  for services |  | $                         | 157   |      | $ | 249   |  | $ | 93    | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 
| | General and
  administrative expenses:                  |  |                           |       |      |   |       |  |   |       | 
| | Rent and
maintenance                                    |  | $                         | 1,440 |      | $ | 1,421 |  | $ | 1,379 | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 
| | Administrative and
management services                  |  | $                         | 503   |      | $ | 207   |  | $ | 169   | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 
| | Purchase of
equipment                                   |  | $                         | 711   |      | $ | 555   |  | $ | 398   | 
| |                                                         |  |                           |       |      |   |       |  |   |       | 

F-33

---

---



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

|           |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:  | RELATED PARTY TRANSACTIONS AND BALANCES (Cont.)
|           |                                                
|           | 2.                                              | 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.                                                                                                                                                                                                                                                                           
|           |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                 | Recently,
  the Company underwent a tax deductions audit by the Israeli Tax Authority
  (ITA). As a result of such audit, the ITA assessed an additional NIS 1.5
  million ($325 as of December 31, 2005) in withholding taxes with respect to
  income derived by Mr. Eisenberg from the exercise of the Options. Following
  consultation with the Companys tax advisors, the Company paid the additional
  withholding tax amount assessed in the audit. The Company was informed that
  it is required to collect such additional tax from Mr. Eisenberg otherwise
  such additional amount will be viewed as a benefit received by Mr. Eisenberg
  from the Company, resulting in additional withholding tax being charged to
  the Company as a result of the grant of such benefit.
|           |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                 | The Company
  believes that it is entitled to demand reimbursement for such additional
  withholding tax from Mr. Eisenberg. Accordingly, the Company intends to demand
  such reimbursement from Mr. Eisenberg and believes that the collection of the
  amount is probable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-34

---

---



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

|           |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                          
|---------- | ----------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:  | GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA
|           |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                          
|           | a.                                                                | Summary
  information about geographic areas:                                                                                                                                                                                                                                                                                                                                            
|           |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                   | The Company
  adopted Statement of Financial Accounting Standard No. 131, Disclosures
  about Segments of an Enterprise and Related Information (SFAS No. 131).
  The Company operates in one reportable segment (see Note 1 for a brief
  description of the Companys business). The total revenues are attributed to
  geographic areas based on the location of the end customer.
|           |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                   | The
  following presents total revenues and long-lived assets as of and for the years
  ended December 31, 2003, 2004 and 2005:                                                                                                                                                                                                                                                          

| |               |  |                         |        |                      |   |                   |  |                      |        |                   |   |                      |  |   |        |  |   |       | 
| | ------------- |  | ----------------------- | ------ | -------------------- | - | ----------------- |  | -------------------- | ------ | ----------------- | - | -------------------- |  | - | ------ |  | - | ----- | 
| |               |  | Year ended December 31, |       
| |               |  |                         |       
| |               |  | 2003                    |        | 2004                 |   | 2005              | 
| |               |  |                         |        |                      |   |                   | 
| |               |  | Total 
  revenues       |        | Long-lived 
  assets |   | Total 
  revenues |  | Long-lived 
  assets |        | Total 
  revenues |   | Long-lived 
  assets | 
| |               |  |                         |        |                      |   |                   |  |                      |        |                   |   |                      | 
|
| | Israel        |  | $                       | 3,357  |                      | $ | 11,791            |  | $                    | 4,200  |                   | $ | 5,578                |  | $ | 3,065  |  | $ | 4,249 | 
| | United States |  |                         | 18,091 |                      |   | 734               |  |                      | 14,112 |                   |   | 533                  |  |   | 17,004 |  |   | 453   | 
| | Europe        |  |                         | 12,047 |                      |   | 20                |  |                      | 11,541 |                   |   | 8                    |  |   | 11,536 |  |   | 4     | 
| | Australia     |  |                         | 1,913  |                      |   | 42                |  |                      | 3,310  |                   |   | 34                   |  |   | 2,466  |  |   | 23    | 
| | South America |  |                         | 5,386  |                      |   | -                 |  |                      | 2,712  |                   |   | -                    |  |   | 3,551  |  |   | -     | 
| | Far East      |  |                         | 2,309  |                      |   | 32                |  |                      | 722    |                   |   | 2                    |  |   | 1,999  |  |   | -     | 
| | South Africa  |  |                         | 2,764  |                      |   | -                 |  |                      | 1,201  |                   |   | -                    |  |   | 3,605  |  |   | -     | 
| |               |  |                         |        |                      |   |                   |  |                      |        |                   |   |                      |  |   |        |  |   |       | 
|
| |               |  | $                       | 45,867 |                      | $ | 12,619            |  | $                    | 37,798 |                   | $ | 6,155                |  | $ | 43,226 |  | $ | 4,729 | 
| |               |  |                         |        |                      |   |                   |  |                      |        |                   |   |                      |  |   |        |  |   |       | 

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

| |               |  |                           |   |      |    |      |  |    |   | 
| | ------------- |  | ------------------------- | - | ---- | -- | ---- |  | -- | - | 
| |               |  | Year ended
  December 31, |  
| |               |  |                           |  
| |               |  | 2003                      |   | 2004 |    | 2005 | 
| |               |  |                           |   |      |    |      | 
| |               |  |                           |   |      |    |      |  |    |   | 
| | Customer A    |  | 10                        | % |      | 9  | %    |  | 6  | % | 
| | Customer B    |  | 9                         | % |      | 16 | %    |  | 14 | % | 
| | Customer C    |  | 11                        | % |      | 4  | %    |  | 4  | % | 
| | Customer D *) |  | 9                         | % |      | 7  | %    |  | 13 | % | 

| |  |    |                                                                                
| |  | -- | -------------------------------------------------------------------------------
| |  | *) | In 2003, the
  Company recorded revenues of 4% from an affiliate of Customer D.

F-35

---

---



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

|           |                                       
|---------- | --------------------------------------
|NOTE 15:  | SELECTED STATEMENTS OF OPERATIONS DATA

| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| | -- | --------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| | a. | Research and
  development, net:                                      |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  | Year ended
  December 31, |       
| |    |                                                                       |  |                           |       
| |    |                                                                       |  | 2003                      |        | 2004 |   | 2005   |  
| |    |                                                                       |  |                           |        |      |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    | Total cost                                                            |  | $                         | 10,512 |      | $ | 11,324 |   | $ | 9,166  |  
| |    | Less - grants and participations                                      |  |                           | 194    |      |   | 580    |   |   | 30     |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    | Research and development, net                                         |  | $                         | 10,318 |      | $ | 10,744 |   | $ | 9,136  |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| | b. | Financial
  income (expenses):                                        |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    | Financial
  expenses:                                                 |  |                           |        |      |   |        |   |   |        |  
| |    | Foreign currency translation
adjustments                              |  | $                         | (1,106 | )    | $ | (568   | ) | $ | (1,480 | )
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    | Financial
  income:                                                   |  |                           |        |      |   |        |   |   |        |  
| |    | Foreign currency translation
adjustments                              |  |                           | 2,444  |      |   | 857    |   |   | 834    |  
| |    | Gain (loss) from sale of marketable
  securities                      |  |                           | 543    |      |   | 271    |   |   | -      |  
| |    | Other than temporary decline in fair value
  of marketable securities |  |                           | -      |      |   | -      |   |   | (301   | )
| |    | Interest and other                                                    |  |                           | 912    |      |   | 766    |   |   | 1,100  |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           | 3,899  |      |   | 1,894  |   |   | 1,633  |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  
| |    | Financial
  income, net                                               |  | $                         | 2,793  |      | $ | 1,326  |   | $ | 153    |  
| |    |                                                                       |  |                           |        |      |   |        |   |   |        |  

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 16:  | RECONCILIATION TO ISRAELI GAAP                                                                                                                                                                                                                                            
|           |                                                                                                                                                                                                                                                                           
|           | The
  consolidated financial statements of the Company have been prepared in
  accordance with U.S. GAAP. Had the consolidated financial statements been
  prepared in accordance with Israeli GAAP, the effects on the financial
  statements would have been as follows:
|           |                                                                                                                                                                                                                                                                           
|           | a.                                                                                                                                                                                                                                                                         | Effect on
  the statement of operations:

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

| |          |  |                                |        |             |   |                         |   |   |        | 
| | -------- |  | ------------------------------ | ------ | ----------- | - | ----------------------- | - | - | ------ | 
| |          |  | Year ended
  December 31, 2004 |       
| |          |  |                                |       
| |          |  | As reported                    |        | Adjustments |   | As per Israeli
  GAAP*) |  
| |          |  |                                |        |             |   |                         |  
| |          |  |                                |        |             |   |                         |   |   |        | 
| | Net loss |  | $                              | 29,494 |             | $ | (1,763                  | ) | $ | 27,731 | 
| |          |  |                                |        |             |   |                         |   |   |        | 

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

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

| |              |  |                     |        |             |   |                            |  |   |        | 
| | ------------ |  | ------------------- | ------ | ----------- | - | -------------------------- |  | - | ------ | 
| |              |  | December
  31, 2004 |       
| |              |  |                     |       
| |              |  | As
  reported       |        | Adjustments |   | As per
  Israeli 
  GAAP*) | 
| |              |  |                     |        |             |   |                            | 
| |              |  | Audited             |       
| |              |  |                     |       
| |              |  |                     |        |             |   |                            |  |   |        | 
| | Total equity |  | $                   | 26,293 |             | $ | 282                        |  | $ | 26,575 | 
| |              |  |                     |        |             |   |                            |  |   |        | 

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

F-37

---

---



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

|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                  
|---------- | -------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:  | RECONCILIATION TO ISRAELI GAAP (Cont.)
|           |                                       
|           | c.                                     | Material adjustments:                                                                                                   
|           |                                        |                                                                                                                         
|           |                                        | The
  abovementioned adjustments result primarily from the differences between U.S.
  GAAP and Israeli GAAP, as follows:
|           |                                        |                                                                                                                         
|           |                                        | 1)                                                                                                                       | Pursuant to
  SFAS 115, marketable securities which are available-for-sale are presented on
  the basis of their market value and changes in such value are charged (or
  credited) to other comprehensive income. According to Israeli GAAP,
  non-current investments in marketable securities are presented at cost, while
  current investments in marketable securities are presented at fair value, with
  changes in fair value charged (or credited) to the statement of operations.
  The effect on net loss for the year ended December 31, 2005, amounted to an
  increase in loss of approximately $ 110.                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                        | 2)                                                                                                                       | According to
  US GAAP, the net loss used to compute the net loss per share is the net loss
  attributed to Ordinary shareholders after deducting the deemed dividend
  associated with the beneficial conversion feature of the Preferred shares. In
  addition, the Preferred shares are not included in the computation of the
  basic net loss per share since the Preferred shares have no contractual
  obligation to participate in the Companys losses. According to Israeli GAAP,
  the net loss used to compute the net loss per share is not affected by the
  deemed dividend and the Preferred shares are included in the computation of
  the basic net loss per share.                                                                                                                                                                                                                                                                                                                                                       
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                        | 3)                                                                                                                       | According to
  U.S. GAAP, the Companys management believes that the dollar is the primary
  currency of the economic environment in which the Company and its subsidiaries
  operate. Thus, the functional and reporting currency of the Company and its
  subsidiaries is the dollar. Accordingly, monetary accounts maintained in
  currencies other than the dollar are remeasured into U.S. dollars in
  accordance with Statement of Financial Accounting Standards No. 52, Foreign
  Currency Translation. All transaction gains and losses of the remeasured
  monetary balance sheet items are reflected in the statement of operations as
  financial income or expenses, as appropriate. In Israel, no directives were
  determined for reporting based on functional currency. Since the Company does
  not comply with Section 29a to Opinion 36 of the Institute of Certified
  Public Accountants in Israel, the Company reports according to Standard 12
  and 13 of the Israel Accounting Standards Board in reported NIS.
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                        | 4)                                                                                                                       | Disclosure
  of the effects of new Accounting Standards prior to their adoption:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                        |                                                                                                                          | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Accounting
  Standard No. 22, Financial Instruments: Disclosure and Presentation:                                                                              
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                  
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | In July 2005,
  the Israel Accounting Standards Board issued Accounting Standard No. 22,
  Financial Instruments: Disclosure and Presentation (the Standard).
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                  
|           |                                        |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The Standard
  will be applicable to financial statements for periods commencing on or after
  January 1, 2006 (the effective date).                           

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 16:  | RECONCILIATION TO ISRAELI GAAP (Cont.)
|           |                                        | 
|           |                                        |  |    | This
  Standard prescribes principles for the presentation of financial instruments
  and identifies the information that should be disclosed about them in the
  financial statements. The presentation principles apply to the classification
  of financial instruments or their component parts, on initial recognition as
  a financial liability, financial asset or equity instrument; the
  classification of related interest, dividends, losses and gains; and the
  circumstances in which a financial asset and a financial liability should be
  offset.                                                                                                                                                                       
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  |    | The Company
  believes that the effect of the new Standard on its financial position,
  results of operations and cash flows is not expected to be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  | b) | Accounting
  Standard No. 24, Share-Based Payment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  |    | In September
  2005, the Israel Accounting Standards Board issued Accounting Standard No.
  24, Share-Based Payment (the Standard). The Standard will be applicable
  to financial statements for periods commencing on or after January 1,
  2006 (the effective date).                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  |    | The Standard
  prescribes that transactions with employees or others which supply similar
  services in return for equity instruments should be measured according to
  their fair value on the date in which such equity instruments were granted.
  The Standard also prescribes certain requirements if the terms of an option
  or share grant are modified. As for share-based transactions with parties
  other than employees, the fair value of the goods or services received must
  be measured upon receipt. Furthermore, if the equity instruments granted do
  not vest until the counterparty completes a specified period of service, the
  services will be recognized in the financial statements over the vesting
  period
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  |    | The Company
  believes that the effect of the Standard on its financial position, results
  of operations and cash flows is not expected to be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  | c) | Accounting
  Standard No. 25, Revenues:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                        |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                        |  |    | In February
  2006, the Israel Accounting Standards Board published Accounting Standard
  No. 25, Revenues (the Standard).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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 16:  | RECONCILIATION TO ISRAELI GAAP (Cont.)
|           |                                       
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  | The Standard
  deals with the recognition of revenue from three types of transactions: sale
  of goods, rendering of services and revenue from interest, royalties and
  dividends and prescribes the criteria for recognizing each type of revenue.
  The basic principle is that revenues should be measured at the fair value of
  the consideration received and/or receivable. If the consideration is not
  received on the date of the transaction, the revenue should be measured by
  discounting the future consideration using the prevailing market rate of
  interest. The Standard also prescribes that in cases where components of one
  transaction may be separately identified, revenue should be measured
  separately for each component if that reflects the substance of the
  transaction. The Standard stipulates that revenues recognized in the
  financial statements should only include the amounts received and/or
  receivable by the Company on its own account. Accordingly, amounts collected
  on behalf of a third party are not revenues of the Company.
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  | The Standard
  and Interpretation will be applicable to financial statements for periods
  beginning on January 1, 2006 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  | The Company
  believes that the effect of the new Standard on its financial position,
  results of operations and cash flows is not expected to be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  | Accounting
  Standard No. 20 (Revised), Accounting for Goodwill and Intangible Assets
  upon Acquisition of Investee:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  | In March
  2006, the Israel Accounting Standards Board published Accounting Standard No.
  20 (Revised), Accounting for Goodwill and Intangible Assets upon Acquisition
  of Investee (the Standard). The Standard is applicable to financial
  statements for periods commencing on January 1, 2006 (the effective date).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  | The Company
  believes that the effect of the Standard on its financial position, results
  of operations and cash flows is not expected to be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | d.                                     | Accounting
  Standard No. 21, Earnings per Share:                                                                                                                                                                                                                                                                                                                   
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                       
|           |                                        | In February
  2006, the Israel Accounting Standards Board published Accounting Standard No.
  21, Earnings per Share (the Standard), which prescribes the principles
  for the computation and presentation of earnings (loss) per share in the
  financial statements and supersedes Opinion No. 55 of the Institute of
  Certified Public Accountants in Israel.

F-40

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

|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- | -------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:  | RECONCILIATION TO ISRAELI GAAP (Cont.)
|           |                                        | According to
  the Standard, earnings per share are to be computed based on the number of
  ordinary shares (and not per NIS 1 par value of the shares as computed until
  the effective date). Basic earnings per share are to include only shares
  which are outstanding during the period whereas convertible securities (such
  as convertible debentures and options) are to be included in the computation
  of diluted earnings per share, in contrast to the principles applied until
  the effective date according to which in cases where a convertible security
  is likely to be converted, it is included in the computation of basic
  earnings per share. In addition, convertible securities which had been
  converted during the period, are to be included in diluted earnings per share
  up to the date of conversion and are to be included in basic earnings per
  share from that date. Pursuant to the Standard, options will be included in
  diluted earnings when their exercise results in the issuance of shares for a
  consideration which is less than the market price of the shares. The amount
  of dilution is the market price of the shares minus the amount that would
  have been received as a result of the conversion of the options into shares.
  This is in contrast to the method of computation prescribed by Opinion No.
  55, which also includes adjustments to earnings.
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                        | This
  Standard is applicable to financial statements for periods beginning on
  January 1, 2006 and thereafter. Comparative data for earnings per share are
  to be retrospectively restated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-41

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