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SECURITIES AND EXCHANGE COMMISSION
                                                  WASHINGTON, 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 EXCHANGEACT OF 1934
For the fiscal year ended December 31, 2002

OR|   | TRANSITION REPORT PURSUANT TO SECTION 13(b) OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period from __________ to

Commission File Number 0-28986

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

Israel
(Jurisdiction of incorporation or organization)

7 Martin Gehl 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:11,872,049 Ordinary Shares, par value NIS 0.5 per share

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

|Yes __X__ | No ______
|--------- | ---------

1

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

|Item 17 ______ | Item 18 __X__
|-------------- | -------------



2

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# TABLE OF CONTENTS

|       |         |                                                     | Page
|------ | ------- | --------------------------------------------------- | ----
|PART I |         |                                                     | 6   
|       | Item 1. | IDENTITY OF DIRECTORS, SENIOR OFFICERS AND ADVISERS | 6   
|       | Item 2. | OFFER STATISTICS AND EXPECTED TIMETABLE             | 6   
|       | Item 3. | KEY INFORMATION                                     | 6   
|       |         | A. Selected Financial Data                          | 6   
|       |         | B. Capitalization and Indebtedness                  | 8   
|       |         | C. Reasons for the Offer and Use of Proceeds        | 8   
|       |         | D. Risk Factors                                     | 8   
|       | Item 4. | INFORMATION ON THE COMPANY                          | 20  
|       |         | A. History and Development of the Company           | 20  
|       |         | B. Business Overview                                | 21  
|       |         |                                                     |     
|       |         | C. Organizational Structure                         | 36  
|       |         | D. Property, Plants and Equipment                   | 37  
|       | Item 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS        | 37  
|       |         | A. Operating Results                                | 37  
|       |         | B. Liquidity and Capital Resources                  | 47  
|       |         | C. Research and Development, Patents and Licenses   | 51  
|       |         | D. Trend Information                                | 51  
|       | Item 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES          | 52  
|       |         | A. Directors and Senior Management                  | 52  
|       |         | B. Compensation                                     | 54  
|       |         | C. Board Practices                                  | 56  
|       |         | D. Employees                                        | 58  
|       |         | E. Share Ownership                                  | 58  
|       | Item 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   | 60  
|       |         | A. Major Shareholders                               | 60  

3

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|        |          |                                                            |   
|------- | -------- | ---------------------------------------------------------- | --
|        |          | B. Related Party Transactions                              | 61
|        |          | C. Interests of Expert and Counsel                         | 64
|        | Item 8.  | FINANCIAL INFORMATION                                      | 64
|        |          | A. Consolidated Statements and Other Financial Information | 64
|        |          | B. Significant Changes                                     | 65
|        | Item 9.  | THE OFFER AND LISTING                                      | 65
|        |          | A. Offer and Listing Details                               | 65
|        |          | B. Plan of Distribution                                    | 66
|        |          | C. Markets                                                 | 66
|        |          | D. Selling Shareholders                                    | 66
|        |          | E. Dilution                                                | 67
|        |          | F. Expenses of the Issue                                   | 67
|        | Item 10. | ADDITIONAL INFORMATION                                     | 67
|        |          | A. Share Capital                                           | 67
|        |          | B. Memorandum and Articles of Association                  | 67
|        |          | C. Material Contracts                                      | 73
|        |          | D. Exchange Controls                                       | 74
|        |          | E. Taxation                                                | 74
|        |          | F. Dividends and Paying Agents                             | 84
|        |          | G. Statement by Experts                                    | 84
|        |          | H. Documents on Display                                    | 84
|        |          | I. Subsidiary Information                                  | 84
|        | Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 85
|        | Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     | 85
|PART II |          |                                                            | 86
|        | Item 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES            | 86

4

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| |          |                                                                              |   
| | -------- | ---------------------------------------------------------------------------- | --
| | Item 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 86
| | Item 15. | CONTROLS AND PROCEDURES                                                      | 86
| | Item 16. | Reserved.                                                                   
| | Item 17. | FINANCIAL STATEMENTS                                                         | 86
| | Item 18. | FINANCIAL STATEMENTS                                                         | 86
| | Item 19. | EXHIBITS                                                                     | 87

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 25, 2003, the exchange rate between the NIS and the dollar, as quoted by the Bank
of Israel, was NIS 4.702 to $1.00.

5

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| | PART
I
| | ------

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

| | Statements
in this annual report concerning our business outlook or future economic performance;
anticipated revenues, expenses or other financial items; introductions and advancements
in development of products, and plans and objectives related thereto; and statements
concerning assumptions made or expectations as to any future events, conditions,
performance or other matters, are forward-looking statements as that term is
defined under the United States Federal Securities Laws. Forward-looking statements
address matters that 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 and in our other filings with the
Securities and Exchange Commission.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Not
applicable.
| | ---------------

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

| | Not
applicable.
| | ---------------

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

| | A. | Selected Financial
Data
| | -- | -----------------------

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

| | We
derived the selected consolidated statements of operations data set forth below for the
years ended December 31, 2000, 2001 and 2002, and the selected consolidated balance sheet
data as of December 31, 2001 and 2002, 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, 1998 and 1999 and the
selected consolidated balance sheet data as of December 31, 1998, 1999 and 2000 from
audited consolidated financial statements that are not included in this annual report.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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December 31
                                            (in thousands)

|                                                     | 1998 | 1999      | 2000 | 2001      | 2002
|---------------------------------------------------- | ---- | --------- | ---- | --------- | ----
|Statement of Income Data:                            |      |           |      |           |     
|Revenues:                                            |     
|Products                                             |      | $14,608   |      | $25,474   |     
|Services                                             |      | 4,493     |      | 5,387     |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Total revenues                                       |      | 19,101    |      | 30,861    |     
|Cost of revenues:                                    |     
|Products                                             |      | 6,261     |      | 10,783    |     
|Services                                             |      | 2,443     |      | 2,894     |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Total cost of revenues                               |      | 8,704     |      | 13,677    |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Gross profit                                         |      | 10,397    |      | 17,184    |     
|                                                     |      |           |      |           |     
|Operating expenses:                                  |     
|Research and development, net                        |      | 2,035     |      | 2,973     |     
|Selling and marketing, net                           |      | 3,396     |      | 5,971     |     
|General and administrative                           |      | 1,985     |      | 2,855     |     
|Allowance for doubtful accounts                      |      | -         |      | -         |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Total operating expenses                             |      | 7,416     |      | 11,799    |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Operating income (loss)                              |      | 2,981     |      | 5,385     |     
|                                                     |      |           |      |           |     
|Financial income, net                                |      | 426       |      | 640       |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Income (loss)  before income taxes                   |      | 3,407     |      | 6,025     |     
|Income taxes                                         |      | 191       |      | 358       |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Net income (loss)                                    |      | $  3,216  |      | $  5,667  |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Basic net earnings (loss) per share                  |      | $    0.39 |      | $    0.61 |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Diluted net earnings (loss) per share                |      | $    0.36 |      | $    0.57 |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Weighted average number of shares used in computing: |     
|                                                     |      |           |      |           |     
|Basic net earnings (loss) per share                  |      | 8,165     |      | 9,351     |     
|                                                     |      |           |      |           |     
|                                                     |      |           |      |           |     
|Diluted net earnings (loss) per share                |      | 8,837     |      | 10,014    |     
|                                                     |      |           |      |           |     

7

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December 31
                                            (in thousands)

|                          | 1998 | 1999     | 2000 | 2001    | 2002
|------------------------- | ---- | -------- | ---- | ------- | ----
|Balance Sheet Data:       |      |          |      |         |     
|Cash and cash equivalents |      | $  5,375 |      | $13,646 |     
|Short term bank deposits  |      | -        |      | -       |     
|Marketable securities     |      | -        |      | 387     |     
|Working capital           |      | 14,524   |      | 27,614  |     
|Total assets              |      | 23,444   |      | 42,612  |     
|Shareholders' equity      |      | 18,110   |      | 33,014  |     

| | B. | Capitalization
and Indebtedness
| | -- | -------------------------------

| | Not
applicable.
| | ---------------

| | C. | Reasons
for Offer and Use of Proceeds
| | -- | -------------------------------------

| | Not
applicable.
| | ---------------

| | D. | Risk
Factors
| | -- | ------------

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

| | Risks
Relating to Our Business and Our Industry
| | -----------------------------------------------

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

| | The
general deterioration of the economy worldwide and economic uncertainty in the
telecommunications market resulted in a curtailment of capital investment by
communications service providers beginning towards the end of 2000. Many new and small
communications service providers have failed and existing service providers have been
reducing or delaying expenditures on new equipment and applications. The attacks on the
United States on September 11, 2001 caused a further decline in the global economy. As a
result, many companies, including our current and potential customers, have indicated
that they plan to postpone or decrease further capital investment. A continued decline in
capital expenditures would reduce our sales and could result in pressure on the price of
our products, each of which would have a material adverse effect on our operating
results.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

8

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

| | A
large portion of our revenues is derived from substantial orders placed by a relatively
small number of customers. Our revenues from our five largest customers represented
approximately 30% of our total revenues in 2000, 54% of our total revenues in 2001 and
48% of our total revenues in 2002. One of these customers recently terminated its
agreement with us. Please see the information about this customer set forth below under
the heading Item 8A Legal Proceedings. Because of our dependence on a
small number of customers and large orders, if expected orders are not received, or
orders are postponed, reduced or cancelled, our revenues and profitability will be
significantly reduced.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | The
market for our products is characterized by:
| | ------------------------------------------------

| | o | rapidly
changing technologies;
| | - | ------------------------------

| | o | evolving
industry standards;
| | - | ----------------------------

| | o | changing
regulatory environments;
| | - | ---------------------------------

| | o | frequent
new product introductions;
| | - | -----------------------------------

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

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

9

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

| | Our
future success will depend on our ability to:
| | -------------------------------------------------

| | o | enhance
our existing products;
| | - | ------------------------------

| | o | 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | o | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
may not be able to recover significant resources we invested in the development of
third-generation network technologies and projects.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | During
2002 we invested significant resources in our ongoing development of third-generation
network technologies and projects. Many of our potential customers for third-generation
products have delayed their implementation of third-generation networks due to the global
economic downturn. As a result of the slow-down in the implementation of third-generation
networks by potential customers, we may not be able to recover the resources we invested
in developing these technologies and products.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
success of our third-generation network products has not yet been fully demonstrated.
| | -----------------------------------------------------------------------------------------

| | We
are in the process of supplying third-generation network products to a small number of
customers. We have not yet completed any third-generation network project. We do not know
if our third-generation network products will receive market acceptance. If our
third-generation network products do not receive market acceptance, we may not be able to
recover significant resources we invested in the development of these products, and we
may lose future revenues. Please see the information set forth below under the heading
Item 8A  Legal Proceedings.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | Our
current customers are located in 29 countries and we are seeking to expand into other
markets. We currently derive significant revenues from business in the United States,
Europe and Israel. We expect our revenues from international sales to continue to account
for a large portion of our total revenues in the future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | o | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | o | adverse
tax consequences;
| | - | -------------------------

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

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

| | o | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

11

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

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

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

| | o | expanding
our direct sales force;
| | - | ---------------------------------

| | o | opening
additional in-region customer support and sales offices; and
| | - | --------------------------------------------------------------------

| | o | adding
distributors and pursuing additional strategic relationships.
| | - | --------------------------------------------------------------------

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

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

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

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

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

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

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

12

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

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

| | o | organizations'
internal design and development departments that produce network management and
operations          support applications for their particular needs;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | providers
of network management and operations support systems applications, such as Cramer,
Granite,          Hewlett-Packard, Inet, Metasolv, Micromuse, Agilent Technologies and
Telecordia;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

| | Currency
fluctuations could reduce our revenues and profitability.
| | ------------------------------------------------------------------

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

13

---

---

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

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

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

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

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

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

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

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

14

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---

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

| | o | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | We
rely on one hardware supplier for one of our Netrac applications, and if this hardware is
not available or does not function properly, our application will not work.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | One
of our Netrac applications, Network Wide View of SS7 Networks, uses probes to interface
with communications systems. Although we acquired the technology related to these probes
from INRANGE Technologies, we still rely on INRANGE and another party to jointly
manufacture these probes for us. This application currently only function with these
probes. If our relationships with these manufacturers are harmed, or the probes do not
function properly, our application will not function. We would need to modify our
software to enable it to operate using probes produced by another manufacturer. We may
not be able to make these modifications on a cost effective basis, if at all. This would
reduce our revenues from this application.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

15

---

---

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

| | o | 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | we
may inadvertently violate the intellectual property rights of other parties and other
parties may assert                       infringement claims against us;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | 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
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

| | o | failure
to achieve market acceptance.
| | - | -------------------------------------

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

16

---

---

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

| | As
of March 14, 2003, Team Software Industries Ltd., a wholly-owned subsidiary of Team
Computers and Systems Ltd., owned approximately 50.22% of our outstanding ordinary
shares. These shares may be deemed to be beneficially owned together by:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Arad
Investments and Industrial Development Ltd., the holder of approximately 54.8% of the
shares of Team                       Computers;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| | o | Shlomo
Eisenberg, the chairman of our board of directors and the boards of directors of Arad,
Team Computers                       and Team Software, and the holder of approximately
15.6% of the shares of                       Team Computers directly, and a member of the
controlling group of                       shareholders of Arad; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Meir
Lipshes, our Chief Executive Officer and a director of us, Team Computers and Team
Software, and the                       holder of approximately 8% of the shares of Team
Computers directly.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result, Team Software, Team Computers, Shlomo Eisenberg or Meir Lipshes may be able to
elect all of our directors and control issues that are decided by a vote of shareholders.
For information concerning certain legal proceedings in which Mr. Eisenberg is
currently involved, please see the information about him which is set forth below under
the heading Item 6A Directors and Senior Management.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Conflicts
of interest may arise with Team Computers.
| | ----------------------------------------------------

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

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

| | 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. Political economic and military conditions in Israel directly affect our
operations. Since October 2000, there has been an increase in hostilities between Israel
and the Palestinians, which has adversely affected the peace process and has negatively
influenced Israels relationship with 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, certain parties with whom
we do business have declined to travel to Israel during this period, forcing us to make
alternative arrangements where necessary, and the United States Department of State has
issued advisories regarding travel to Israel, impeding the ability of travelers to attain
travel insurance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, could adversely
affect our operations. Specifically, the ongoing war in Iraq could result in these
adverse effects.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

17

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---

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

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

| | Our
investment programs were granted the status of an approved enterprise under Israels
Law for Encouragement of Capital Investments, 1959, pursuant to which we have elected to
forego certain Israeli government grants in return for an alternate package of tax
benefits. To be eligible for tax benefits as a result of the approved enterprise status
granted to us under Israeli law, we must continue to meet certain conditions, including
making certain investments in fixed assets, financing a percentage of investments with
share capital and maintaining a minimum level of revenues from export. If we fail to meet
such conditions in the future, the tax benefits would be canceled and we could be
required to refund the tax benefits already received. This could harm our business and
our profitability.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
tax benefits we receive may not be continued in the future at their current levels or at
all. Israeli governmental authorities have indicated that the government may reduce or
eliminate these benefits in the future. The termination or reduction of these tax
benefits could harm our business and our profitability.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | We
receive grants and participate in programs sponsored by the government of the State of
Israel and the Israel-United States Binational Industrial Research and Development
Foundation, known as the BIRD Foundation and from the European Union. We have relied on
such grants for the financing of a significant portion of our product development since
our inception. We are required to meet several conditions under these grant programs,
such as prohibitions on the transfer of intellectual property rights or requirements that
we share intellectual property rights that are the subject of such grants. If we do not
meet these conditions we may have to return some of the sums granted. If we do not
receive these grants in the future, we will have to allocate other funds to product
development at the expense of other operational costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
government programs in which we currently participate may be terminated or reduced in the
future.
| | -----------------------------------------------------------------------------------------------------

| | The
Israeli authorities have indicated that the government may reduce or abolish grants from
the Office of the Chief Scientist of the Ministry of Industry and Trade in the future.
Termination or substantial reduction of Chief Scientist grants would require us to divert
other funds to product development and increase our other operational costs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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---

| | 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. In addition, if a military conflict or war occurs, these persons
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. While we believe that we have operated relatively efficiently given
these requirements since we began operations and during the period of the increase in
hostilities with the Palestinians since October 2000, we cannot assess what the full
impact of these requirements on our workforce or business would be if the situation with
the Palestinians would change or if the ongoing war in Iraq would involve Israel. As a
result of the ongoing war in Iraq, Israel is in an escalated state of readiness and has
increased the number of citizens performing military reserve duty. We cannot predict the
effect on our business operations of any expansion or reduction of these requirements.
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.
| | --------------------------------------------------------------------------------------

| | We
are incorporated in Israel. Substantially all of our executive officers and directors are
nonresidents of the United States, and a substantial portion of our assets and the assets
of these persons are located outside the United States. It may be difficult to enforce a
judgment obtained in the United States against us or any of these persons.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provisions
of Israeli law could delay, prevent or make difficult a change of control and therefore
depress the price of our stock.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | The
Israeli Companies Law 1999, includes restrictions on mergers, like special voting
requirements, the ability of creditors to seek court intervention to prevent a merger and
a mandatory waiting period. In addition, under certain circumstances, the Companies Law
requires that acquisitions be performed in compliance with tender offer regulations. The
Israeli Minister of Justice has adopted regulations which exempt from the majority of
these tender offer regulations companies like us that were publicly traded outside of
Israel and on a stock exchange in Israel prior to the effective date of the Companies
Law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

19

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---

| | Risks
Related to the Market for Our Ordinary Shares
| | ---------------------------------------------------

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

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

| | o | fluctuations
in our quarterly revenues and earnings and those of our publicly held competitors;
| | - | -----------------------------------------------------------------------------------------------

| | o | shortfalls
in our operating results from levels forecast by securities analysts;
| | - | --------------------------------------------------------------------------------

| | o | announcements
concerning us or our competitors;
| | - | -----------------------------------------------

| | o | the
introduction of new telecommunications services and new industry standards;
| | - | -------------------------------------------------------------------------------

| | o | changes
in pricing policies by us or our competitors;
| | - | -----------------------------------------------------

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

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

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

| | In
addition, trading in shares of companies listed on the Nasdaq National Market in general
and trading in shares of technology companies in particular have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to
operating performance. The price levels of technology stocks traded on the Nasdaq
National Market decreased significantly during 2000, 2001 and 2002. These broad market
and industry factors may depress our share price, regardless of our operating results.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|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 Systems Ltd., after having operated as a division of Team Computers since
1988. Team Computers is a publicly traded company in Israel. We first developed network
management and operations support systems in 1988 for Bezeq, the Israeli
Telecommunications Corp. and have since derived substantial revenues from the sale of
products and services.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

20

---

---

| | Our
capital expenditures in 2002 were approximately $5.943 million, primarily for computers,
equipment, software, motor vehicles, improvements to our offices and investments in the
development of our capitalized software. Our capital expenditures in 2002 included
approximately $0.3 million for improvement of leased premises.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Business
Overview
| | -- | -----------------

| | We
are a leading provider of network management systems, operations support systems and
business support systems for communications service providers. Our software products and
solutions enable communications service providers to improve the management of their
wireline and wireless networks and services in order to compete more effectively. Our
Netrac suite of products allows communications service providers to maximize their return
on investment in network infrastructure by helping them to streamline their operations
and rapidly roll out new services. Our software products manage multi-vendor voice and
data networks based on various advanced technologies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2002, we repositioned our Netrac suite of products due to marketing considerations. Using
our Netrac suite of products, communications service providers can effectively perform
and manage functions critical to the operations of their networks, such as:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Service
Management- monitors service performance and manages service level agreements;
| | - | --------------------------------------------------------------------------------------

| | o | Inventory
Management- provides an accurate physical, logical and service view of the network, and
synchronizes the OSS database with the actual network;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Fault
Management- detects alarms across the entire network and accelerates the problem
resolution cycle;
| | - | --------------------------------------------------------------------------------------------------------

| | o | Performance
Management- performs traffic and quality of service analysis based on performance
counters and xDR records (e.g. CDRs, IPDRs, RADIUS);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

| | o | xDR
Analysis- analyzes quality of service in the network using xDR records (e.g. CDRs,
IPDRs, RADIUS), detects fraudulent activity and identifies errors in
the billing process;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Planning- automatically designs and assigns services routes, and helps users to plan and
implement mass changes in the network;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| | o | Provisioning- streamlines the service provisioning process end-to-end, and automates the activation
of services;
| | - | ----------------------------------------------------------------------------------------------------------------

| | o | Security
Management- ensures secure, centralized access to the network elements, and protects the
network from internal and external security threats; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Mediation- collects and processes raw data from network elements and element managers and
distributes it to other applications, and enables users and
applications to send commands to the network.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| | Industry
Background
| | -------------------

| | Historically,
the communications industry has been characterized by significant government regulation
or ownership and limited competition. In recent years, deregulation and privatization of
the communications industry worldwide has led to increased competition among
communications service providers. To remain competitive, communications service providers
are differentiating themselves by offering better customer service and value, improving
existing services and rapidly introducing new and enhanced services. Concurrently, they
are seeking to reduce their capital expenditures (CAPEX) and operational expenditures
(OPEX) and streamline their business processes to operate more efficiently and gain a
competitive edge.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
recent downturn in the global economy in general, and in the communications industry in
particular, has significantly reduced spending by communications service providers. Many
communications service providers, however, continue to invest in operations support
systems in an effort to maximize their return on invested capital. Operations support
systems and business support systems maximize the return on invested capital by
increasing the operators efficiency and staff productivity, reducing operational
costs, and facilitating the rapid deployment of new services.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the last decade, the use of Internet and Internet-related services has grown rapidly.
This increased connectivity to the Internet and the availability of new communications
technologies are making Internet based voice, data and video communications an integral
part of the services offered by wireline and wireless communications service providers.
As the variety of communication services and the volume of network voice and data traffic
increases, communications service providers are transforming their networks into
converged, next-generation networks spanning both circuit and packet-switched
technologies.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
communications service providers enhance their networks and introduce new technologies,
they increasingly focus on new services and migrating to next-generation networks. These
next-generation networks are designed to accommodate increasing volumes of data traffic
and offer the opportunity to deliver advanced services such as fast Internet access,
interactive multimedia and mobile commerce. Typically, communications service providers
seek systems that will enable them to manage both existing and next-generation networks
from a single management platform.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
last decade has also seen rapid technological changes and an enormous growth in usage of
wireless communications services. Emerging cellular network technologies that support
data and multimedia services, commonly known as third generation (3G) networks, are
expected to provide a wide range of advanced mobile services. To meet expected demand for
these services 3G networks are being constructed at a rapid pace. The development of 3G
networks is driving the demand for readily available management systems that can handle
the increased complexity of these advanced networks.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Legacy
Systems
| | --------------

| | In
the past, operations support systems and network management systems were used by
communications service providers predominantly to manage local and long distance
telephone service over traditional landlines. These systems were usually developed
in-house or purchased from communications equipment vendors. In general, these systems
were not easily scalable, lacked the ability to efficiently aggregate information from
different types of network elements and could not provide a platform onto which new
network elements could be easily added.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

---

| | Given
the changes in the communications industry, these existing systems may not be capable of
accommodating a substantially increased subscriber base and volume of voice and data
traffic. These systems are generally not flexible enough to handle new types of network
elements with increasingly complex network configurations. As a result, many
communications service providers need to upgrade their existing network management
systems and operations support systems.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Modern
Network Management Requirements
| | --------------------------------------

| | In
upgrading their legacy network management systems and operations support systems,
communications service providers require systems that meet their service fulfillment,
service assurance and service management needs. To better manage their multi-vendor,
multi-technology networks and services, deliver new and enhanced services and respond to
the demands of increased competition and usage, communications service providers are
seeking solutions that:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | provide
a comprehensive integrated and modular product offering that addresses the entire range
of management                   functionalities and which may be tailored to their
specific business needs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | are
provided on a turn-key basis;
| | - | ---------------------------------

| | o | are
rapidly deployable to enable new services to be introduced quickly;
| | - | -----------------------------------------------------------------------

| | o | are
easily scalable to accommodate network growth and the addition of new subscribers;
| | - | --------------------------------------------------------------------------------------

| | o | manage
existing and next-generation networks via one unified management system;
| | - | -------------------------------------------------------------------------------

| | o | are
based on open architecture and can easily integrate with other systems; and
| | - | -------------------------------------------------------------------------------

| | o | are
cost effective and enable communications service providers to maximize their return on
investment in                   network infrastructure.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Solution
| | ------------

| | Our
Netrac suite of products enables 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 and offer new services over complex
networks. We have expertise derived from over a decade of developing and implementing
software solutions for various types of communications service providers around the
world.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac suite of products provides the following advantages:
| | ---------------------------------------------------------------

| | Comprehensive,
integrated and modular product offering.Our Netrac suite is composed of products
that may be used in any combination to suit a communications service providers
specific business needs and budget. Our Netrac modules seamlessly integrate with one
another to provide either a comprehensive, full-fledged solution or address specific
functions in areas such as fault management or service impact analysis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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---

| | Turn-key
implementation. We deliver end-to-end integrated turn-key solutions to communications
service providers which are tailored to meet their specific requirements without the need
for additional internal development or customization. Our trained and experienced
implementation and integration teams perform seamless installation and deployment of our
products within a communications service providers existing operations support
system environment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rapidly
deployable solutions.Our Netrac platform is vendor-independent, which enables
communications service providers to easily and cost effectively deploy new network
elements and introduce services quickly. Our Netrac suite of products includes a
pre-built set of modules and applications that can quickly be deployed, thereby
minimizing the amount of customization or development necessary to satisfy a
communications service providers requirements. Our Netrac suite of products
incorporates numerous libraries, enabling communication service providers to use our
products to manage and control equipment from all the leading vendors in the marketplace.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Scalability.          Our
Netrac suite of products easily scales to accommodate the addition of new
          equipment and subscribers.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Management
of existing and next-generation networks. Our Netrac suite of products is designed to
manage both existing and next-generation wireline and wireless networks via one unified
management platform. As a result, a communications service provider is able to manage
heterogeneous convergent networks, protect its investment in existing systems, and
facilitate the migration to, and installation of, new advanced technologies.
Next-generation networks managed by our Netrac suite of products include, among others:
wireless 3G, data and voice over Internet Protocol or IP, optical and Digital Subscriber
Line or DSL.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Open
architecture. Netracs open architecture allows for easy integration with both
existing and future systems. Netracs open, mature application programming
interfaces (APIs) enable a communications service provider to integrate all the systems
and applications in its operations support system environment so that valuable data can
be exchanged among these systems.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
effectiveness and maximizing return on investment. Netrac 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 results in rapid
deployment of network devices and services, leading to faster time-to-revenue.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Strategy
| | --------

| | Our
goal is to become a leading provider of network management systems, operations support
systems, and business support systems for communications service providers. Our strategy
to achieve this goal contains the following key elements:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Capitalize
on existing customer base.We have established long-term relationships with
communications service providers. We capitalize on our existing customer base by
cross-selling our Netrac suite of products to additional divisions within our customers organizations.
Through our ongoing customer support and sales efforts, we strengthen our relationships
with our existing customers and determine their evolving requirements. This process
enables us to gain valuable industry expertise and identify emerging applications and new
sales opportunities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Focus
sales penetration efforts on large communications service providers. We will continue
to focus on increasing our penetration to large communications service providers. By
offering our products to a growing number of industry-leading communications service
providers, we continuously increase acceptance and demand for our products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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---

| | Expand
and enhance product offerings. We have developed an integrated suite of network
management systems, operations support systems, and business support systems products to
enable communications service providers to run their networks more efficiently. We
continue to develop and introduce new products and product features that address the
increasingly sophisticated needs of communications service providers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expand
sales and marketing. We plan to expand our sales and marketing efforts in existing
markets and enter new geographic markets. To date, we have been successful in penetrating
markets in North and South America, Europe, Israel, South Africa, Australia and the Far
East. We have established offices in the UK, France, Germany, the Netherlands, South
Africa, Australia, Hong Kong, Costa Rica and several locations in the United States. We
are in the process of establishing an office in India. In addition, we have sales
representatives and sales consultants located in Benelux, Brazil, Canada, Colombia,
Cyprus, Finland, Greece, Indonesia, Italy, Russia, Taiwan, Thailand, Turkey and Poland.
We plan to strengthen our global presence by recruiting additional sales and marketing
personnel and opening additional sales offices throughout the world.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Lead
in management of next-generation wireline and wireless networks. We intend to
establish our position as the leading provider of management solutions for
next-generation wireline and wireless networks. However, we are closely monitoring the
adoption rates of 3G technology in wireless operators  which so far are lower than
what was originally projected and we will modify our strategy accordingly.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Develop
strategic partnerships. We have partnered with leading software and hardware vendors
and system integrators. These strategic partnerships enable us to leverage the marketing
strengths and customer base of our partners, thereby expanding our own installed base. To
date, we have established partnerships with a number of vendors, including IBM, Nortel,
VocalTec, Siemens and CMG. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Extend
technological leadership. We are committed to keeping our products at the forefront
of the industry by offering products that support new services and technologies,
including Asynchronous Transfer Mode, or ATM, and Synchronous Optical Network/Synchronous
Digital Hierarchy, or SONET/SDH, Internet Protocol, or IP, Voice over IP, or VoIP, DSL,
Dense Wavelength Division Multiplexing, or DWDM, General Packet Radio Service, or GPRS,
Code Division Multiple Access 2000, or CDMA2000, Time Division Multiple Access, or TDMA,
Universal Mobile Telecommunications System, or UMTS, and Single Carrier Radio
Transmission Technology, or 1xRTT, and Third Generation Radio Transmission Technology, or
3xRTT.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
products are based on the latest computing and communications standards such as
Telecommunications Management Network, or TMN, International Telecommunications Union
standards, and the Electronic Industries Association/Telecommunications Industry
Association Recommended Standards, or EIA-TIA, Common Object Request Broker Architecture,
or CORBA protocols, 3G Performance Protocols, and using the latest proven development
techniques and methodologies, such as object-oriented paradigms.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

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| | Products
and Services
| | ---------------------

| | Our
Netrac suite of products is capable of monitoring and managing complex wireline and
wireless networks spanning the various domains, including transmission, Signaling System
7, or SS7, ATM, SONET/SDH, IP, VoIP, DSL, CDMA, TDMA, GSM, GPRS, UMTS, CDMA2000, and
1xRTT/3xRTT. Our pre-integrated products can be used in various combinations to construct
network and service management solutions for communications service providers. The
products handle mission-critical network management functions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have recently begun to reduce our activities in the SS7 field, although we continue to
support existing customers.
| | ---------------------------------------------------------------------------------------------------------------------

| | Underlying
our Netrac suite of products is the Netrac platform, or base package, which serves as the
operational infrastructure for our other products and provides a common database,
graphical user interface and general administrative services. Our Netrac suite is made up
of nine families, where each family is composed of pre-integrated products. The nine
product families are:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Service
Management;
| | - | -------------------

| | o | Inventory
Management;
| | - | ---------------------

| | o | Fault
Management;
| | - | -----------------

| | o | Performance
Management;
| | - | -----------------------

| | o | xDR
Analysis;
| | - | -------------

| | o | Planning;
| | - | ---------

| | o | Provisioning;
| | - | -------------

| | o | Security
Management; and
| | - | ------------------------

| | o | Mediation.
| | - | ----------

| | To
provide communications service providers with turn-key solutions, we also offer a full
range of professional services, which include: customization, implementation,
integration, training, maintenance and consulting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
quality management system for the development, design, testing, support and sales of our
network management systems, operations support systems and business support systems has
been certified as meeting ISO 9001 standards by the Standards Institution of Israel.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Netrac
Base Package
| | -------------------

| | Our
Netrac base package serves as a common platform for our families of products. The
advantages of the Netrac base package include a state-of-the-art graphical user
interface, a communications backbone which enables the seamless integration of Netrac
products and their integration with external applications, as well as an infrastructure
that is easily customizable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

---

| | Service
Management products
| | ---------------------------

| | Our
Netrac Service Management products enable communications service providers to monitor and
manage services across multi-technology, multi-vendor networks, and perform historical
analysis of service behavior for improved service planning and design. The Service
Management family allows service providers to define, track and manage service level
agreements and ensure that customers are benefiting from high network performance and
availability levels.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac Service Management family of products includes the following:
| | ------------------------------------------------------------------------

| | SLA
Manager defines, tracks and reports on service level agreements (SLAs). SLA Manager
collects and calculates key quality indicators from the entire network in order to assess
the service levels delivered to customers and determine whether SLAs are being met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
Monitor monitors service performance in near real time, and pinpoints service
performance degradations and outages.
| | ---------------------------------------------------------------------------------------------------------------------------

| | Service
Analyzercollects, processes and analyzes historical service performance
and quality of service. Service Analyzer presents this information in reports that enable
network personnel to better understand service demand patterns and improve service
planning and design decisions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ServiceTest is
a system that measures the performance and availability of services from the end-users
point of view via testing probes.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Inventory
Management products
| | -----------------------------

| | Our
Netrac Inventory Management products provide a total end-to-end physical, logical and
service view of the entire network. The Inventory family gives service providers the
ability to know what network resources are available so they could use more of the
resources more efficiently. The Inventory family also synchronizes the operations support
systems database with the actual network, leading to reduced order fallout and allowing
service providers to detect and reclaim unused resources.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac Inventory Management family of products includes the following:
| | --------------------------------------------------------------------------

| | Physical
Inventoryoffers a physical representation of the network, and enables service
providers to model, track and manage all the physical entities in their network. Physical
Inventory serves as the underlying infrastructure for both Netrac applications and other
third-party systems, and makes valuable inventory data accessible to systems such as
Provisioning, Fault and Performance Management.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Logical
Inventory represents the logical network, visualizes circuit layout, and graphically
presents the logical connections between the network elements. Logical Inventory models
existing and emerging technologies, including Frame Relay, IP, ATM, SDH/SONET, 2G, 2.5G
and 3G.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
Inventory enables operators to efficiently create and model existing and new
services. It also maps the relationships between offered services, network resources, and
customers, and graphically represents this information in schematic views.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sync synchronizes
the inventory database with the actual network, and auto-discovers new network elements
that are introduced into the network. Sync produces discrepancy reports that detail any
inconsistencies between the inventory database and the actual network. This helps service
providers to identify assets that exist in the network but are not recorded in the
inventory database and vice versa, and pinpoint under-utilized network resources.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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---

| | Fault
Management products
| | -------------------------

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

| | Our
Netrac Fault Management family of products includes the following:
| | ----------------------------------------------------------------------

| | Fault
Management(FaM)is a real-time alarm surveillance and management system that
offers network operations center (NOC) personnel an all-inclusive, prioritized view of
alarms coming from various network domains and equipment. This product provides a
comprehensive set of tools for monitoring, analyzing and isolating alarms, including a
real-time alarm monitor, a graphical alarm map and alarm history reports.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Correlator+is an alarm correlation system designed to detect and isolate root-cause faults from
the incoming alarm volume. This allows customers to efficiently handle multiple alarms
and quickly resolve problems by reducing large alarm volumes into a single root-cause
alarm.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NetImpactidentifies, in real-time, the services and customers that are impacted by faults.
This allows network operations center (NOC) controllers to prioritize repair activities
and proactively contact affected subscribers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FaultProproactively solves network faults by automatically sending predefined commands to
network elements in response to alarms.
| | ---------------------------------------------------------------------------------------------------------------------------------

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

| | Performance
Management products
| | -------------------------------

| | Our
Netrac Performance Management family of products performs real-time monitoring and
long-term analysis of network behavior based on performance measurements and xDR records
(e.g. CDRs, IPDRs, RADIUS). The Performance Management products help service providers to
identify and address traffic degradations before they impact customers, maximize network
performance, and increase network utilization. Using performance reports, service
providers can detect inefficiently used equipment and plan for future network growth.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac Performance Management family of products includes the following:
| | ----------------------------------------------------------------------------

| | Performance
Management Module (PMM)collects and analyzes performance measurements and xDR
records (e.g. CDRs, IPDRs, RADIUS) in order to provide an accurate picture of network
health and utilization. The Performance Management Module also presents traffic
information in Web-based reports that help network staff to understand network and
service status at a glance and predict future network behavior.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | TrafficView provides
operators with near real-time network monitoring and traffic surveillance capabilities
based on performance measurements and xDR records (e.g. CDRs, IPDRs, RADIUS). TrafficView
detects traffic exceptions using sophisticated dynamic thresholds, alerting service
providers to potential problems before they affect customers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

---

| | Traffic
Control Handler (TCH)is an application that enables authorized personnel to respond
to traffic exceptions in the network by sending traffic controls to the appropriate
network elements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | xDR
Analysis Family
| | -------------------

| | Our
Netrac xDR Analysis family of products analyzes quality of service in the network,
identifies fraudulent call behavior patterns and ensures the accuracy of the billing
process using xDR records (e.g. CDRs, IPDRs, RADIUS).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac xDR Analysis family of products includes:
| | ----------------------------------------------------

| | CallExperttransforms raw xDR records into meaningful information that can be used for network
and service monitoring, capacity planning, and marketing-related applications. This
product provides communications service providers with the tools to perform advanced
quality of service, call failure, and traffic trends analysis.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FraudDetect detects
fraudulent activity in the network by comparing suspicious usage patterns with predefined
profiles, and alerts users to suspicious behavior so they can take immediate action.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Planning
Family
| | ---------------

| | Our
Planning family automates service design and assign processes, and enables network users
to plan and implement mass changes in the network.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac Planning family of products includes the following:
| | --------------------------------------------------------------

| | Route
Builder automatically designs service routes while taking into account user-defined
parameters such as cost, distance and maximum number of hops, as well as technical and
business constraints. Route Builder also assigns network resources and capacity to the
designed route, and performs validity checks.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Change
Planner enables users to plan changes in the network such as circuit and facility
changes; external and internal connection changes; and mass modifications in the network.
Change Planner keeps network personnel updated on the status of the change, and sends
notifications to the appropriate personnel if an error occurs at any stage of the network
change process.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provisioning
Family
| | -------------------

| | The
Provisioning family streamlines the provisioning process end-to-end, from order intake to
order fulfillment. By automating time-consuming manual operations, the Provisioning
family allows operators to roll out services fast, and meet customers demands
quickly and cost-effectively. The Provisioning family manages the information flow
throughout the entire organization and provides users with complete information on an
orders status, helping them to rapidly pinpoint and address any provisioning
obstacles in real time.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

---

| | Our
Netrac Provisioning family of products includes the following:
| | ------------------------------------------------------------------

| | Work
Order is a powerful workflow engine that models and automates complex provisioning
processes in dynamic environments. Work Order replaces error-prone manual operations with
computerized tasks, driving out inefficiencies from the provisioning process. It
processes and coordinates huge volumes of service orders, and tracks the progression of
each activity in the provisioning process. Work Order also provides workflow relevant
knowledge and visual control access to users handling multiple service orders.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Security
Management Family
| | --------------------------

| | The
Security Management family ensures secure, centralized access to the network elements.
The Security Management products protect the network from both internal and external
security threats by rapidly detecting security risks and alerting administrators to take
corrective action.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Netrac Security Management family of products includes the following:
| | -------------------------------------------------------------------------

| | SecureCentral automates
the process of downloading user security profiles to the network elements. This replaces
the need for the system administrator to manually update each network element with user
information. SecureCentral also ensures that when a users security account is
modified, the modifications are automatically updated in the network elements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SecureNE provides
a centralized gateway through which authorized users can view, access and send commands
to the different network elements. SecureNE ensures that only authorized users can gain
access to the network elements, thus preventing network penetration and downtime caused
by accidental use or malicious intent.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SecureDetect identifies
internal and external security threats and intrusion attempts in the network, and sends
warning notifications to security administrators. SecureDetect enables system
administrators to define security thresholds that trigger alerts if the thresholds are
exceeded.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mediation
products
| | ------------------

| | The
Netrac Mediation products collect raw data from various network elements, process and
transfer the data to other Netrac products and external third-party systems. The
Mediation products also support the sending of commands and controls from the
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 family of products includes the following:
| | ---------------------------------------------------------------

30

---

---

| | Device
Expert(DvXpert)collects events, alarms, performance indicators, configuration
information and xDR records from the entire network. Device Expert then 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 the
network elements, regardless of the elements unique command language and syntax.
Commands include operational, provisioning, activation and corrective commands, as well
as traffic controls. Commands can be sent on a manual, automatic or scheduled basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maintenance
and Customer Support
| | --------------------------------

| | We
believe that a high level of maintenance and customer support is critical to our
continued success in developing long-term relationships with our customers.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the time of installation, customers generally receive on-site training tailored to the
user organization. We also offer supplementary training to clients on an as needed basis.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
initial warranty period, which typically lasts for one year, is included in the cost of
the license for our software. After that period, we offer support contracts to our
customers, typically for a percentage of the total license price, but in some cases based
on hourly fees. These contracts are renewable on an annual basis for an additional fee.
The support contract entitles the customer to unlimited telephone support, product
updates and product maintenance during the support period. We offer toll-free technical
customer support during business hours, which, for an additional fee, can be extended to
24 hours a day, seven days a week. Support is provided via telephone, remote-access and
e-mail. We generally provide an initial diagnosis within four hours and, if necessary,
provide on-site assistance within 48 hours. Substantially all of our customers are
covered by support contracts, in some cases, with services provided by local
subcontractors.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Beyond
the standard support contracts, we also provide on-site network support at an additional
price. Site management services include:
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | o | system
management;
| | - | ------------------

| | o | configuration
changes;
| | - | ----------------------

| | o | failure
recovery;
| | - | -----------------

| | o | performance
tuning;
| | - | -------------------

| | o | database
administration support;
| | - | --------------------------------

| | o | communications
administration support;
| | - | --------------------------------------

| | o | preventive
maintenance activities; and
| | - | --------------------------------------

| | o | coordination
between hardware and software vendors.
| | - | ---------------------------------------------------

31

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---

| | Customers
| | ---------

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

| | o | incumbent
local exchange carriers;
| | - | ----------------------------------

| | o | long-distance
carriers;
| | - | -----------------------

| | o | competitive
local exchange carriers;
| | - | ------------------------------------

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

| | o | communications
equipment vendors, such as vendors of switches, fixed wireless access equipment,
transmission                   equipment and test equipment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | To
date, we have approximately 60 customers for our software in 29 countries. Our largest
existing customers include the following communications service providers:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    |                       
|----------------------------------- | ----------------------
|AT&T                                | Partner Communications
|Belgacom                            | Pelephone             
|Bezeq                               | Sprint                
|Bezeq International                 | Tele2                 
|Cable & Wireless                    | Telekom SA            
|Cellcom                             | Telia                 
|Cyprus Telecommunications Authority | Telstra               
|Golden Lines                        | TCO                   
|Hutchison 3G                        | TSTT                  
|ICE                                 | Tyco                  
|KPN                                 | Unefon                
|Luxemburg PTT                       | US Cellular           
|Maltacom                            | Viag                  
|Nortel Networks                     | Western Wireless      

| | Backlog
| | -------

| | Our
backlog represents signed purchase orders deliverable within 12 months. Backlog was
approximately $24.3 million on December 31, 2000, approximately $ 24 million on December
31, 2001 and approximately $33 million on December 31, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sales
and Marketing
| | -------------------

| | We
market our products and services to communications service providers. To leverage our
marketing efforts, we have established strategic partnerships with leading software and
hardware vendors and system integrators.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

32

---

---

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

| | We
plan to expand our sales and marketing efforts in existing markets and enter new
geographic markets. To date, we have been successful in penetrating markets in North and
South America, Europe, Israel, South Africa, Australia and the Far East. We have
established offices in the UK, France, Germany, the Netherlands, South Africa, Australia,
Hong Kong, Costa Rica and several locations in the United States. We are in the process
of establishing an office in India. In addition, we have sales representatives and sales
consultants located in Benelux, Brazil, Canada, Colombia, Cyprus, Finland, Greece,
Indonesia, Italy, Russia, Taiwan, Thailand, Turkey and Poland. We plan to strengthen our
global presence by recruiting additional sales and marketing personnel and opening
additional sales offices throughout the world.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
currently employ 95 sales and marketing personnel. We intend to hire additional direct
sales personnel and to appoint additional representatives. To date, we have established
relationships with IBM, Nortel, Business Edge Solutions, VocalTec, Siemens and CMG.
Through these partnerships, we deliver a joint, comprehensive solution that builds on
each respective companys strengths and jointly market our products. We intend to
strengthen our existing strategic relationships, establish additional relationships and
recruit additional sales representatives as a means of identifying business opportunities
and entering new markets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and Development
| | ------------------------

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

| | We
have expertise derived from more than a decade of developing software adapted to a
variety of network hardware and software configurations. Our products are based on our
proprietary development environment, as well as external development environments. Our
core capabilities include our:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | o | ability
to assess customers' networks and understand their network management requirements;
| | - | -------------------------------------------------------------------------------------------

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

| | o | ability
to adapt our products to different kinds of existing, next-generation and
third-generation networks; and
| | - | ----------------------------------------------------------------------------------------------------------------

| | o | expertise
in utilizing leading programming languages, operating systems and databases to create
user-friendly         distributed network management and operations support systems
solutions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33

---

---

| | We
are continuously reevaluating and enhancing our product line and we seek to introduce new
releases of each product regularly.
| | --------------------------------------------------------------------------------------------------------------------------------

| | We
currently employ 160 full-time employees in research and development. Gross research and
development expenses were approximately $5.6 million, or 13.2% of our revenues, for the
year ended December 31, 2000. Gross research and development expenses were approximately
$7.8 million, or 13% of our revenues, for the year ended December 31, 2001. Gross
research and development expenses were approximately $9.3 million, or 16% of our
revenues, for the year ended December 31, 2002. We also invested $2.7 million in 2000,
$6.6 million in 2001 and $2 million in 2002 in the development of our new platform, which
amounts were capitalized in our financial statements. We anticipate that we will commit
increasing amounts to research and development in future periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
government of Israel encourages research and development projects oriented toward
producing systems and products for export. We received grants and participate in programs
sponsored by the Office of the Chief Scientist of the Israel Ministry of Industry and
Trade, the BIRD Foundation and the European Union. We have relied on these grants for the
financing of a portion of our product development expenditures. In the past, we
recognized grants totaling $4.7 million from the Chief Scientist and the BIRD Foundation
for the development of various aspects of our products. Under Israeli law, royalties on
the revenues derived from sales of products and services developed using grants from the
Chief Scientist are payable to the Israeli government, generally at the rate of 3% during
the first three years, 4% over the following three years and 5% in or after the seventh
year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, in 2002 we received a grant of approximately $ 687,000 from the Chief Scientist
as part of our participation in a consortium of companies engaged in the development of a
management system for large networks. We are not required to repay this grant, nor are we
required to pay any royalties in respect thereof.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
of December 31, 2002, our total contingent liability in respect of grants received from
the Chief Scientist and the BIRD Foundation, net of royalties paid or accrued, was
approximately $3 million. Although we have received grants in the past, and may do so in
the future, we intend to fund future research and development efforts primarily from our
own funds and through fees charged for customization and enhancement of products for our
customers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Competition
| | -----------

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

| | To
improve our competitive position, we must continue to develop and introduce, on a timely
basis, new enhanced products and product features that keep pace with technological
developments and emerging industry standards and which address the increasingly
sophisticated needs of our customers. Our cutting edge products must be able to deal with
new kinds of networks and respond to the challenges posed by competitors products.
In addition, we must continue to provide high customer service levels and competitive
prices.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

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---

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

| | We
believe that we currently compete favorably overall with respect to these factors. Our
current and prospective competitors offer a variety of solutions to address the
communications service provider market and generally fall within four categories:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | organizations'
internal design and development departments that produce network management and
operations          support applications for their particular needs;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | providers
of network management and operations support systems applications, such as Cramer,
Granite,          Hewlett-Packard, Inet, Metasolv, Micromuse, Agilent Technologies and
Telecordia;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Intellectual
Property
| | ---------------------

| | We
rely on a combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect our proprietary rights. We
currently have no registered patents. We currently have two patent applications pending.
In addition, 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 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 codes for internal development purposes according to
agreed terms. Such arrangements relating to our source codes 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 might not prevent misappropriation of
such technology, and such protections may not prevent competitors from developing
products with functionality or features similar to our products. We believe that, because
of the rapid pace of technological change in the market for our products, legal
protections of our proprietary technology are less significant factors in our success
than the knowledge, technical expertise, ability and experience of our employees, the
frequency of product enhancements and the quality of professional services and customer
support provided by us.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

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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, the proprietary rights of third parties. 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:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | be
time-consuming;
| | - | ------------------

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

| | o | cause
product shipment delays;
| | - | ------------------------------

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

| | o | enter
into royalty or licensing agreements.
| | - | -------------------------------------------

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

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

| | C. | Organizational
Structure
| | -- | ------------------------

| | Both
our legal and commercial name is TTI Team Telecom International Ltd. We were incorporated
under the laws of the State of Israel and we are domiciled in Israel. We operate under
the laws of the State of Israel. We commenced independent operations in September 1992,
as a subsidiary of Team Computers and Systems Ltd. As of March 14, 2003, Team Software
Industries Ltd., a wholly-owned subsidiary of Team Computers, held 50.22% of our shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

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| | Currently
our subsidiaries are:
| | -------------------------------

| | o | TTI-Telecom
International Inc., a wholly-owned subsidiary, incorporated under the laws of the State
of         Delaware, and domiciled in New Jersey, U.S.A.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | TTI-Telecom
International B.V., a wholly-owned subsidiary, incorporated under the laws of The
Netherlands, and         domiciled in Amsterdam, The Netherlands.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | TTI
Telecom Australia PTY. Ltd., a wholly-owned subsidiary, incorporated under the laws of
Australia, and         domiciled in Sydney, Australia.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| | o | TTI
France S.A.R.L., a wholly-owned subsidiary, incorporated under the laws of France, and
domiciled in Paris,         France.
| | - | ------------------------------------------------------------------------------------------------------------------------------

| | o | Axarte
Ltd., a wholly-owned subsidiary, incorporated under the laws of the United Kingdom, and
domiciled in         Newberry, UK.
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| | o | Axarte
GmbH, a wholly-owned subsidiary of Axarte Ltd., incorporated under the laws of Germany,
and domiciled in         Dorfen, Germany.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | o | TTI
BVI Ltd., a wholly-owned subsidiary, incorporated under the laws of the British Virgin
Islands, and         domiciled in the British Virgin Islands.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | TTI
Telecom (HK) Limited, a wholly-owned subsidiary, incorporated under the laws of Hong
Kong, and domiciled in         Hong Kong.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | o | TTI
Telecom Software Private Limited, a wholly-owned subsidiary, in formation under the laws
of India, and         domiciled in Mumbai, India.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | o | TTI
Telecom de Costa Rica S.A., a wholly-owned subsidiary, in formation under the laws of
Costa Rica, and         domiciled in San Jose, Costa Rica.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Property,
Plants and Equipment
| | -- | ------------------------------

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

| | We
also lease the following facilities, used primarily as marketing and sales offices:
approximately 4,135 square feet in Hoboken, New Jersey, USA; approximately 1,186 square
feet in Plantation, Florida, USA; approximately 23,305 square feet in Atlanta, Georgia,
USA; approximately 3,270 square feet in Lenexa, Kansas, USA; approximately 1,937 in
Redmond, Washington, USA; approximately 4,300 square feet in Reading, England;
approximately 1,000 square feet in Antony, France; approximately 450 square feet in
Dorfen, Germany; approximately 400 square feet in Amsterdam, The Netherlands;
approximately 1,300 square feet in Sydney, Australia; and approximately 2,283 square feet
in Hong Kong. Our leasing expenses for our facilities were approximately $1.32 million in
2002. We expect to pay total leasing expenses for our facilities of approximately $1.6
million in 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A. | Operating
Results.
| | -- | ------------------

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

37

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| | 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. We first developed
network management and operations support systems in 1992 for Bezeq, the Israeli
Telecommunications Corp. and have since derived substantial revenues from the sale of
products and services.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Product
revenues consist primarily of Netrac 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 sale ranges from $1 million to $18
million, depending upon the scope of the network and functionality required for a
specific customer application. We believe that revenues from the license, service and
support of our Netrac family of products will continue to account for most of our total
revenues for the foreseeable future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from software licenses that require significant customization, integration and
installation 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 60 to 120 days after we invoice customers. As a result, an
average of five to six months passes between our performance of work and our receipt of
payment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sales
effected through our strategic relationships with IBM, Nortel, VocalTec, Siemens and CMG
accounted for approximately 10% of our revenues in 2000, 10% of our revenues in 2001 and
14% of our revenues in 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

38

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| | Our
Functional Currency
| | -----------------------

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

| | Critical
Accounting Policies
| | ----------------------------

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

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

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

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

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

39

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---

| | Revenues
from maintenance and support contracts are recognized ratably over the life of the
agreement, which is typically one year.
| | -----------------------------------------------------------------------------------------------------------------------------------

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

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

| | Impairment
of long-lived assets. Our long-lived assets and certain identifiable intangibles are
reviewed for impairment in accordance with Statement of Financial Accounting Standard
No.144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No.144) whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the future undiscounted
cash flows expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. We have performed impairment
tests on our long-lived assets and as of December 31, 2002, no impairment losses have
been identified.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 year end 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2002, all securities were designated as available-for-sale. Accordingly, the
available-for-sale securities are stated at fair value, with unrealized gains and losses
reported in a separate component of shareholders equity, accumulated other
comprehensive income. Amortization of premium and accretion of discounts are included in
financial income and other, net. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the consolidated
statements of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Capitalized
software development costs. Based on our product development process, technological
feasibility is established upon completion of a working model. Costs incurred by us
between completion of the working model and the point at which the product is ready for
general release, are capitalized in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

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

| | 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                           | 82.2%                   
|Service                           | 17.8                    
|                                  |                         
|                                  |                         
|                                  |                         
|Total revenues                    | 100.0                   
|Cost of revenues:                
|Product                           | 34.4                    
|Service                           | 8.1                     
|                                  |                         
|                                  |                         
|Total cost of revenues            | 42.5                    
|                                  |                         
|                                  |                         
|Gross profit                      | 57.5                    
|Operating expenses:              
|Research and development, net     | 11                      
|Selling and marketing,            | 19.7                    
|General and administrative        | 8.7                     
|                                  |                         
|Allowance for doubtful accounts   |                         
|                                  |                         
|                                  |                         
|Total operating expenses          | 39.4                    
|                                  |                         
|                                  |                         
|Operating income (loss)           | 18.1                    
|Financial income, net             | 6                       
|                                  |                         
|                                  |                         
|Income (loss) before income taxes | 24.1                    
|Income taxes                      | 1.6                     
|                                  |                         
|                                  |                         
|Net income (loss)                 | 22.5%                   
|                                  |                         

41

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|                           | Years Ended December 31,
|-------------------------- | ------------------------
|
|Sales by Geographic Areas: |                         
|Israel                     | 11.2%                   
|United States              | 52.1                    
|Europe                     | 23.8                    
|Australia                  | 2                       
|South America              | 10                      
|Far East                   | 0                       
|South Africa               | 0.9                     
|                           |                         
|                           |                         
|                           | 100.0%                  
|                           |                         

| | Year
ended December 31, 2002 compared to year ended December 31, 2001
| | ---------------------------------------------------------------------

| | Revenues.              Revenues
consist primarily of product revenues, which include license fees and           fees for
professional services required to customize products and commissions           from
hardware vendors. Service revenues include fees for maintenance and           customer
support, as well as development services. Total revenues decreased 4%           to $58.3
million in 2002 from $60.8 million in 2001.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Product
revenues decreased 12% to $47 million in 2002 from $53.5 million in 2001. The decrease in
total revenues was primarily attributable to difficulties in obtaining new contracts with
customers, and due to the termination of a contract with a major customer as more fully
set forth below under the heading Item 8A  Legal Proceedings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gross
Profit. 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, allocated other expenses and amortization of
capitalized software and royalties paid to the Chief Scientist and European Union. Cost
of service revenues consists primarily of personnel costs for providing professional
services, fees paid to third-party providers of professional services and third-party
software vendors, personnel costs for telephone support and maintenance and allocated
other expenses. Gross profit decreased 30.7% to $25.3 million in 2002 from $36.5 million
in 2001. Gross margin decreased to 43.3% in 2002 from 59.9% in 2001. Gross profit on
product revenues decreased 40% to $19.6 million in 2002 from $32.8 million in 2001. Gross
margin on product revenues decreased to 41.7% in 2002 from 61.2% in 2001. Gross profit on
service revenues increased 53.4% to $5.6 million in 2002 from $3.7 million in 2001. Gross
margin on service revenues was 49.9% in 2002 compared to 50.6 % in 2001. The decrease in
the gross profit and gross profit margin on products is due to intense competition and
the increasing demands of customers to receive more functionality for reduced prices. The
margin on gross profit for services remains relatively unchanged due to the execution of
previous maintenance contracts during 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Gross research and
development expenditures increased 19% to $9.3 million in 2002, from $7.8 million in 2001
and were offset by $1.4 million in grants recognized in 2002 compared to an offset of
$1.6 million for grants recognized in 2001. As a result, research and development
expenses, net (and after capitalization of our investments in the development of our new
platform), increased 26% to $8 million, or 13.6% of total revenues, in 2002 from $6.3
million, or 10.3 % of total revenues, in 2001. This increase was primarily due to costs
associated with increased personnel, equipment and facilities with no additional grants
to offset such expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42

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| | 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
increased 45% to $17.7 million, or 30.4% of total revenues, in 2002 from $12.2 million,
or 20% of total revenues, in 2001. This increase was primarily due to the expansion of
our sales and marketing organization in the United States, Asia Pacific and in Europe, as
well as increased expenses for trade shows and other marketing programs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, professional services expenses, and other
expenses. General and administrative expenses increased 33% to $7 million, or 12% of
total revenues in 2002 from $5.2 million, or 8.6 % of total revenues, in 2001. This
increase was primarily due to increased hiring, facilities costs and associated expenses
necessary to manage and support our growth.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
Income, Net. Financial income consists primarily of interest derived from cash and
cash equivalents, short-term investments, foreign currency translation adjustments offset
by impairment of marketable securities. We recognized financial income of $3.4 million in
2002 compared to financial income of $2.365 million in 2001.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allowance
for doubtful accounts. The allowance for doubtful accounts consists of the balance of
the unpaid sums under our agreements with two major customers, one of which was
terminated by the customer, and our management has concerns that the other may be
terminated by the customer if a pending dispute is not resolved. Allowance for doubtful
accounts was in the aggregate amount of $7.456 million in 2002. Please see the
information about these customers set forth below under the heading Item 8A  Legal
Proceedings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year
ended December 31, 2001 compared to year ended December 31, 2000
| | ---------------------------------------------------------------------

| | Revenues.              Revenues
consist primarily of product revenues, which include license fees and           fees for
professional services required to customize products, and commissions           from
hardware vendors. Service revenues, include fees for maintenance and           customer
support, as well as development services.. Total revenues increased 42%           to
$60.8 million in 2001 from $42.8 million in 2000. The operations of our
          subsidiary Axarte are consolidated with our other operations in our
consolidated           financial statements as of January 31, 2001.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Product
revenues increased 52% to $53.5 million in 2001 from $35.2 million in 2000. The increase
in total revenues was primarily attributable to an increase in the number and dollar
amounts of projects for new and existing customers. Significant new contracts include
KPN, Sprint PCS and Nortel.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gross
Profit. 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 and allocated other expenses. Cost of service
revenues consists primarily of personnel costs for providing professional services, fees
paid to third-party providers of professional services and third-party software vendors,
personnel costs for telephone support and maintenance and allocated other expenses. Gross
profit increased 48% to $36.5 million in 2001 from $24.6 million in 2000. Gross margin
increased to 60% in 2001 from 57.5% in 2000. Gross profit on product revenues increased
60% to $32.8 million in 2001 from $20.4 million in 2000. Gross margin on product revenues
increased to 61.2% in 2001 from 58.1% in 2000. Gross profit on service revenues decreased
12% to $3.7 million in 2001 from $4.2 million in 2000. Gross margin on service revenues
decreased to 50.6% in 2001 from 54.7% in 2000. The change in the gross profit was
predominantly due to the mixture of projects reflected by our revenues.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

---

---

| | 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. Gross research and
development expenditures increased 38.8% to $7.8 million in 2001, from $5.6 million in
2000 and were offset by $1.554 million in grants recognized in 2001 compared to an offset
of $936,000 for grants recognized in 2000. As a result, research and development
expenses, net (and after capitalization of our investments in the development of our new
platform), increased 33.4% to $6.3 million, or 10.3% of total revenues, in 2001 from $4.7
million, or 11% of total revenues, in 2000. This increase was primarily due to costs
associated with increased personnel, equipment, facilities and support.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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,
increased 44.4% to $12.2 million, or 20% of total revenues, in 2001 from $8.5 million, or
19.7% of total revenues, in 2000. This increase was primarily due to the expansion of our
sales and marketing organization in the United States and in Europe, as well as increased
expenses for trade shows and other marketing programs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and professional services expenses. General and
administrative expenses increased 41.2% to $5.2 million, or 8.6% of total revenues in
2001 from $3.7 million, or 8.7% of total revenues, in 2000. This increase was primarily
due to increased hiring, facilities costs and associated expenses necessary to manage and
support our growth.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
Income, Net. Financial income consists primarily of interest derived from cash and
cash equivalents and short-term investments. We recognized financial income of $2.365
million in 2001 compared to financial income of $2.578 million in 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 $936,000 for the year ended December 31,
2000, $1.6 million for the year ended December 31, 2001 and $1.4 million for the year
ended December 31, 2002.Of our total research and development expenses, these
grants accounted for 16.6% in 2000 20% in 2001 and 14.6% in 2002. Under Israeli law,
royalties on the revenues derived from sales of products and services developed using
grants from the Chief Scientist are payable to the Israeli government, generally at the
rate of 3% to 5%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
maximum aggregate royalties payable generally cannot exceed 100% of the U.S.
dollar-linked value of the total grants received. Royalties payable with respect to
grants received under programs approved after January 1, 1999, however, 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
government of Israel does not own proprietary rights in technology developed using its
funding and there is no restriction on the export of products manufactured using the
technology. The technology is, however, subject to other legal restrictions, including
the obligation to manufacture the product based on such technology in Israel,
prohibitions on the transfer of intellectual property rights without the consent of the
Chief Scientist, or requirements that we share intellectual property rights that are the
subject of such grants. If the Chief Scientist consents to the manufacture of the
products outside Israel, we may be required to pay increased royalties, ranging from 120%
to 300% of the amount of the Chief Scientist grant, depending on the percentage of
foreign manufacture.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44

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---

| | These
restrictions continue to apply even after we have paid the full amount of royalties
payable in respect of the grants. Based upon the aggregate grants received to date, we
expect that we will continue to pay royalties to the Israeli government on sales of our
products and related services for the foreseeable future. We paid or accrued to the
Israeli government approximately $18,000 for the year endedDecember 31, 2000,
$347,000 for the year ended December 31, 2001 and $258,000 for the year ended December
31, 2002. From time to time, provisions of Israeli law relating to the terms of the Chief
Scientist participations have been amended and may be further amended in the future. The
Chief Scientist budget has been subject to reductions and such reductions may affect the
availability of funds for Chief Scientist participations in the future. We have also
received royalty-bearing grants from the BIRD Foundation to be repaid at the rate of 3%
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 $11,000 for the
year ended December 31, 2000, $10,000 for the year ended December 31, 2001 and $36,000
for the year ended December 31, 2002. We have not received grants from the BIRD
Foundation in the last six years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, we received grants of approximately $323,000 in 2001 and $687,000 in 2002 from
the Chief Scientist as part of our participation in a consortium of companies (MAGNET
program) engaged in the development of a management system for large networks. We are not
required to repay these grants, nor are we required to pay any royalties in respect
thereof.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
received grants of approximately $192,000 in 2001 and $62,000 in 2002 from the European
Union as part of our participation in a consortium of companies engaged in the
development of a platform for the management and control of IP over optical networks
(DWDM). We are not required to repay these grants, nor are we required to pay any
royalties in respect thereof.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketing
Grants
| | ----------------

| | The
Marketing Fund provides grants to Israeli companies for overseas marketing expenses,
including expenses for maintaining branches, advertising, catalogs, exhibitions and
surveys, up to a maximum rate of 33% of such expenses, not to exceed $1.2 million
annually. We did not apply for any grants from the Marketing Fund in 2000, 2001 or 2002.
In 1999, we received grants from the Marketing Fund totaling approximately $180,000, and
were required to pay royalties in connection with such grants at a rate of 4% of the
increase in sales outside of Israel up to the total U.S. dollar-linked amount of such
grants, plus interest at an annual rate of LIBOR. Marketing Fund grants are currently
awarded only to companies whose annual exports in the year preceding the application did
not exceed $15 million. As of December 31, 2002, we have no further liability to the
Israeli government in respect of grants received from the Marketing Fund.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

45

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---

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

|                           | Quarters Ended
|-------------------------- | --------------
|
|
|Revenues:                  |               
|Products                   | 88.7%         
|Services                   | 11.3          
|                           |               
|                           |               
|Total revenues             | 100.0         
|Cost of revenues:         
|Products                   | 40.4          
|Services                   | 48.5          
|                           |               
|                           |               
|Total cost of revenues     | 41.3          
|                           |               
|                           |               
|Gross profit               | 58.7          
|                           |               
|Operating expenses:       
|                           |               
|Research and               | 10.8          
|development, net          
|Selling and marketing      | 20.0          
|                           |               
|General and administrative | 8.3           
|                           |               
|                           |               
|Provision for doubtful     | 0.0           
|accounts                  
|                           |               
|                           |               
|Total operating expenses   | 39.2          
|                           |               
|                           |               
|Operating Income (loss)    | 19.6          
|                           |               
|Financial income, net      | 5.2           
|                           |               
|                           |               
|Income(loss) before        | 24.7          
|Income taxes              
|Income  Taxes              | 1.7           
|                           |               
|                           |               
|Net income (loss)          | 29.1%         
|                           |               
|                           |               

46

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---

| | B. | Liquidity
and Capital Resources
| | -- | -------------------------------

| | We
had cash and cash equivalents of $48.09 million, $54.486 million and $49.91million for
the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
operating activities provided cash of $1.9 million, $16.3 million and $5.5 million for
the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively.
We had no cash from financing activities in 2002. We had cash from financing activities
of $3.6 million and $35.5 million in 2001 and 2000, respectively, primarily due to our
public offerings and the exercise of options under our employee share option plans.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
capital expenditures were $3.9 million in 2002, $5 million in 2001 and $4 million in
2000. Our capital investments for improvements of leased premises was $1.3 million in
2001 and $0.3million in 2002. We also invested $2.7 million in 2000, $6.6 million in
2001and $2 million in 2002 in the development of our new platform, which investments were
capitalized in our financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
following table presents information on our short-term and long-term contractual
obligations.
| | -------------------------------------------------------------------------------------------------

47

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---

Payments Due By Period

(US$ million)

|Contractual Obligations | Total | 2003  | 2004  | 2005  | 2006  | 2007 
|----------------------- | ----- | ----- | ----- | ----- | ----- | -----
|Operating leases        | 6.212 | 1.629 | 1.629 | 1.374 | 1.099 | 0.481

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes our cash and cash equivalents reserve, as well as cash flow from 2003
operations, will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next twelve months. However, if we carry out acquisitions of
other companies or new technologies by paying cash, there may be a need to raise
additional capital by issuing debt or equity during the year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Corporate
Tax Rate
| | ------------------

| | Our
consolidated effective tax rate was 6.6% in 2000, 6.6% in 2001 and 5.1% in 2002. Our
investment programs were granted the status of an approved enterprise under Israels
Law for Encouragement of Capital Investments, 1959, pursuant to which we have elected to
forego certain Israeli government grants in return for an alternate package of tax
benefits. We have derived, and expect to continue to derive, a portion of our income from
approved enterprise investments. Under the approved enterprise program, we are entitled
to reductions in the tax rate normally applicable to Israeli companies with respect to
income generated from our approved enterprise investments. We are also entitled to
certain tax exemptions in connection with our approved enterprise investments. Due to the
expiration of certain of the tax benefits and exceptions discussed above and a decrease
in the impact of the remaining benefits, our effective tax rate was supposed to increase
to 17% in 2003, but since we incurred losses in this year, we were not required to pay
taxes. We base this expectation upon various factors including our assumptions regarding
our growth, and none of our assumptions may prove to be correct.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

48

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| | In
recent years, until 1997, inflation in Israel exceeded the devaluation of the NIS against
the dollar and we experienced increases in the dollar cost of our operations in Israel.
For example, the rate of inflation in Israel was 10.6% in 1996, while the devaluation of
the NIS against the dollar was 3.7% in 1996. This trend was partially reversed beginning
in 1997, as the rate of inflation was 7.0% in 1997, 8.6% in 1998, 1.3% in 1999, 0% in
2000, 1.4% in 2001 and 6.5% in 2002, while the rate of devaluation was 8.8% in 1997,
17.6% in 1998, (0.2)% in 1999, (2.7)% in 2000, 9.3% in 2001 and 7.3% in 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Market
Risk
| | -----------

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

| | Grants
from the Office of the Chief Scientist
| | ---------------------------------------------

| | Under
the Law for the Encouragement of Industrial Research and Development, 1984, or the
Research and Development Law, a research and development program that meets specified
criteria is eligible for grants of up to 50% of the programs expenses. The program
must be approved by a committee of the Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade. The recipient of the grants is required to return the
grants by the payment of royalties on the sale of products developed using the grants.
Current regulations promulgated under the law provide for the payment of royalties to the
Office of the Chief Scientist ranging from 3% to 5% on the sale of products developed
using such grants until 100% of the grant is repaid. Grants received under programs
approved after January 1, 1999 accrue interest at an annual rate of 12-month LIBOR
applicable to dollar deposits. Royalties are paid in NIS linked to the dollar at the
exchange rate in effect at the time of payment. Following the full payment of such
royalties and interest, there is no further liability for payment. In the case of
unsuccessful development of a product following Office of the Chief Scientist
participation, or if the product does not generate any revenues, we would not be
obligated to repay the grants we received for the products development.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
terms of grants under the law require that we manufacture in Israel the products
developed with these grants. Approval is not required for the export of any products
resulting from such research or development. Under the regulations promulgated under the
law, we or another entity may manufacture any such product outside Israel only if prior
approval is received from the Office of the Chief Scientist. Ordinarily, as a condition
to obtaining such approval, we would be required to pay increased royalties. If the
manufacturing is performed by us, the increased royalties would ordinarily be one
percentage point above the otherwise applicable royalty rate. If the manufacturing is
performed by an entity other than us, the rate would depend on the amount of
manufacturing performed outside of Israel and the size of the grants in relation to the
investments made by us in the project. The total amount to be repaid to the Office of the
Chief Scientist would also be adjusted to between 120% and 300% of the grants, depending
on the manufacturing volume that is performed outside Israel. We may not transfer the
technology developed pursuant to the terms of these grants to third parties without the
prior approval of a governmental committee. Approval of the transfer of technology may be
granted only if the recipient abides by all the provisions of the law and related
regulations, including the restrictions on the transfer of know-how and the obligation to
pay royalties in an amount that may be increased. Approval to manufacture products
outside of Israel or consent to the transfer of technology, if requested, might not be
granted.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49

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---

| | We
recorded a grant participation from the Office of the Chief Scientist and the European
Union totaling $936,000 in 2000, $1.6 million in 2001 and $1.4 million in 2002. Of our
total research and development expenses, these grants accounted for 16.6% in 2000, 20% in
2001 and 14.6% in 2002. Under Israeli law, royalties on revenues derived from sales of
products and services developed using grants from the Chief Scientist are payable to the
Israeli government, generally at the rate of 3% during the first three years, 4% over the
following three years, and 5% in or after the seventh year. As of December 31, 2002, our
contingent liability to the Office of the Chief Scientist in respect of grants received
was approximately $ 3 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
November 2002, the Israeli parliament approved an amendment to the Research and
Development Law. The amendment became effective on April 1, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | As
opposed to the Research and Development Law prior to the amendment, which requires an
undertaking in the application that all manufacturing will be performed in Israel, the
amendment to the Research and Development Law allows for the approval of grants in cases
in which the applicant declares that part of the manufacturing will not be performed in
Israel. This declaration is required to include details regarding the locations in which
the manufacture of the product will be performed in Israel and out of Israel, the
manufacture activities to be performed in such locations (including the reasons for
performing such manufacture activities out of Israel) and the proportionate manufacturing
expenditures in Israel and out of Israel. This declaration will be a significant factor
in the determination of the Office of Chief Scientist whether to approve a plan and the
amount and other terms of benefits to be granted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the amendment to the Research and Development Law, a plan will be
approved if the applicant is an Israeli corporation and as a result of the plan the
applicant will develop in Israel, by Israeli residents, a new product or a significant
improvement to an existing product, unless the Office of Chief Scientist is convinced
that it is essential for the execution of the plan that part of it will be performed out
of Israel or by non-Israeli residents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amendment to the Research and Development Law further allows the Office of Chief
Scientist to provide grants for portions of 20%, 30%, 40% or 50% of certain approved
expenditures of a research and development. The Research and Development Law prior to the
amendment only allowed for grants covering 50% of such expenditures. This amendment and
the budget of the Office of the Chief Scientist may affect the rate of additional grants
that may be requested by us in the future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amendment to the Research and Development Law adds reporting requirements with respect to
certain changes in the ownership of a grant recipient. The amendment requires the grant
recipient and its controlling shareholders and interested parties to notify the Office of
the Chief Scientist of any change in control of the recipient or a change in the holdings
of the means of control of the recipient that results in a non-Israeli becoming an
interested party directly in the recipient. 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 and the right to appoint
directors or the chief executive officer. An interested party of a company
includes its chief executive officer and directors, someone who has the right to appoint
its chief executive officer or at least one director, and a holder of 25% or more of the
companys outstanding equity or voting rights.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

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---

| | The
proposed amendment to the Research and Development Law that would have allowed in certain
circumstances the transfer of the ownership of the technology developed with the funding
of the Office of the Chief Scientist to third parties outside of Israel was not approved
at this time.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Research
and Development, Patents and Licenses
| | -- | ----------------------------------------------

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

| | We
currently employ 160 full-time employees in research and development. Gross research and
development expenses were approximately $5.6 million, or 13.2% of our revenues, for the
year ended December 31, 2000. Gross research and development expenses were approximately
$7.8 million, or 13% of our revenues, for the year ended December 31, 2001. Gross
research and development expenses were approximately $9.3 million, or 16% of our
revenues, for the year ended December 31, 2002. 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | D. | Trend
Information
| | -- | -----------------

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

51

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

| | A. | Directors
and Senior Management
| | -- | -------------------------------

| | Our
directors and officers are as follows:
| | ------------------------------------------

|                 |     |                                             
|---------------- | --- | --------------------------------------------
|
|
|Name             | Age | Position                                    
|Shlomo Eisenberg | 54  | Chairman of the Board                       
|Meir Lipshes     | 57  | Director and Chief Executive Officer        
|Ron Al-Dor       | 43  | President                                   
|Israel Ofer      | 49  | Chief Financial Officer                     
|Norman Tutnauer  | 44  | Vice President of Sales                     
|Avichai Levy     | 39  | Vice President of Marketing                 
|Rami Doron       | 46  | Vice President of Development and Operations
|Gadi Komet       | 43  | Vice President of Products Group            
|David Azaria     | 64  | Director                                    
|Meir Dvir        | 73  | Director                                    
|Zeev Refuah      | 61  | Director                                    

| | Shlomo
Eisenberg, has served as Chairman of our board of directors since our inception in
September 1992. Since 1990, Mr. Eisenberg has served as Chairman of the board of
directors of Team Computers and Systems Ltd., the parent company of our major
shareholder, Team Software Industries Ltd. and Team Computers various subsidiaries.
Since 1994, Mr. Eisenberg has served as Chairman of the board of directors of Team
Software. Since 1988, Mr. Eisenberg has served as Chairman of the board of directors of
Arad, a Tel Aviv Stock Exchange-listed company which, directly and indirectly, owns 54.8%
of Team Computers. Mr. Eisenberg is a shareholder of Team Computers and a member of the
controlling group of shareholders of Arad. Since May 1989, Mr. Eisenberg has been the
Chairman and Chief Executive Officer of Isras Investment Company, Ltd. Mr. Eisenberg
received a Masters of Science degree in mathematics from the Hebrew University,
Jerusalem. In November 1997, a motion for certification of a class action was filed
against Mr. Eisenberg, Arad and the other directors of Arad in the Tel Aviv District
Court. The class action alleged that the defendants, including Mr. Eisenberg, had, among
other things, wrongfully obtained the approval by Arads shareholders of a
transaction in which Arad acquired shares of Isras from Mr. Eisenberg and two other
controlling shareholders of Arad which was financed through a rights offering. On
February 24, 1999, all of the defendants, except Mr. Eisenberg, signed a settlement
agreement with respect to this action without admitting any of the charges. With respect
to Mr. Eisenberg, he was given a specific period of time following the resolution of the
criminal proceedings described below to joint the settlement agreement. Following an
investigation by the Israel Securities Authority of certain aspects of the
above-mentioned matter, an indictment was filed against Mr. Eisenberg and other accused
persons in the Tel Aviv District Court alleging, among other things, that Mr. Eisenberg
and other accused persons have failed to disclose to the Arad public shareholders and in
the rights offering prospectus, the circumstances surrounding the sale of certain Arad
shares by Mr. Eisenberg to third parties, including certain understandings that the
parties to that transaction have allegedly reached. The indictment alleges that the
purpose of that transaction was to fraudulently obtain the shareholders consent
required under Israeli law for the acquisition by Arad of the Isras shares from Arads
related parties. The charges include violations of Israels Securities Law
(including making a misleading statement in a prospectus) and Penal Law. Mr. Eisenberg
pled not guilty to the charges. The trial has been completed and the judges verdict
is awaited. Under current Israeli law, if Mr. Eisenberg is convicted of certain of the
alleged criminal offenses, he would be disqualified to serve as a director of a public
company, including ours, unless permitted so to serve by a court order.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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

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

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

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

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

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

53

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

| | David
Azaria became a director in 1998. Mr. Azaria served on the board of directors of
YAANA Systems Ltd., a publicly-held Israeli software company, from 1993 to 1998. Mr.
Azaria was Chief Executive Officer of YAANA from 1968 to 1993, Chairman of the Board of
Directors of YAANA from 1973 to 1998, and Chief Executive Officer and Chief Financial
Officer of Yeul Data Processing Cooperative from 1963 to 1998. Mr. Azaria was the
founder of the Israel Defense Forces Main Computation Center. He received a Bachelor of
Science degree in statistics and sociology from the Hebrew University, Israel.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Zeev
Refuah became a director in 1999. Mr. Refuah has been Chief Executive Officer of Haft
Refuah Ltd. Financial and Business Consultants since 1991. Mr. Refuah additionally has
held the following positions, among others: Manager of the Government Companies Authority
of the Ministry of the Treasury from 1985 to 1991, Founder, Chief Executive Officer and
Chairman of the board of directors of Nikuv Computers (Israel) Ltd. from 1964 to 1985.
Mr. Refuah also serves on the management committees of various kibbutzim in Israel and on
the board of directors of Dirom  Building Investments and Development Company Ltd.
In the past, Mr. Refuah served on the board of directors of various government companies
and publicly-traded companies. Mr. Refuah holds a L.L.B. from the Tel Aviv University
School of Law, Israel.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Compensation
| | -- | ------------

| | Our
directors, other than Shlomo Eisenberg and Meir Lipshes, receive annual compensation of
approximately $7,900 each and in addition approximately $300 per board meeting or per
board committee meeting in which they participate, and approximately $150 per such
meeting by telephone in which they participate.  During 2002 we paid our directors, other
than Shlomo Eisenberg and Meir Lipshes, the aggregate amount of approximately $30,272.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

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| | We
undertook to pay monthly management fees of NIS 30,000 to Shlomo Eisenberg, and NIS
60,000 to Meir Lipshes.  These amounts are linked to the Israeli Consumer Price Index and
are updated every month according to this Index.  As of December 31, 2002, we paid
monthly management fees of NIS 32,492 ($6,859 according to the exchange rate prevailing
on December 31, 2002) to Shlomo Eisenberg, and NIS 64,984 ($13,718 according to the
exchange rate prevailing on December 31, 2002) to Meir Lipshes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
compensation paid to our directors, other than our external directors, during 2002 was
$443,895, out of which $166,480 was in respect of amounts accrued during 2001.  In 2003
we will pay approximately $63,331 in respect of amounts accrued during 2002.   The total
amount of the compensation paid during 2002 of $443,895 includes pension, bonuses,
retirement and similar benefits. This amount also includes a bonus paid in 2002 to Meir
Lipshes of NIS 300,000 in respect of his performance during 2001, and a bonus paid in
2002 to Shlomo Eisenberg of NIS 150,000 in respect of his performance during 2001.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Total
compensation during 2002 to the members of senior management included in the table at the
beginning of this "Item 6A - Directors, Senior Management and Employees", but who are not
directors, amounted to approximately $1.3 million. This amount includes special bonuses,
pension, retirement and similar benefits amounting to approximately $663,605.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2001, these members of senior management, other than Shlomo Eisenberg and Meir
Lipshes, were granted options to purchase a total of up to 46,666 ordinary shares for an
exercise price of either $19 or $30 each.  These options vest over 2 years.  The
expiration date of these options is November 9, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | In
November 2001, our board of directors authorized the grant of options to purchase up to
an additional 15,000 Ordinary Shares to Shlomo Eisenberg, and options to purchase up to
an additional 20,000 Ordinary Shares to Meir Lipshes.  These options vest over 2 years.
These options expire on November 9, 2005.  Out of the 15,000 options granted to Shlomo
Eisenberg, 12,000 options have an exercise price of $19.00 per share, and 3,000 options
have an exercise price of $30.00 per share.  Out of the 20,000 options granted to Meir
Lipshes, 16,000 options have an exercise price of $19.00 per share, and 4,000 options
have an exercise price of $30.00 per share. Of these options, 10,000 of Mr. Eisenberg's
options are currently exercisable or will become exercisable within 60 days, and 13,334
of Mr. Lipshes' options are currently exercisable or will become exercisable within 60
days. These option grants were approved by our shareholders in October 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

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| | C. | Board
Practices.
| | -- | ----------------

| | 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.
 Our officers serve at the discretion of the board of directors.  There are no family
relationships among our directors and executive officers.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Alternate
Directors
| | -------------------

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

| | External
Directors
| | ------------------

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

| | o | an
employment relationship;
| | - | ---------------------------

| | o | business
or professional relationship maintained on a regular basis;
| | - | --------------------------------------------------------------------

| | o | control;
and
| | - | ------------

| | o | service
as an office holder.
| | - | ----------------------------

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

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

56

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

| | o | the
total number of shares of non-controlling shareholders that voted against the election of
the director does                       not exceed one percent of the aggregate voting
rights in the company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
initial term of an external director is three years and may be extended for an additional
three years. Each committee of a companys board of directors will be required to
include at least one external director. Pursuant to the provisions of the Companies Law,
we elected two external directors, David Azaria and Zeev Refuah.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Audit
Committee
| | ---------------

| | Under
the Companies Law, the board of directors of a public company must appoint an audit
committee, comprised of at least three directors including all of the external directors,
but excluding:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the
chairman of the board of directors;
| | - | ---------------------------------------

| | o | any
director who is employed by the company or provides services to the company on a regular
basis; and
| | - | -------------------------------------------------------------------------------------------------------

| | o | 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. In addition, the approval of the
audit committee is required to effect specified actions and transactions with office
holders and interested parties.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
interested party is defined in the Companies Law as a shareholder who holds 5% or more of
a companys issued share capital voting rights, any person or entity who has the
right to designate one director or more or the general manager of the company or any
person who serves as a director or as a general manager.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
audit committee may not approve an action or a transaction with an interested party or
with an office holder 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
members of our audit committee are Meir Dvir, David Azaria and Zeev Refuah.
| | -------------------------------------------------------------------------------

| | 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 either, 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).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57

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| | We
have agreed to indemnify our office holders to the fullest extent permitted under Israeli
law. We have obtained directors and officers liability insurance for the benefit of our
office holders.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Employees
| | -- | ---------

| | We
currently employ 595 full-time employees, including 434 in research and development and
project integration, 95 in sales and marketing and 66 in finance and administration.
 Competition for technical personnel in the communications and computer industry is
intense.  Although we believe we have been able to attract talented development and other
support personnel, there is a large demand for highly qualified technical personnel in
Israel and competition is intense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | E. | Share
Ownership
| | -- | ---------------

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

| | As
of March 14, 2003, Team Software Industries Ltd., a wholly-owned subsidiary of Team
Computers and Systems Ltd. owned 5,962,550 of our ordinary shares.  As of March 14, 2003,
Shlomo Eisenberg, Chairman of our board of directors, owned approximately 15.6% of Team
Computers directly; Arad Investments and Industrial Development Ltd., of which Mr.
Eisenberg is a member of the controlling group of shareholders and Chairman of Arad's
board of directors, owned approximately 54.8% of Team Computers' shares.  As of March 14,
2003, Meir Lipshes, a member of our board of directors and our Chief Executive Officer,
owned approximately 8% of Team Computers' shares.  Shlomo Eisenberg and Meir Lipshes are
members of our board of directors and of the board of directors of Team Software and Team
Computers, and therefore, may be deemed to beneficially own the ordinary shares owned by
Team Software in us.  Messrs. Eisenberg and Lipshes disclaim any beneficial interest in
the ordinary shares owned by Team Software in us.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58

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| | Options
to Purchase Our Ordinary Shares
| | ---------------------------------------

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

| | Under
our employee share option plans, as of March 25, 2003, we had granted options to purchase
an aggregate of 2,211,543 ordinary shares to certain of our employees and directors, at
exercise prices ranging from $0.66 to $30 per ordinary share.  As of March 25, 2003,
1,572,608 of such options had been exercised, 26,509 of these options were forfeited and
612,426 of these options remain outstanding. As of March 25, 2003, options to purchase
506,981 of such shares were exercisable, and 140,481 options remained available for grant
pursuant to the share option plans. The following table sets forth the dates of
expiration for the options granted under the share option plans and not yet exercised,
excluding options granted to Shlomo Eisenberg and Meir Lipshes:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Number of Options |  | Expiration Date  
|----------------- |  | -----------------
|                  |  |                  
|2,500             |  | November 13, 2004
|7,000             |  | April 13, 2003   
|80,413            |  | October 28, 2003 
|97,000            |  | October 28, 2004 
|96,846            |  | January 31, 2004 
|54,333            |  | January 31, 2005 
|25,667            |  | April 5, 2005    
|53,333            |  | November 9, 2005 
|75,000            |  | November 30, 2005
|12,833            |  | April 5, 2006    
|37,500            |  | November 30, 2006
|                  |  |                  
|Total:542,425     |  |                  

59

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

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

| | In
November 2001, our board of directors authorized the grant of options to purchase up to
an additional 15,000 Ordinary Shares to Shlomo Eisenberg, and options to purchase up to
an additional 20,000 Ordinary Shares to Meir Lipshes. These options vest over 2 years.
These options expire on November 9, 2005. Out of the 15,000 options granted to Shlomo
Eisenberg, 12,000 options have an exercise price of $19.00 per share, and 3,000 options
have an exercise price of $30.00 per share. Out of the 20,000 options granted to Meir
Lipshes, 16,000 options have an exercise price of $19.00 per share, and 4,000 options
have an exercise price of $30.00 per share. Of these options, 10,000 of Mr. Eisenbergs
options are currently exercisable or will become exercisable within 60 days, and 13,334
of Mr. Lipshes options are currently exercisable or will become exercisable within
60 days. These option grants were approved by our shareholders in October 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | A. | Major
Shareholders
| | -- | ------------------

| | Set
forth below is information concerning our shareholders that are the beneficial owners of
5% or more of our outstanding ordinary shares as of March 14, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name of shareholder                                   | Number of
ordinary shares
held | Percentage of
our
outstanding
ordinary
shares(1)
|----------------------------------------------------- | ------------------------------ | ------------------------------------------------
|
|
|Team Software Industries Ltd.(2)                      | 5,962,550                      | 50.22%                                          
|                                                      |                                |                                                 
|All directors and executive
officers as a group(3)(4) | 6,195,607                      | 52.19%                                          
|                                                     
|                                                      |                                |                                                 

60

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| | (1) | Based
on 11,872,049 ordinary shares outstanding as of March 14, 2003. Ordinary
               shares deemed beneficially owned by virtue of the right of any person or
group                to acquire such ordinary shares within 60 days are treated as
outstanding only                for purposes of determining the percent owned by such
person or group.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Team
Software is a wholly-owned subsidiary of Team Computers and Systems Ltd.
               Team Computers, an Israeli company whose shares are publicly traded on the
Tel                Aviv Stock Exchange, is a large computer vendor in Israel. The
principal                shareholder of Team Computers is Arad Investments and Industrial
Development                Ltd., an Israeli company, whose shares are publicly traded on
the Tel Aviv Stock                Exchange, which, as of March 14, 2003, owned
approximately 54.8% of Team                Computers shares. Team Softwares
and Team Computers address is                7 Martin Gehl Street, Kiryat Aryeh,
Petach Tikva, Israel, 49512.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes
5,962,550 ordinary shares owned by Team Software. As of March 14, 2003,
               Shlomo Eisenberg, Chairman of our board of directors, owned approximately
15.6%                of Team Computers shares directly; Arad, of which Mr.
Eisenberg is a                member of the controlling group of shareholders and
Chairman of the board of                directors, owned approximately 54.8% of Team
Computers shares; and Meir                Lipshes, a member of our board of
directors and our Chief Executive Officer,                owned approximately 8% of Team
Computers shares. Shlomo Eisenberg and Meir                Lipshes are directors of
each of Team Software, Team Computers and us, and                therefore may be deemed
to beneficially own the ordinary shares owned by Team                Software. Messrs.
Eisenberg and Lipshes disclaim any beneficial interest in our                ordinary
shares owned by Team Software.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes
199,956 ordinary shares issuable upon the exercise of
               currently-exercisable options granted to directors and executive officers
under                our employee share option plans (of which options to purchase an
aggregate of                58,333 ordinary shares are held by Shlomo Eisenberg and Meir
Lipshes ), and                28,101 ordinary shares held by Shlomo Eisenberg, as a
result of exercise of                options.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
major shareholders do not have different voting rights.
| | -----------------------------------------------------------

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

| | As
of December 31, 2002, there were approximately 23 record holders of our ordinary shares,
of which 17 were record holders with mailing addresses in the United States owning an
aggregate of approximately 55% of our outstanding shares. The number of record holders in
the United States is not representative of the number of beneficial holders nor is it
representative of where such beneficial holders are resident since many of these ordinary
shares were held of record by brokers or other nominees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Related
Party Transactions
| | -- | --------------------------

| | Sale
of Products; Services
| | --------------------------

| | Since
the commencement of our operations in 1992, Team Computers has from time to time paid us
commissions in respect of the sale by us of certain products represented and sold by Team
Computers.  This relationship is reflected in an agreement between us and Team Computers
dated October 1996.  Team Computers generally pays us a commission at the rate of 15% of
the sales price of these products, up to a maximum of 50% of the amount received by Team
Computers from these sales less the cost to Team Computers. We recorded commissions of
approximately $974,000 in 2001, and $520,000 in 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

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| | In
addition, Team Computers provides us certain administrative services, including computer
servicing, salary administration, automotive fleet maintenance, legal counsel and basic
insurance coverage, and we reimburse Team Computers for the actual cost of such services.
 We recorded expenses for such services of $589,000 in 2000, $636,000 in 2001 and
$583,000 in 2002.  We and Team Computers have agreed to indemnify each other for
liabilities resulting from the acts or omissions of their respective employees
constituting intellectual property violations.  The agreement is automatically renewed
for successive terms of one year on each December 31, and can be terminated by either
party at the end of any such term upon at least 60 days' prior written notice.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 $1.1 million in 2000, and approximately $2.014 million in 2001.  We
recorded the amount of $884,000 for such asset purchases in 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.  When and if we will receive additional payments for these projects, we
are required to pay Team Computers an additional payment based on Team Computers' pro
rata share of the project.  The aggregate additional amount that we may have to pay to
Team Computers for all of these projects is $563,000.  One of these major customers
terminated its agreement with us.  Please see the information about this customer set
forth below under the heading "Item 8A - Legal Proceedings."  We have not yet executed a
written agreement reflecting our understanding with Team Computers.  This agreement is
subject to approvals required by applicable law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Registration
Rights
| | -------------------

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

| | Leased
Facilities
| | -----------------

| | Since
February 1998, we have leased our principal facilities in Petach Tikva, Israel from Team
Computers pursuant to a lease agreement dated February 1, 1998.  Aggregate payments under
this lease, which amount includes rent, maintenance and additional related expenses, were
approximately $1.3 million during 2001 and $1.3 million during 2002. We exercised our
option to extend the lease until August 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

62

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---

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

| | Compensation
to Directors
| | -------------------------

| | Options
| | -------

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

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

| | In
November 2001, our board of directors authorized the grant of options to purchase up to
an additional 15,000 ordinary shares to Shlomo Eisenberg, and options to purchase up to
an additional 20,000 ordinary shares to Meir Lipshes.  These options vest over 2 years.
These options expire on November 9, 2005.  Out of the 15,000 options granted to Shlomo
Eisenberg, 12,000 options have an exercise price of $19.00 per share, and 3,000 options
have an exercise price of $30.00 per share.  Out of the 20,000 options granted to Meir
Lipshes, 16,000 options have an exercise price of $19.00 per share, and 4,000 options
have an exercise price of $30.00 per share. Of these options, 10,000 of Mr. Eisenberg's
options are currently exercisable or will become exercisable within 60 days, and 13,334
of Mr. Lipshes' options are currently exercisable or will become exercisable within 60
days. These option grants were approved by our shareholders in October 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
Fees and Bonuses
| | ---------------------------

| | We
undertook to pay monthly management fees of NIS 30,000 to Shlomo Eisenberg, and NIS
60,000 to Meir Lipshes.  These amounts are linked to the Israeli Consumer Price Index and
are updated every month according to this Index.  As of December 31, 2002, we paid
monthly management fees of NIS 32,492 ($6,859 according to the exchange rate prevailing
on December 31, 2002) to Shlomo Eisenberg, and NIS 64,984 ($13,718 according to the
exchange rate prevailing on December 31, 2002) to Meir Lipshes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

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---

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

| | During
January 2003, we paid a bonus to Meir Lipshes of NIS 300,000 ($63,331 according to the
exchange rate prevailing on December 31, 2002) in respect of his performance during 2001,
and during November 2002, the Company paid a bonus to Shlomo Eisenberg of NIS 150,000
($31,666 according to the exchange rate prevailing on December 31, 2002) in respect of
his performance during 2001.  These bonuses were approved by our shareholders in October
2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Interests
of Experts and Counsel
| | -- | --------------------------------

| | Not
applicable.
| | ---------------

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

| | A. | Consolidated
Statements and Other Financial Information
| | -- | -------------------------------------------------------

| | Financial
Statements
| | --------------------

| | See
Item 18.
| | ------------

| | Legal
Proceedings
| | -----------------

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

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

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

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

64

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---

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

| | We
also have an agreement for the supply of a MoM with another customer that is an affiliate
of the customer referred to above. Following a dispute that arose between us and the
abovementioned customer regarding deliveries and payments stipulated in the agreement,
our management has concerns regarding termination of this contract in the event this
dispute will not be resolved. We are currently considering the best manner in which to
resolve this dispute.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have recorded trade and unbilled receivables in the amount of US$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, we have classified an amount of US$2.9 million as long-term trade
and unbilled receivables, which represents the amount whose collection is probable,
in our managements opinion.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Dividend
Policy
| | ---------------

| | Subject
to the Companies Law, our board of directors may from time to time declare and cause us
to pay, such interim dividend as may appear to the board of directors justified. Our
board of directors is to determine the time for payment of dividends and the record date
for determining the shareholders entitled to receive dividends.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have never declared or paid cash dividends on our ordinary shares.
| | ---------------------------------------------------------------------

| | B. | Significant
Changes
| | -- | -------------------

| | No
significant change has occurred since December 31, 2002, 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

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---

|                                    | High            | Low            
|----------------------------------- | --------------- | ---------------
|
|
|1998:                               |                 |                
|Full Year                           | $         9.18  | $         3.063
|                                    |                 |                
|1999:                              
|Full Year                           | $       23.00   | $         6.875
|                                    |                 |                
|2000:                              
|Full Year                           | $       50.75   | $       14.125 
|                                    |                 |                
|2001:                              
|Full Year                           | $       26.84   | $         10.19
|First Quarter                       | 21.88           | 11.75          
|Second Quarter                      | 19.80           | 10.63          
|Third Quarter                       | 20.85           | 10.19          
|Fourth Quarter                      | 26.84           | 11.70          
|                                    |                 |                
|2002:                              
|Full Year                           | $       34.50$  | 4.11           
|First Quarter                       | 34.50           | 24.87          
|Second Quarter                      | 29.03           | 15.50          
|Third Quarter                       | 15.46           | 6.78           
|Fourth Quarter                      | 7.73            | 4.11           
|                                    |                 |                
|Most Recent Six Months:            
|March 2003 (through March 25, 2003) | $         5.81$ | 5.04           
|February 2003                       | 5.25            | 4.25           
|January 2003                        | 5.70            | 4.11           
|December 2002                       | 5.46            | 4.29           
|November 2002                       | 7.73            | 4.11           
|October 2002                        | 6.42            | 4.96           

| | On
March 25, 2003, the last reported sale price of our ordinary shares on the Nasdaq
National Market was $5.15 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.
| | ---------------

66

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| | E. | Dilution
| | -- | --------

| | Not
applicable.
| | ---------------

| | F. | Expenses
of the Issue
| | -- | ---------------------

| | Not
applicable.
| | ---------------

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

| | A. | Share
Capital
| | -- | -------------

| | Not
applicable.
| | ---------------

| | B. | Memorandum
and Articles of Association
| | -- | --------------------------------------

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

| | Objects
and Purposes
| | --------------------

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

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

67

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| | Directors
| | ---------

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

| | Election
of Directors
| | ---------------------

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

| | Remuneration
of Directors
| | -------------------------

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

| | Powers
of the Board of Directors
| | --------------------------------

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

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

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

68

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| | Redeemable
Shares
| | -----------------

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

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

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

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

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

| | o | 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | o | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Conflict
of Interest
| | --------------------

| | 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. A personal interest of an office holder includes an interest
of a company in which the office holder is, directly or indirectly, 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. In the case of an extraordinary
transaction, the office holders duty to disclose applies also to a personal
interest of the office holders relative, which term is defined in the Companies Law
as the persons spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69

---

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| | Under
Israeli law, an extraordinary transaction is a transaction:
| | -----------------------------------------------------------------

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

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

| | o | 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 a matter 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 this matter, 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

70

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| | Duties
of Shareholders
| | ----------------------

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

| | o | 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
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | 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, 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:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

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

| | o | a
breach of his duty of loyalty to us,  provided  that the office  holder acted in good
faith and had  reasonable         cause to assume that his act would not prejudice our
interests; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | a
financial liability imposed upon him in favor of another person.
| | - | ------------------------------------------------------------------

71

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| | Indemnification
of Office Holders
| | ---------------------------------

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

| | o | a
financial  liability  imposed on him in favor of another  person by any judgment,
 including a settlement or an         arbitration  award approved by a court; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Our
articles of association also include provisions:
| | ----------------------------------------------------

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

| | o | authorizing
us to retroactively indemnify an office holder.
| | - | -----------------------------------------------------------

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

| | o | a
breach by the office  holder of his duty of loyalty,  unless,  with respect to insurance
 coverage,  the office         holder  acted in good  faith and had a  reasonable  basis
to  believe  that the act would  not  prejudice  the         company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | o | 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 directors and officers liability insurance.
| | --------------------------------------------------------------

| | Anti-Takeover
Provisions; Mergers and Acquisitions
| | --------------------------------------------------

| | The
Companies Law provides for mergers, provided that each party to the transaction obtains
the approval of its board of directors and shareholders. For purposes of the shareholder
vote of each party, unless a court rules otherwise, the merger will not be deemed
approved if a majority of the shares not held by the other party, 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, have voted 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 that party. Finally, a merger may
not be completed unless at least 70 days have passed from the time that the requisite
proposals for approval of the merger have been filed with the Israeli Registrar of
Companies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

72

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| | In
addition, provisions of the Companies Law that deal with arrangements between
a company and its shareholders may be used to effect squeeze-out transactions in which
the target company becomes a wholly-owned subsidiary of the acquiror. These provisions
generally require that the merger be approved by a majority of the participating
shareholders holding at least 75% of the shares voted on the matter. In addition to
shareholder approval, court approval of the transaction is required, which entails
further delay. The Companies Law also provides for a merger between Israeli companies,
after completion of the above procedure for an arrangement transaction and
court approval of the merger.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companies Law also provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser would
become a 25% shareholder of the company. This rule does not apply if there is already
another 25% shareholder of the company. Similarly, the Companies Law provides that an
acquisition of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% shareholder of the company,
unless there is already a majority shareholder of the company. The Israeli Minister of
Justice has the authority to adopt regulations exempting from these tender offer
requirements companies that are publicly traded outside Israel. In any event, if as a
result of an acquisition of shares the acquirer will hold more than 90% of a companys
shares, the acquisition must be made by means of a tender offer for all of the shares. If
more than 95% of the outstanding shares are tendered in the tender offer, all the shares
that the acquirer offered to purchase will be transferred to it. Israel tax law treats
stock-for-stock acquisitions between an Israeli company and another company less
favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder
who exchanges his ordinary shares for shares in another corporation to taxation on half
the shareholders shares two years following the exchange and on the balance of the
shares four years thereafter even if the shareholder has not yet sold the shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | C. | Material
Contracts
| | -- | ------------------

| | For
a description of the agreements we have entered into with Team Computers, please refer to
"Item 7B - Related Party Transactions." At the end of 2000, we signed a term sheet for a
$4.1 million strategic investment in privately-owned Axarte, Ltd., a U.K.-based developer
of network management and operations support system software for the communications
industry with a focus on configuration and provisioning. The investment was completed in
January 2001. Thereafter, we undertook the management and policy-making of Axarte,
designated the members of Axarte's board of directors, and provided additional financing
to Axarte in the form of loans in exchange for convertible debentures.  The operations of
Axarte are consolidated with our other operations in our consolidated financial
statements as of January 31, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
invested in Axarte in order to accelerate our product development in the configuration
and provisioning area through the close cooperation of our and Axarte's respective
research and development teams, and to strengthen our presence in Europe through joint
sales and marketing activities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

73

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| | Our
original investment in Axarte was in the form of a six-year convertible debenture with a
call option, granted by the shareholders of Axarte, entitling us to acquire all of the
equity interests in Axarte for nominal value at any time prior to December 31, 2006.  On
December 31, 2001, we exercised our call option, and we now own 100% of Axarte's issued
and outstanding shares.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Exchange
Controls
| | -- | -----------------

| | Exchange
Controls and Other Limitations Affecting Security Holders
| | ------------------------------------------------------------------

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

74

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| | 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 headings "-Passive Foreign Investment Companies" and
"-Foreign Personal Holding Company" below, a U.S. holder will be required to include in
gross income as ordinary income the amount of any distribution paid on ordinary shares on
the date the distribution to the extent that such distribution does not exceed our
current and accumulated earnings and profits, as determined for U.S. federal income tax
purposes.  The amount of a distribution which exceeds our earnings and profits will be
treated first as a non-taxable return of capital, reducing the U.S. holder's tax basis
for the ordinary shares to the extent thereof, and then as capital gain.  Preferential
tax rates for long-term capital gains are applicable for U.S. holders that are
individuals, estates or trusts.  Corporate holders generally will not be allowed a
deduction for dividends received.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

75

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| | Disposition
of Shares
| | ---------------------

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

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

| | Passive
Foreign Investment Companies
| | ------------------------------------

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

| | o | 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
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

76

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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 will not be a PFIC for 2003. The tests for determining PFIC status,
however, are applied annually, and it is difficult to make accurate predictions of future
income and assets in which are relevant to this determination. Accordingly, there can be
no assurance that we will not become a PFIC. U.S. holders who hold ordinary shares during
a period when we are a PFIC will be subject to the foregoing rules, even if we cease to
be a PFIC, subject to certain exceptions for U.S. holders who made a mark-to-market or
QEF election. U.S. holders are strongly urged to consult their tax advisors about the
PFIC rules, including the eligibility, manner and consequences to them of making a
mark-to-market or QEF election with respect to our ordinary shares in the event that we
qualify as a PFIC.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign
Personal Holding Company
| | --------------------------------

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

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| | Backup
Withholding
| | ------------------

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

| | Non-U.S.
holders of Ordinary Shares
| | -----------------------------------

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

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

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

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

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

| | ISRAELI
TAXATION
| | ----------------

| | The
following discussion represents a summary of certain Israeli tax laws affecting us and
our shareholders, including U.S. and other non-Israeli shareholders, for general
information only and is not intended to substitute for careful or specific tax planning.
To the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed herein
will accord with any such interpretation in the future. This discussion is not intended,
and should not be construed, as legal or professional tax advice, and does not cover all
possible tax considerations. Accordingly, each potential investor should consult his or
her own tax advisor 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

78

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| | Tax
Reform
| | ----------

| | On
January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No. 132),
5762-2002, known as the Tax Reform, came into effect, following its enactment by the
Israeli Parliament on July 24, 2002. On December 17, 2002, the Israeli Parliament
approved a number of amendments to the Tax Reform, which came into effect on January 1,
2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (i) | Reduction
of the tax rate levied on capital gains (other than gains deriving                from
the sale of listed securities) derived after January 1, 2003, to a general
               rate of 25% for both individuals and corporations. Regarding assets
acquired                prior to January 1, 2003, the reduced tax rate will apply to a
proportionate                part of the gain, in accordance with the holding periods of
the asset, before or                after January 1, 2003, on a linear basis;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Imposition
of Israeli tax on all income of Israeli residents, individuals and
               corporations, regardless of the territorial source of income, including
income                derived from passive sources such as interest, dividends and
royalties;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Introduction
of controlled foreign corporation (CFC) rules into the Israeli tax
               structure. Generally, under such rules, an Israeli resident who holds,
directly                of indirectly, 10% or more of the rights in a foreign corporation
whose shares                are not publicly traded, in which more than 50% of the rights
are held directly                or indirectly by Israeli residents, and a majority of
whose income in a tax year                is considered passive income, will be liable
for tax on the portion of such                income attributed to his holdings in such
corporation, as if such income were                distributed to him as a dividend; and;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Imposition
of capital gains tax on capital gains realized by individuals as of
               January 1, 2003, from the sale of shares of publicly traded companies
(such gain                was previously exempt from capital gains tax in Israel). For
information with                respect to the applicability of Israeli capital gains
taxes on the sale of                ordinary shares, see Capital Gains Tax below;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) | Introduction
of a new regime for the taxation of shares and options issued to                employees
and officers (including directors).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | General
Corporate Tax Structure
| | -------------------------------

| | Israeli
companies are generally subject to company tax at the rate of 36% of taxable income, such
rate having become effective on January 1, 1996, and are subject to Capital Gains Tax at
a rate of 25% for capital gains derived after January 1, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

79

---

---

| | 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. Expenditures not so approved or funded, are deductible over a
three-year period. However, expenditures made out of proceeds of Government grants are
not deductible.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Law
for the Encouragement of Capital Investments, 1959
| | ------------------------------------------------------

| | Our
facilities currently enjoy approved enterprise status under the Investment Law.
| | -----------------------------------------------------------------------------------

| | The
Investment 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. Under an amendment to the Investments
Law that was made within the framework of the Tax Reform, it was clarified that tax
benefits under the Investments Law shall also apply to income generated by a company from
the grant of a usage right with respect to know-how developed by the approved enterprise,
income generated from royalties, and income derived from a service which is auxiliary to
such usage right or royalties, provided that such income is generated within the approved
enterprises ordinary course of business. If a company has more than one approval or
only a portion of its capital investments are approved, its effective tax rate is the
result of a weighted average of the applicable rates. The tax benefits under the
Investment Law are not available with respect to income derived from products
manufactured outside of Israel.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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, depending on the geographic location of the approved
enterprise within Israel, and such company will be eligible for a reduced tax rate under
the Investment Law for the remainder of the benefits period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

80

---

---

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

| | The
Ministry of Finance has announced that it may seek to reduce, or even cancel, some or all
of the benefits under the Investment Law.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | 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
Investment 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 used this benefit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Grants
and other incentives received by a company in accordance with the Investment 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
application to the Investment Center is reviewed separately, and a decision as to whether
or not to approve such application is based, among other things, on the then prevailing
criteria set forth in the Investment Law, on the specific objectives of the applicant
company set forth in such application and on certain financial criteria of the applicant
company. Accordingly, there can be no assurance that any such application by us will be
approved. In addition, the benefits available to an approved enterprise are conditional
upon the fulfillment of certain conditions stipulated in the Investment 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

81

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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 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 on a linked basis without limit. 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, 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
following the Tax Reform (and which were previously exempt from tax) are
          taxable at a company tax rate in certain circumstances. However, dealers in
          securities are subject to the regular tax rules applicable to business income
in           Israel.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Law
for the Encouragement of Industry (Taxes), 1969
| | ---------------------------------------------------

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

| | The
following preferred corporate tax benefits are available to Industrial Companies,
including us:
| | ---------------------------------------------------------------------------------------------------

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

| | (b) | An
election under certain conditions to file a consolidated tax return with
          additional related Israeli Industrial Companies.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Accelerated
depreciation rates on equipment and buildings.
| | --- | ----------------------------------------------------------

82

---

---

| | Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We do not currently exercise the benefits
described above. 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 capital 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.
Prior to the Tax Reform, our ordinary shares held by individuals were generally exempt
from Israeli capital gains tax so long as they were listed on the Nasdaq National Market
or on a stock exchange recognized by the Israeli Ministry of Finance and we qualified as
an Industrial Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Tax Reform, generally capital gains tax is imposed at a rate of 15% on real gains
derived on or after January 1, 2003 from the sale of shares in companies (i) publicly
traded on the Tel Aviv Stock Exchange (TASE) or; (ii) (subject to a necessary
determination by the Israeli Minister of Finance) Israeli companies publicly traded on a
recognized stock exchange outside of Israel (such as our company). This tax rate does not
apply to: (i) dealers in securities; (ii) shareholders that report in accordance
with the Inflationary Adjustment Law; or (iii) shareholders who acquired their
shares prior to an initial public offering (that are subject to a different tax
arrangement). The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a request may be made to the tax authorities to
consider the actual adjusted cost of the shares as the tax basis if it is higher than
such average price.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on the TASE,. In addition, non-Israeli corporations will not be
entitled to the exemption with respect to gains derived from the sale of shares of
Israeli companies publicly traded on the TASE, if an Israeli resident (i) has a
controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the
beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
any event, the provisions of the Tax Reform shall not affect the exemption from capital
gains tax for gains accrued before January 1, 2003, as described above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
U.S.-Israel Tax Treaty is in effect for taxable years beginning on or after January 1,
1995. Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of shares by a
person 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.
income tax imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

83

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| | Tax
on Dividends
| | ----------------

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

| | F. | Dividends
and Paying Agents
| | -- | ---------------------------

| | Not
applicable.
| | ---------------

| | G. | Statement
by Experts
| | -- | --------------------

| | Not
applicable.
| | ---------------

| | H. | Documents
on Display
| | -- | --------------------

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

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

84

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|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. Prior to 1997, inflation in Israel
exceeded the rate of devaluation of the NIS against the U.S. dollar, and as a result, we
experienced increases in the U.S. dollar cost of our operations in Israel. The rate of
inflation in Israel was 10.6% in 1996. The rate of devaluation in Israel was 3.7% in
1996. This imbalance was reversed when the rate of inflation Israel was 7.0% in 1997 and
8.6% in 1998. The rate of devaluation was 8.8% in 1997 and 17.6% in 1998. In 1999, the
rate of inflation was 1.3% and the rate of devaluation was 0.2%. In 2000, the rate of
inflation was 1.4% and the rate of devaluation was 2.7%. In 2001, the rate of inflation
was 0% and the rate of devaluation was 9.3%. In 2002, the rate of inflation was 6.5% and
the rate of devaluation was 7.3%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

85

---

---

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

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

| | Not
applicable.
| | ---------------

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

| | Modification
of Rights
| | ----------------------

| | Not
applicable.
| | ---------------

| | Use
of Proceeds
| | ---------------

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

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

| | Within
90 days prior to the date of this report, 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. Based on this evaluation, our principal executive officer and
principal financial officer have concluded that our disclosure controls and procedures
are effective to ensure that information required to be included in our periodic reports
to the Securities and Exchange Commission is recorded, processed, summarized and reported
in a timely manner.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Although
we believe our pre-existing disclosure controls and procedures and internal controls were
adequate to enable us to comply with our disclosure obligations, as a result of such
review we intend to implement changes, primarily to formalize and document procedures
already in place.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

86

---

---

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

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

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

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

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

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

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

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

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

|            |                                                                        
|----------- | -----------------------------------------------------------------------
|
|
|Exhibit No  | Exhibit                                                                
|*1.1        | Memorandum of Association of Registrant, as amended.                   
|*1.2        | Articles of Association of Registrant, as amended.                     
|***4.1      | Agreement between the Registrant and Bezeq                             
|*4.2        | Investment Agreement - Axarte Ltd.                                     
|**10.1      | Form of Underwriting Agreement.                                        
|***10.2     | Specimen Certificate for Ordinary Shares.                              
|****10.3    | The Registrant's Share Option Plan, dated January 15, 1995, as amended.
|****10.4    | The Registrant's Share Option Plan, dated November 15, 1996.           
|*10.5       | The Registrant's 2000 Employee Stock Purchase Plan.                    
|***10.6     | Agreement, dated October 9, 1996, between the Registrant and Team.     
|***10.7     | Registration Rights Agreement, dated October 22, 1996, between the     
|            | Registrant and TSIL.                                                   
|***10.8     | Share Purchase Agreement, dated October 23, 1996, among the Registrant,
|            | Team and ECI, as amended.                                              
|*****10.9   | Lease, dated February 1, 1998, between the Registrant and Team.        
|******10.10 | Amendment to Lease Agreement dated September 2, 2002.                  
|10.11       | Consent of Independent Auditors of the Registrant                      
|99.1        | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|99.2        | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

87

---

---

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

88

---

---

| | SIGNATURES
| | ----------

| | Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tel Aviv, Israel on the 2nd day
of April, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



---

---

# CERTIFICATIONS

I, Meir Lipshes, certify
that:

1.
          I have reviewed this annual report on Form 20-F of TTI Team Telecom
          International Ltd.;

2.
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the
financial statements, and other financial           information included in this annual
report, fairly present in all material           respects the financial condition,
results of operations and cash flows of the           registrant as of, and for, the
periods presented in this annual report;

4. The           registrants
other certifying officers and I are responsible for           establishing and
maintaining disclosure controls and procedures (as defined in           Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

| | a. | designed
          such disclosure controls and procedures to ensure that material information
          relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | evaluated
the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this
annual                report (the Evaluation Date); and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | presented
in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the
Evaluation                Date;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.                The registrants
other certifying officers and I have disclosed, based on                our most recent
evaluation, to the registrants auditors and the audit                committee of
registrants board of directors (or persons performing the                equivalent
function):

| | a. | all
significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record,
process,                summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls;
and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | any
fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls;
and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.                The registrants
other certifying officers and I have indicated in this                annual report
whether or not there were significant changes in internal controls                or in
other factors that could significantly affect internal controls subsequent
               to the date of our most recent evaluation, including any corrective
actions with                regard to significant deficiencies and material weaknesses.

Date: April 2, 2003

| | /s/ Meir Lipshes
Meir Lipshes
Chief Executive Officer
| | -----------------------------------------------------



---

---

I, Israel (Eli) Ofer, certify that:

1.
          I have reviewed this annual report on Form 20-F of TTI Team Telecom
          International Ltd.;

2.
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the
financial statements, and other financial           information included in this annual
report, fairly present in all material           respects the financial condition,
results of operations and cash flows of the           registrant as of, and for, the
periods presented in this annual report;

4. The           registrants
other certifying officers and I are responsible for           establishing and
maintaining disclosure controls and procedures (as defined in           Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

| | a. | designed
such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated
subsidiaries,                is made known to us by others within those entities,
particularly during the                period in which this annual report is being
prepared;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | evaluated
the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this
annual                report (the Evaluation Date); and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | presented
in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the
Evaluation                Date;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):



---

---

| | a. | all
significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record,
process,                summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls;
and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | any
fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls;
and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.
          The registrants other certifying officers and I have indicated in this
          annual report whether or not there were significant changes in internal controls
          or in other factors that could significantly affect internal controls subsequent
          to the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.

Date: April 2, 2003

| | /s/ Israel (Eli) Ofer
Israel (Eli) Ofer
Chief Financial Officer
| | ---------------------------------------------------------------



---

---

# Exhibit Index

|            |                                                                        
|----------- | -----------------------------------------------------------------------
|
|
|Exhibit No  | Exhibit                                                                
|*1.1        | Memorandum of Association of Registrant, as amended.                   
|*1.2        | Articles of Association of Registrant, as amended.                     
|***4.1      | Agreement between the Registrant and Bezeq                             
|*4.2        | Investment Agreement - Axarte Ltd.                                     
|**10.1      | Form of Underwriting Agreement.                                        
|***10.2     | Specimen Certificate for Ordinary Shares.                              
|****10.3    | The Registrant's Share Option Plan, dated January 15, 1995, as amended.
|****10.4    | The Registrant's Share Option Plan, dated November 15, 1996.           
|*10.5       | The Registrant's 2000 Employee Stock Purchase Plan.                    
|***10.6     | Agreement, dated October 9, 1996, between the Registrant and Team.     
|***10.7     | Registration Rights Agreement, dated October 22, 1996, between the     
|            | Registrant and TSIL.                                                   
|***10.8     | Share Purchase Agreement, dated October 23, 1996, among the Registrant,
|            | Team and ECI, as amended.                                              
|*****10.9   | Lease, dated February 1, 1998, between the Registrant and Team.        
|******10.10 | Amendment of Lease Agreement dated September 2, 2002                   
|10.11       | Consent of Independent Auditors of the Registrant                      
|99.1        | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|99.2        | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

|* | Previously
filed as an exhibit to TTIs annual report on Form 20-F for the fiscal year ended
         December 31, 2000, and incorporated herein by reference.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Previously
filed as an exhibit to TTI's Amendment No. 1 to Registration Statement on Form F-1
         (Registration No. 11590), and incorporated herein by reference.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



---

---

|**** | English
summary from Hebrew original was previously filed as an exhibit to TTIs
Registration Statement on Form F-1 (Registration No. 333-5902), and incorporated herein
by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|***** | English
summary from Hebrew original was previously filed as an exhibit to TTIs annual
report on Form 20-F for the fiscal year ended December 31, 1998, and incorporated herein
by reference.
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|****** | English
translation from Hebrew original.
|------ | -----------------------------------------



---

---

# Exhibit 10.10

| | September
2, 2002
| | -----------------

# Amendment to Lease
Agreement Dated February 1, 1998

|Between: | Team
Computers and Systems Ltd. (hereafter: the "Landlord")
|-------- | -----------------------------------------------------------

|And: | TTI
Team Telecom International Ltd. (hereafter: the "Tenant")
|---- | -------------------------------------------------------------

|WHEREAS, | the
Tenant leases from the Landlord a unit located in a building located on property owned by
the Landlord since February 1, 1998, pursuant to the Principles of Lease Agreement dated
February 1, 1998 (this agreement together with the notice of First Expansion (as defined
below) and the Second Expansion (as defined below) are hereafter referred to as: the
Lease Agreement). The Principles of Lease Agreement is attached hereto as Annex
A;
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|WHEREAS, | pursuant
to the notice of the Tenant dated January 1, 1999, in accordance with the provisions of
the Lease Agreement, the Tenant exercised an option to lease additional premises
(hereafter: the "First Expansion");
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|WHEREAS, | the
Tenant and the Landlord agreed to the expansion of the leased premises by an
                     additional 2,800 square meters that were occupied on February 24,
2001 and June 16,                      2001 (hereafter: the "Second Expansion");
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|WHEREAS, | the
Tenant delivered a notice to the Landlord on September 2, 2002, indicating its desire to
exercise the option term pursuant to the Lease Agreement. The notice is attached hereto
as Annex B.
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---

# IT IS AGREED,
STIPULATED AND DECLARED AS FOLLOWS:

| | The
Lease Agreement shall be extended for an additional term subject to the following
changes:
| | ----------------------------------------------------------------------------------------------

|1. | The
new lease term following exercise of the option term pursuant to the Lease
               Agreement shall be until August 31, 2007 (4.5 years from March 1, 2003)
               (hereafter: the New Lease Term). The price during the New
Lease Term                shall remain as is (as of today, US$8.8 per gross square meter,
including                external walls).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Section
3 of the Lease Agreement, which relates to the leased premises shall be
               amended such that it shall provide that the leased premises is expanded as
               agreed between the parties (by an additional area of 2,800 square meters)
and                today constitutes 5,829.39 square meters total (including public
areas).
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | The
remaining terms of the Lease Agreement shall remain in effect, subject to
               the changes mentioned above.
|-- | -------------------------------------------------------------------------------------------------------------------------

|4. | This
Agreement including the annexes hereto constitutes the entire agreement
               between the parties and any prior oral or written agreement, if any,
and/or any                exchange and/or offers between the parties shall be of no
effect whatsoever                unless they are incorporated in this agreement. Any
amendment to this agreement                and the annexes attached hereto shall be
effective only if reduced to writing                and signed by both parties hereto.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
validity of this agreement is subject to receipt of all approvals required
               by law.
|-- | -----------------------------------------------------------------------------------------------------

IN WITNESS WHEREOF, the
parties hereto have executed this Agreement.

|/s/ Shimshon Tauber
Team Computers and Systems Ltd. | /s/ Eli Ofer
TTI Team Telecom International Ltd.
|--------------------------------------------------- | ------------------------------------------------



---

---

ANNEX A

# TTI  TEAM

# Principles of Lease
Agreement

|1. | TTI
shall lease the second floor of the building located at 7 Martin Gehl
               Street, Kiryat Arie, Petach-Tikva, from 1.2.98, totaling
approximately                2,000 sq. meters.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | TTI
shall lease additional premises on the first floor of the building in the
               total of 700 sq. meters from 15.3.98 and additional premises of 300
sq.                meters on the first floor from 1.1.99.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | The
lease is for gross areas, including ancillary systems.
|-- | ----------------------------------------------------------

|4. | The
term of the lease is for five years commencing on 1.2.98. An option to renew
               the lease agreement for additional 4.5 years shall be given.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
construction and modification of the rental premises shall be at TTIs
               expense.
|-- | --------------------------------------------------------------------------------------------------

|6. | On
behalf of the lease of gross areas, TTI shall pay $10 per sq. meter + VAT
               during the first term of the lease. In the event the option is exercised,
the                rent shall be the market value at the time of the renewal.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | With
the approval of TEAM, TTI shall be entitled to sub-lease the premises to a
               sub-lessee whose operations are similar to those of TTIs.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | For
the maintenance of the building, TTI will be charged based on the relative
               cost of the premises in its possession, including its share of the public
areas.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. | In
the event TTI evacuates the building before the end of the second option
               term, it shall be compensated in proportion to its investment in the
leased                premises, with respect to investments of a general nature which can
be used by                TEAM or by a new lessee.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|/s/ Eli Ofer
TTI Team Telecom International Ltd. | /s/ Shlomo Eisenberg/s/ Idit Evron
Team Computers and Systems Ltd.
|------------------------------------------------ | ------------------------------------------------------------------

February 1998



---

---

ANNEX B

September 2, 2002

To: Team Computers Ltd. Attention: Haim Mizrahi

# Notice of Exercise of
Option Period  Lease

Pursuant
to Section 1 of the Principles of Lease Agreement dated February 1, 1998, I hereby notify
you of our intention to exercise the option term, and to extend the lease term by 4.5
additional years, commencing on March 1, 2003 and until August 31, 2007.

| | Sincerely,/s/ Eli Ofer
Eli Ofer
Chief Financial Officer
| | -------------------------------------------------------



---

---

# Exhibit 10.11

# CONSENT OF INDEPENDENT
AUDITORS

We
consent to the incorporation by reference in Registration Statement (Form S-8 No.
333-6992, 333-10724, No. 333-13708 and No. 333-101979) of our report dated, February 27, 2003, with
respect to the consolidated financial statements of TTI Team Telecom International Ltd.
included in the Annual Report (on Form 20-F) for the year ended December 31, 2002.

|Tel-Aviv, Israel
April 2, 2003 | /s/ Kost, Forer and Gabbay

   KOST FORER and GABBAY
A Member of Ernst & Young Global
|------------------------------ | -------------------------------------------------------------------------------------



---

---

# EXHIBIT 99.1

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In
connection with the Annual Report on Form 20-F of TTI Team Telecom International Ltd. (the
Company) for the period ending December 31, 2002 (the Report), I,
Meir Lipshes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
          the Report fully complies with the requirements of Section 13(a) or 15(d) of the
          Securities Exchange Act of 1934; and

2.
          the information contained in the Report fairly presents, in all material
          respects, the financial condition and results of operations of the Company.

Date: April 2, 2003

| | /s/ Meir Lipshes
Meir Lipshes
Chief Executive Officer
| | -----------------------------------------------------

A signed original of this written
statement required by Section 906 has been provided to TTI Team Telecom International Ltd.
and will be retained by TTI Team Telecom International Ltd. and furnished to the
Securities and Exchange Commission or its staff upon request.



---

---

# EXHIBIT 99.2

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In
connection with the Annual Report on Form 20-F of TTI Team Telecom International Ltd. (the
Company) for the period ending December 31, 2002 (the Report), I,
Israel (Eli) Ofer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
          the Report fully complies with the requirements of Section 13(a) or 15(d) of the
          Securities Exchange Act of 1934; and

2.
          the information contained in the Report fairly presents, in all material
          respects, the financial condition and results of operations of the Company.

Date: April 2, 2003

| | /s/ Israel (Eli) Ofer
Israel (Eli) Ofer
Chief Financial Officer
| | ---------------------------------------------------------------

A signed original of this written
statement required by Section 906 has been provided to TTI Team Telecom International Ltd.
and will be retained by TTI Team Telecom International Ltd. and furnished to the
Securities and Exchange Commission or its staff upon request.



---

---

# TTI TEAM TELECOM
INTERNATIONAL LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2002

# IN U.S DOLLARS

# INDEX

|                                              |           
|--------------------------------------------- | ----------
|                                              | Page      
|Report of Independent Auditors                | F-2       
|Consolidated Balance Sheets                   | F-3 - F-4 
|Consolidated Statements of Operations         | F-5       
|Statements of Changes in Shareholders' Equity | F-6       
|Consolidated Statements of Cash Flows         | F-7 - F-8 
|Notes to Consolidated Financial Statements    | F-9 - F-36



---

---

| | E
RNST | & | Y
OUNG
| | ------ | - | ------

# REPORT OF INDEPENDENT
AUDITORS

# To the Shareholders of

# TTI TEAM TELECOM
INTERNATIONAL LTD.

We
have audited the accompanying consolidated balance sheets of TTI Team Telecom
International Ltd. (the Company) and its subsidiaries as of December 31, 2001
and 2002, 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, 2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2001 and 2002, and the consolidated results of their
operations and cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United States.

|Tel-Aviv, Israel February 27, 2003 | KOST FORER & GABBAY A Member of Ernst & Young Global
|---------------------------------- | ----------------------------------------------------

F-2

---

---

# TTI TEAM TELECOM
INTERNATIONAL LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED BALANCE SHEETS

---

# U.S. dollars in thousands

|                                                                        | December 31,
|----------------------------------------------------------------------- | ------------
|
|ASSETS                                                                  |             
|                                                                        |             
|CURRENT ASSETS:                                                         |             
|Cash and cash equivalents                                               |             
|Short-term bank deposits                                                |             
|Marketable securities (Note 3)                                          |             
|Trade receivables (net of allowance for doubtful accounts - $ 0 in 2001 |             
|and $ 464 in 2002)                                                      |             
|Unbilled receivables                                                    |             
|Other accounts receivable and prepaid expenses (Note 4)                 |             
|                                                                        |             
|Totalcurrent assets                                                     |             
|                                                                        |             
|LONG-TERM INVESTMENTS:                                                  |             
|Investment in other company                                             |             
|Severance pay fund                                                      |             
|Long-term prepaid expenses                                              |             
|Long-term trade and unbilled receivables (Note 1c)                      |             
|                                                                        |             
|Totallong-term investments                                              |             
|                                                                        |             
|PROPERTY AND EQUIPMENT, NET (Note 5)                                    |             
|                                                                        |             
|OTHER INTANGIBLE ASSETS, NET (Note 6)                                   |             
|                                                                        |             
|GOODWILL (Note 7)                                                       |             
|                                                                        |             
|Totalassets                                                             |             
|                                                                        |             

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

F-3

---

---

# TTI TEAM TELECOM
INTERNATIONAL LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED BALANCE
SHEETS

---

# U.S. dollars in
thousands, except share data

|                                                                                  | December 31,
|--------------------------------------------------------------------------------- | ------------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                              |             
|                                                                                  |             
|CURRENT LIABILITIES:                                                              |             
|Short-term bank loan                                                              |             
|Trade payables                                                                    |             
|Related parties (Note 13)                                                         |             
|Deferred revenues                                                                 |             
|Other accounts payable and accrued expenses (Note 8)                              |             
|                                                                                  |             
|Totalcurrent liabilities                                                          |             
|                                                                                  |             
|ACCRUED SEVERANCE PAY                                                             |             
|                                                                                  |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)                                   |             
|                                                                                  |             
|SHAREHOLDERS' EQUITY (Note 11):                                                   |             
|Share capital:                                                                    |             
|Authorized: 30,000,000 Ordinary shares of NIS 0.5 par value as of                 |             
|December 31, 2001 and 2002; Issued and outstanding: 11,752,600                    |             
|shares as of December 31, 2001 and 11,872,052 shares as of      December 31, 2002 |             
|Additional paid-in capital                                                        |             
|Accumulated other comprehensive income (loss)                                     |             
|Retained earnings                                                                 |             
|                                                                                  |             
|Totalshareholders' equity                                                         |             
|                                                                                  |             
|Totalliabilities and shareholders' equity                                         |             
|                                                                                  |             

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

F-4

---

---

# TTI TEAM TELECOM
INTERNATIONAL LTD. AND ITS SUBSIDIARIES

# CONSOLIDATED STATEMENTS
OF OPERATIONS

---

# U.S. dollars in
thousands, except per share data

|                                                | Year ended December 31,
|----------------------------------------------- | -----------------------
|
|Revenues (Note 14):                             |                        
|Products                                        |                        
|Services                                        |                        
|                                                |                        
|Totalrevenues                                   |                        
|                                                |                        
|Cost of revenues:                               |                        
|Products                                        |                        
|Services                                        |                        
|                                                |                        
|Totalcost of revenues                           |                        
|                                                |                        
|Gross profit                                    |                        
|                                                |                        
|Operating expenses:                             |                        
|Research and development, net (Note 15a)        |                        
|Selling and marketing                           |                        
|General and administrative                      |                        
|Allowance for doubtful accounts (Note 1c)       |                        
|                                                |                        
|Totaloperating expenses                         |                        
|                                                |                        
|Operating income (loss)                         |                        
|Financial income, net (Note 15b)                |                        
|                                                |                        
|Income (loss) before income taxes               |                        
|Income taxes (Note 10)                          |                        
|                                                |                        
|Net income (loss)                               |                        
|                                                |                        
|Basic net earnings (loss) per share (Note 12)   |                        
|                                                |                        
|Diluted net earnings (loss) per share (Note 12) |                        
|                                                |                        

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

F-5

---

---

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

|                                                                           |  | Number of
  shares |            | Share
  capital |  | Additional
  paid-in
  capital |       | Accumulated other
  comprehensive income (loss) |  | Retained
  earnings |        | Total comprehensive
  income (loss) |  | Total
  shareholders
  equity |     
|-------------------------------------------------------------------------- |  | ------------------ | ---------- | --------------- |  | ------------------------------ | ----- | ----------------------------------------------- |  | ------------------- | ------ | ----------------------------------- |  | ------------------------------ | ----
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Balance as of January 1, 2000                                              |  |                    | 9,992,013  |                 |  | $                              | 1,566 |                                                 |  | $                   | 18,925 |                                     |  | $                              | -   
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Issuance
  of shares, net                                                  |  |                    | 1,100,000  |                 |  |                                | 136   |                                                 |  |                     | 34,744 |                                     |  |                                | -   
|Exercise
  of stock options                                                |  |                    | 279,001    |                 |  |                                | 34    |                                                 |  |                     | 481    |                                     |  |                                | -   
|Exercise
  of options granted to a consultant                              |  |                    | 12,000     |                 |  |                                | 1     |                                                 |  |                     | 63     |                                     |  |                                | -   
|Comprehensive
  income:                                                    |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Unrealized gains on available-for-sale marketable
        securities, net  |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | -      |                                     |  |                                | 79  
|Net
  income                                                               |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | -      |                                     |  |                                | -   
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Total comprehensive income                                                 |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Balance
  as of December 31, 2000                                          |  |                    | 11,383,014 |                 |  |                                | 1,737 |                                                 |  |                     | 54,213 |                                     |  |                                | 79  
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Exercise
  of stock options                                                |  |                    | 344,642    |                 |  |                                | 40    |                                                 |  |                     | 2,491  |                                     |  |                                | -   
|Exercise
  of options granted to a consultant                              |  |                    | 13,165     |                 |  |                                | 2     |                                                 |  |                     | 68     |                                     |  |                                | -   
|Issuance
  of shares in respect of ESPP                                    |  |                    | 11,779     |                 |  |                                | 2     |                                                 |  |                     | 160    |                                     |  |                                | -   
|Comprehensive
  income (loss):                                             |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Unrealized losses on available-for-sale marketable
        securities, net |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | -      |                                     |  |                                | (179
|Net
  income                                                               |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | -      |                                     |  |                                | -   
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Total comprehensive income                                                 |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Balance
  as of December 31, 2001                                          |  |                    | 11,752,600 |                 |  |                                | 1,781 |                                                 |  |                     | 56,932 |                                     |  |                                | (100
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Exercise
  of stock options                                                |  |                    | 119,452    |                 |  |                                | 13    |                                                 |  |                     | 1,720  |                                     |  |                                | -   
|Tax
  benefit related to exercise of options                               |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | 219    |                                     |  |                                | -   
|Comprehensive
  income (loss):                                             |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Unrealized gains on available-for-sale marketable
        securities, net  |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | -      |                                     |  |                                | 285 
|Net
  loss                                                                 |  |                    | -          |                 |  |                                | -     |                                                 |  |                     | -      |                                     |  |                                | -   
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Total comprehensive loss                                                   |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     
|Balance
  as of December 31, 2002                                          |  |                    | 11,872,052 |                 |  | $                              | 1,794 |                                                 |  | $                   | 58,871 |                                     |  | $                              | 185 
|                                                                           |  |                    |            |                 |  |                                |       |                                                 |  |                     |        |                                     |  |                                |     

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, |        
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                        |  |                         |        
|                                                                                                        |  | 2000                    |        
|                                                                                                        |  |                         |        
|Cash flows from operating activities:                                                                   |  |                         |        
|Net income (loss)                                                                                       |  | $                       | 9,654  
|Adjustments required to reconcile net income (loss)
      to net cash provided by operating activities: |  |                         |        
|Depreciation and amortization                                                                           |  |                         | 2,088  
|Trading marketable securities, net                                                                      |  |                         | (728   
|Realized
    loss (gain) on available-for-sale           marketable securities                          |  |                         | (143   
|Impairment of available-for-sale marketable
         securities                                         |  |                         | 526    
|Amortization
    of premium and accrued interest on
           available-for-sale marketable securities |  |                         | 34     
|Long-term prepaid expenses write-off                                                                    |  |                         | -      
|Accrued interest on short-term bank deposits                                                            |  |                         | (297   
|Severance pay, net                                                                                      |  |                         | 680    
|Deferred taxes, net                                                                                     |  |                         | (116   
|Decrease (increase) in trade receivables                                                                |  |                         | (4,033 
|Decrease (increase) in unbilled receivables                                                             |  |                         | (2,362 
|Increase in long-term trade and unbilled 
        receivables                                           |  |                         | -      
|Decrease
    (increase) in other accounts receivable
           and prepaid expenses                    |  |                         | (2,021 
|Increase (decrease) in trade payables                                                                   |  |                         | 1,034  
|Increase (decrease) in related parties                                                                  |  |                         | (996   
|Increase (decrease) in deferred revenues                                                                |  |                         | 829    
|Increase
    (decrease) in other accounts payable and
                accrued expenses                  |  |                         | 1,487  
|Other                                                                                                   |  |                         | (122   
|                                                                                                        |  |                         |        
|Net cash provided by operating activities                                                               |  |                         | 5,514  
|                                                                                                        |  |                         |        
|Cash flows from investing activities:                                                                   |  |                         |        
|Acquisition of subsidiary, Axarte Limited (a)                                                           |  |                         | -      
|Investment in short-term bank deposits                                                                  |  |                         | (6,285 
|Investment in available-for-sale marketable securities                                                  |  |                         | (27,381
|Proceeds from
    sales and redemption of available-for-
                sale marketable securities     |  |                         | 4,143  
|Proceeds from short-term bank deposits                                                                  |  |                         | -      
|Proceeds from sale of property and equipment                                                            |  |                         | 105    
|Capitalization of software development costs                                                            |  |                         | (2,672 
|Investment in other company                                                                             |  |                         | -      
|Increase in long-term prepaid expenses                                                                  |  |                         | -      
|Purchase of property and equipment                                                                      |  |                         | (4,020 
|                                                                                                        |  |                         |        
|Net cash used in investing activities                                                                   |  |                         | (36,110
|                                                                                                        |  |                         |        

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

F-7




|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|                                                          
|U.S. dollars in thousands                                 

|                                                                                                        |  | Year ended December 31, |       
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                                        |  |                         |       
|                                                                                                        |  | 2000                    |       
|                                                                                                        |  |                         |       
|Cash flows from financing activities:                                                                   |  |                         |       
|Short-term bank loan, net                                                                               |  |                         | -     
|Proceeds from issuance of shares, net                                                                   |  |                         | 34,880
|Proceeds from exercise of options, net                                                                  |  |                         | 579   
|                                                                                                        |  |                         |       
|Net cash provided by (used in) financing activities                                                     |  |                         | 35,459
|                                                                                                        |  |                         |       
|Increase (decrease) in cash and cash equivalents                                                        |  |                         | 4,863 
|Cash and cash equivalents at the beginning of the year                                                  |  |                         | 13,646
|                                                                                                        |  |                         |       
|Cash and cash equivalents at the end of the year                                                        |  | $                       | 18,509
|                                                                                                        |  |                         |       
|Supplemental disclosure of cash flows information:                                                      |  |                         |       
|Cash paid during the year for:                                                                          |  |                         |       
|Interest                                                                                                |  | $                       | 11    
|                                                                                                        |  |                         |       
|Taxes                                                                                                   |  | $                       | -     
|                                                                                                        |  |                         |       
|Supplemental disclosure of non-cash financingactivities:                                                |  |                         |       
|Tax benefit related to exercise of options                                                              |  | $                       | -     
|                                                                                                        |  |                         |       
|(a)    Acquisition of subsidiary, Axarte Limited:                                                       |  |                         |       
|                                                                                                        |  |                         |       
|Estimated fair value of assets acquired
and
            liabilities
assumed at the
date of acquisition: |  |                         |       
|                                                                                                        |  |                         |       
|Working capital deficiency (excluding cash
and
            cash
equivalents in the
amount of $ 4)       |  | $                       | -     
|Property and equipment                                                                                  |  |                         | -     
|Goodwill                                                                                                |  |                         | -     
|Acquired technology                                                                                     |  |                         | -     
|                                                                                                        |  |                         |       
|                                                                                                        |  | $                       | -     
|                                                                                                        |  |                         |       

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

F-8




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



|NOTE
  1:- | GENERAL
|---------- | -------
|           |        
|           | a.     
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           | b.     
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        
|           |        

F-9

---

---

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

|NOTE 1:- | GENERAL (cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                

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

| |  | The
  following represents the unaudited pro-forma results of operations for the
  years ended December 31, 2000 and 2001, assuming that the Axarte acquisition
  had been consummated as of January 1, 2000 and 2001, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                |  | Year ended December 31, |       
| | ------------------------------ |  | ----------------------- | ------
| |                                |  |                         |       
| |                                |  | 2000                    |       
| |                                |  |                         |       
| |                                |  |                         |       
| | Revenues                       |  | $                       | 44,793
| |                                |  |                         |       
| |                                |  |                         |       
| | Net income                     |  | $                       | 5,095 
| |                                |  |                         |       
| |                                |  |                         |       
| | Basic net earnings per share   |  | $                       | 0.46  
| |                                |  |                         |       
| |                                |  |                         |       
| | Diluted net earnings per share |  | $                       | 0.44  
| |                                |  |                         |       

| |  | The
  pro-forma financial information is not necessarily indicative of the
  consolidated results that would have been attained had the acquisition taken
  place at the beginning of 2000, nor is it necessarily indicative of future
  results.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10

---

---

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

|NOTE 1:- | GENERAL (cont.)                                                                                                                                             
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                             
|         | c.                                                                                                                                                          
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|         |                                                                                                                                                             
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                             
|         |                                                                                                                                                             
|         | The consolidated
  financial statements have been prepared in accordance with generally accepted
  accounting principles in the United States (U.S. GAAP).
|         |                                                                                                                                                             
|         | a.                                                                                                                                                          
|         |                                                                                                                                                             
|         |                                                                                                                                                             

F-11

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | b.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | c.                                     
|         |                                        
|         |                                        
|         |                                        
|         | d.                                     
|         |                                        
|         |                                        
|         |                                        
|         | e.                                     
|         |                                        
|         |                                        
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        

F-12

---

---

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

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

F-13

---

---

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

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

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

| |    | The Company
  and its subsidiaries long-lived assets are reviewed for impairment in
  accordance with Statement of Financial Accounting Standard No. 144
  Accounting for the Impairment for Disposal of Long-Lived Assets (SFAS No.
  144) whenever events or changes in circumstances indicate that the carrying
  amount of an asset may not be recoverable. Recoverability of assets to be
  held and used is measured by a comparison of the carrying amount of an asset
  to the future undiscounted cash flows expected to be generated by the assets.
  If such assets are considered to be impaired, the impairment to be recognized
  is measured by the amount by which the carrying amount of the assets exceeds
  the fair value of the assets. Assets to be disposed of are reported at the
  lower of the carrying amount or fair value less costs to sell. As of December
  31, 2002, no impairment losses have been identified.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | i. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  and its subsidiaries account for income taxes in accordance with Statement of
  Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
  No. 109). This statement prescribes the use of the liability method whereby
  deferred tax asset and liability account balances are determined based on
  differences between financial reporting and tax bases of assets and
  liabilities and are measured using the enacted tax rates and laws that will
  be in effect when the differences are expected to reverse. The Company and
  its subsidiaries provide a valuation allowance, if necessary, to reduce
  deferred tax assets to their estimated realizable value.                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | j. | 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.
  Netrac has been licensed to various types of telecommunications operators.
  The Company also generates revenues from services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-14

---

---

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

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

F-15

---

---

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

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

F-16

---

---

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

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

F-17

---

---

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

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

| |                                                     |  | Year ended December 31, |      
| | --------------------------------------------------- |  | ----------------------- | -----
| |                                                     |  |                         |      
| |                                                     |  | 2000                    |      
| |                                                     |  |                         |      
| |                                                     |  |                         |      
| | Net income (loss) as reported                       |  | $                       | 9,654
| |                                                     |  |                         |      
| | Less - stock-based compensation expense             |  |                         |      
| | determined under fair value
  method for            |  |                         |      
| | all awards                                          |  |                         | 1,672
| |                                                     |  |                         |      
| |                                                     |  |                         |      
| | Pro forma net income (loss)                         |  | $                       | 7,982
| |                                                     |  |                         |      
| |                                                     |  |                         |      
| | Pro forma basic net earnings (loss) per
    share   |  | $                       | 0.72 
| |                                                     |  |                         |      
| |                                                     |  |                         |      
| | Pro forma diluted net earnings (loss) per
    share |  | $                       | 0.69 
| |                                                     |  |                         |      

| |    | The Company
  applies SFAS No. 123 and EITF 96-18 Accounting for Equity Instruments that
  are Issued to Other than Employees for Acquiring, or in Conjunction with
  Selling, Goods or Services with respect to options issued to non-employees.
  SFAS No. 123 requires the use of an option valuation model to measure the
  fair value of the options at the date of grant.                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | q. | 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 deposits, trade receivables, unbilled receivables, long-term
  trade and unbilled receivables, short-term bank loan, trade payables and
  related parties approximates their fair value due to the short-term maturities
  of such instruments.                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The carrying
  amounts and the fair value of marketable securities is based on the quoted
  market prices (see Note 3).                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | r. | Severance
  pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The
  Companys liability for severance pay is calculated pursuant to Israeli
  severance pay law based on the most recent salary of the employees multiplied
  by the number of years of employment, as of the balance sheet date. Employees
  are entitled to one months salary for each year of employment or a portion
  thereof. The Companys liability for all of its employees is fully provided
  by monthly deposits with insurance policies and by an accrual.

F-18

---

---

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

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

F-19

---

---

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

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

F-20

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                  
|-------- | -------------------------------------------------------------------------
|         |                                                                          
|         |                                                                          
|         |                                                                          
|         | w.                                                                       
|         |                                                                          
|         |                                                                          
|         |                                                                          
|NOTE 3:- | MARKETABLE
  SECURITIES                                                  
|         |                                                                          
|         | The
  following is a summary of available-for-sale marketable securities:

| |                       |  | December 31,     |       
| | --------------------- |  | ---------------- | ------
| |                       |  |                  |       
| |                       |  | 2001             |       
| |                       |  |                  |       
| |                       |  | Amortized
  cost |       
| |                       |  |                  |       
| | Available-for-sale:   |  |                  |       
| | Mutual funds          |  | $                | 5,377 
| | Government debentures |  |                  | 2,153 
| | Corporate debentures  |  |                  | 10,752
| |                       |  |                  |       
| |                       |  | $                | 18,282
| |                       |  |                  |       

| | The net
  adjustment to unrealized holding gains (losses) on available-for-sale
  marketable securities included as a separate component of shareholders
  equity, accumulated other comprehensive income (loss) amounted to $ (179)
  and $ 285 in 2001 and 2002, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21

---

---

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

|NOTE 3:- | MARKETABLE
  SECURITIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | During 2002,
  the Company recorded proceeds from sales and redemption of available-for-sale
  securities in the amount of $ 18,977 and related losses of $ 56 in
  financial income, net.                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | During 2002,
  the Company recorded an impairment expense in the amount of $ 2,137 as a
  decline in market value of available-for-sale securities deemed to be other
  than temporary. The amount was recorded in the financial expenses. During
  2001 and 2002, the Company recorded an impairment expense in the amount of $
  612 and $ 368, respectively as a decline in market value of mutual funds
  securities deemed to be other-than-temporary.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | As of
  December 31, 2001 and 2002, the Company no longer holds trading securities.
  During 2001, the Company recorded losses of $ 249 on trading securities
  in the financial income, net.                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | Aggregate
  maturities of available-for-sale securities for years subsequent to December
  31, 2002 are:                                                                                                                                                                                                                                                                                                                                                   

| |                     |  | December
  31, 2002 |       
| | ------------------- |  | ------------------- | ------
| |                     |  |                     |       
| | Available-for-sale: |  | Amortized
  cost    |       
| |                     |  |                     |       
| |                     |  |                     |       
| | 2005                |  | $                   | 3,395 
| | 2006                |  |                     | 4,227 
| | 2008                |  |                     | 3,053 
| | 2009                |  |                     | 2,029 
| |                     |  |                     |       
| |                     |  |                     |       
| |                     |  | $                   | 12,704
| |                     |  |                     |       

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

| |                               |  | December
  31, |      
| | ----------------------------- |  | -------------- | -----
| |                               |  |                |      
| |                               |  | 2001           |      
| |                               |  |                |      
| |                               |  |                |      
| | Prepaid expenses              |  | $              | 599  
| | Unbilled contract costs       |  |                | 2,729
| | Office of the Chief Scientist |  |                | 1,653
| | Loans to employees            |  |                | 415  
| | Deferred tax assets           |  |                | 175  
| | Other                         |  |                | 715  
| |                               |  |                |      
| |                               |  |                |      
| |                               |  | $              | 6,286
| |                               |  |                |      

F-22

---

---

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

|NOTE 5:- | PROPERTY AND EQUIPMENT, NET
|-------- | ---------------------------

| |                                      |  | December
  31, |       
| | ------------------------------------ |  | -------------- | ------
| |                                      |  |                |       
| |                                      |  | 2001           |       
| |                                      |  |                |       
| |                                      |  |                |       
| | Cost:                                |  |                |       
| | Computers and peripheral
  equipment |  | $              | 9,766 
| | Office furniture and equipment       |  |                | 898   
| | Motor vehicles                       |  |                | 4,324 
| | Leasehold improvements               |  |                | 3,260 
| |                                      |  |                |       
| |                                      |  |                |       
| |                                      |  |                | 18,248
| |                                      |  |                |       
| | Accumulated depreciation:            |  |                |       
| | Computers and peripheral
  equipment |  |                | 5,938 
| | Office furniture and equipment       |  |                | 324   
| | Motor vehicles                       |  |                | 1,414 
| | Leasehold improvements               |  |                | 789   
| |                                      |  |                |       
| |                                      |  |                |       
| |                                      |  |                | 8,465 
| |                                      |  |                |       
| |                                      |  |                |       
| | Depreciated cost                     |  | $              | 9,783 
| |                                      |  |                |       

|         | Depreciation expenses for the years ended
  December 31, 2000, 2001 and 2002 are $ 2,088, $ 2,910 and $ 3,474,
  respectively.
|-------- | ------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                               
|NOTE 6:- | OTHER
  INTANGIBLE ASSETS, NET                                                                                                

| |    |                                          |  | December
  31, |       
| | -- | ---------------------------------------- |  | -------------- | ------
| |    |                                          |  |                |       
| |    |                                          |  | 2001           |       
| |    |                                          |  |                |       
| |    |                                          |  |                |       
| | a. | Original amounts:                        |  |                |       
| |    | Capitalized software
  development costs |  | $              | 9,242 
| |    | Acquired technology (see Note
  1)       |  |                | 4,119 
| |    |                                          |  |                |       
| |    |                                          |  |                |       
| |    |                                          |  |                | 13,361
| |    |                                          |  |                |       
| |    | Accumulated amortization:                |  |                |       
| |    | Capitalized software
  development costs |  |                | -     
| |    | Acquired technology                      |  |                | -     
| |    |                                          |  |                |       
| |    |                                          |  |                |       
| |    |                                          |  |                | -     
| |    |                                          |  |                |       
| |    |                                          |  |                |       
| |    | Amortized cost                           |  | $              | 13,361
| |    |                                          |  |                |       

| | b. | During 2001,
  the Company purchased technology from Axarte and capitalized software
  development costs in the amount of $ 13,361 (The Netrac2 Technology).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                               
| |    | The Netrac2
  Technology is amortized using the straight-line method over the estimated
  economic life of the technology, which is six years.                

F-23

---

---

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

|NOTE 6:- | OTHER
  INTANGIBLE ASSETS, NET (cont.)
|-------- | --------------------------------------
|         |                                       
|         |                                       
|         |                                       
|         |                                       
|         |                                       
|         | c.                                    
|         |                                       
|         | d.                                    



| | 2003 |  | $ | 2,894  | 
| | ---- |  | - | ------ | 
| | 2004 |  |   | 2,894  | 
| | 2005 |  |   | 2,727  | 
| | 2006 |  |   | 2,227  | 
| | 2007 |  |   | 2,225  | 
| |      |  |   |        | 
| |      |  |   |        | 
| |      |  | $ | 12,967 | 
| |      |  |   |        | 

|NOTE 7:- | GOODWILL
|-------- | --------
|         |         
|         | a.      



| |                                   |  |   | Total | 
| | --------------------------------- |  | - | ----- | 
| |                                   |  |   |       | 
| |                                   |  |   |       | 
| | Balance as of January 1, 2002     |  | $ | 1,052 | 
| | Goodwill acquired during the year |  |   | -     | 
| |                                   |  |   |       | 
| |                                   |  |   |       | 
| | Balance as of December 31, 2002   |  | $ | 1,052 | 
| |                                   |  |   |       | 



| | b. | A pro-forma
  chart reflecting the operations, had the Company adopted the non-amortization
  provisions of SFAS No. 142, was not presented due to immateriality.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

---

---

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



|NOTE 8:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | -------------------------------------------



| |                                  | December
  31,
| | -------------------------------- | --------------
| |                                  |               
| |                                  | 2001          
| |                                  |               
| |                                  |               
| | Employees
  and payroll accruals | $             
| | Accrued
  expenses               |               
| | Government
  authorities         |               
| | Others                           |               
| |                                  |               
| |                                  |               
| |                                  | $             
| |                                  |               



|NOTE 9:- | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | --------------------------------------
|         |                                       
|         | a.                                    
|         |                                       
|         |                                       



| | 2003 |  | $ | 1,629 | 
| | ---- |  | - | ----- | 
| | 2004 |  |   | 1,629 | 
| | 2005 |  |   | 1,374 | 
| | 2006 |  |   | 1,099 | 
| | 2007 |  |   | 481   | 
| |      |  |   |       | 
| |      |  |   |       | 
| |      |  | $ | 6,212 | 
| |      |  |   |       | 



| |    | Total
  rent expenses for the years ended December 31, 2000, 2001 and 2002 were
  $ 675, $ 1,001 and $ 1,320 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | b. | Royalty
  commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Under the
  Companys research and development agreements with the Office of the Chief
  Scientist (OCS) and the Binational Industrial Research and Development
  Foundation (BIRD-F), and pursuant to applicable laws, the Company is
  required to pay royalties at the rate of 3%-5% of sales of products developed
  with funds provided by the OCS and BIRD-F, up to an amount equal to 100%-150%
  of the research and development grants (dollar-linked) received from the OCS
  and BIRD-F. The obligation to pay these royalties is contingent on actual
  sales of the products and, in the absence of such sales, no payment is
  required. Royalties payable with respect to grants received under programs
  approved by the OCS after January 1, 1999, are subject to interest on the
  U.S. dollar-linked value of the total grants received at the annual rate of
  LIBOR applicable to U.S. dollar deposits. Royalties payable with respect to grants
  received from BIRD-F are linked to the Consumer Price Index in the United
  States.

F-25

---

---

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



|NOTE 9:-  | COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
|--------- | ----------------------------------------------
|          |                                               
|          |                                               
|          |                                               
|          | c.                                            
|          |                                               
|          |                                               
|          |                                               
|NOTE 10:- | INCOME TAXES                                  
|          |                                               
|          | a.                                            
|          |                                               
|          |                                               
|          |                                               
|          | b.                                            
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               
|          |                                               

F-26

---

---

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



|NOTE 10:- | INCOME TAXES (Cont.)
|--------- | --------------------
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     
|          |                     

F-27

---

---

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



|NOTE 10:- | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     
|          | c.                  
|          |                     
|          |                     
|          |                     
|          | d.                  
|          |                     
|          |                     
|          |                     
|          | e.                  
|          |                     
|          |                     



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



| | f. | The
  Companys subsidiaries in the U.K. and Australia have estimated total
  available carryforward tax losses of $ 10,194 and $ 222 respectively to
  offset against future taxable income for an indefinite period. As of December
  31, 2002, the Company recorded a deferred tax asset of approximately $ 3,125
  relating to the available net carryforward tax losses. A valuation allowance
  for the entire balance was recorded due to the uncertainty of the future
  realization of the tax asset.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The Company
  has provided valuation allowance regarding tax loss carryforward on a portion
  of the deferred tax assets which it is more likely than not that a tax
  benefit will not be realized. During 2002, the Company increased the
  valuation allowance by $ 1,208 to $ 3,965.                                                                                                                                                                                                                      

F-28

---

---

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



|NOTE 10:- | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     
|          | g.                  
|          |                     
|          |                     



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



| | h. | The Israeli
  company has final tax assessment until 1999.
| | -- | ----------------------------------------------------------

F-29

---

---

|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands                                 

|NOTE 10:- | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     
|          | i.                  

| |                             | Year ended December 31,             
| | --------------------------- | ------------------------------------
| |                             |                                     
| |                             | 2000                                
| |                             |                                     
| |                             |                                     
| | Current taxes:              |                                     
| | Domestic                    | $                                   
| | Foreign                     |                                     
| |                             |                                     
| | Deferred taxes:             |                                     
| | Domestic                    |                                     
| |                             |                                     
| |                             |                                     
| |                             | $                                   
| |                             |                                     
| |                             |                                     
| | j.                          | Income (loss) before income taxes is
| | comprised of the following: |                                     
| |                             |                                     
| | Domestic                    | $                                   
| | Foreign                     |                                     
| |                             |                                     
| |                             |                                     
| |                             | $                                   
| |                             |                                     
| |                             |                                     

|NOTE 11:- | SHAREHOLDERS EQUITY                                                                                                                                                               
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                    
|          | The Companys Ordinary shares have been traded on the NASDAQ National Market since
TTIs initial public offering (IPO) on December 4, 1996.                                      
|          |                                                                                                                                                                                    
|          | In 1999 and 2000, the Company effected additional two secondary offerings.                                                                                                         
|          |                                                                                                                                                                                    
|          | The Ordinary shares confer upon their holders the right to receive notice to participate and
vote in the Companys general meeting and the right to receive dividends, if declared.
|          |                                                                                                                                                                                    
|          | a.                                                                                                                                                                                 
|          |                                                                                                                                                                                    
|          |                                                                                                                                                                                    
|          |                                                                                                                                                                                    
|          |                                                                                                                                                                                    

F-30

---

---

|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands. except share data              

|NOTE 11:- | SHAREHOLDERS EQUITY (cont.)
|--------- | ----------------------------
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             

|                                                                              | Year ended December 31,                         |         
|----------------------------------------------------------------------------- | ----------------------------------------------- | --------
|                                                                              |                                                 |         
|                                                                              | 2000                                            |         
|                                                                              |                                                 |         
|                                                                              | Amount of
              
               options |         
|                                                                              |                                                 |         
|                                                                              |                                                 |         
|                                                                              |                                                 |         
|Outstanding at the
              
                      beginning of the year |                                                 | 917,096 
|Granted                                                                       |                                                 | 214,800 
|Exercised                                                                     |                                                 | (279,001
|Forfeited                                                                     |                                                 | (9      
|                                                                              |                                                 |         
|                                                                              |                                                 |         
|Outstanding at the end of
              
                      the year       |                                                 | 852,886 
|                                                                              |                                                 |         
|Options exercisable at the
              
                      end of year   |                                                 | 235,886 
|                                                                              |                                                 |         

F-31

---

---

|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands. except share data              

|NOTE 11:- | SHAREHOLDERS EQUITY (cont.)
|--------- | ----------------------------
|          |                             
|          |                             

| | Exercise
              
               price |  | Options
              
               outstanding
              
               as ofDecember 31,
               2002 |  |       |  | Weighted
              
               average
              
               remaining
               contractual
               life |  |  |  | Weighted
              
               average
              
               exercise
              
               price |  |  |  | Options
              
               exercisable
              
               as of
              
               December 31,
               2002 |  |  |  | Weighted
              
               average exercise
              
               price of
              
               exercisable
               options | 
| | -------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |                                              |  |                                                                                                                       |  |       |  |                                                                                                                                       |  |  |  |                                                                                                                          
| |                                              |  |                                                                                                                       |  | years |  | $                                                                                                                                     |  |  |  | $                                                                                                                        
| |                                              |  |                                                                                                                       |  |       |  |                                                                                                                                       |  |  |  |                                                                                                                          
| | 7.5                                          |  | 7,000                                                                                                                 |  |       |  | 0.28                                                                                                                                  |  |  |  | 7.50                                                                                                                      |  |  |  | 7,000                                                                                                                                                |  |  |  | 7.50                                                                                                                                                            | 
| | 10.5                                         |  | 99,405                                                                                                                |  |       |  | 1.45                                                                                                                                  |  |  |  | 10.50                                                                                                                     |  |  |  | 99,405                                                                                                                                               |  |  |  | 10.50                                                                                                                                                           | 
| | 12.88                                        |  | 106,009                                                                                                               |  |       |  | 1.42                                                                                                                                  |  |  |  | 12.88                                                                                                                     |  |  |  | 106,009                                                                                                                                              |  |  |  | 12.88                                                                                                                                                           | 
| | 18.63-19.63                                  |  | 78,667                                                                                                                |  |       |  | 2.79                                                                                                                                  |  |  |  | 19.00                                                                                                                     |  |  |  | 53,278                                                                                                                                               |  |  |  | 18.99                                                                                                                                                           | 
| | 20-23                                        |  | 303,678                                                                                                               |  |       |  | 2.02                                                                                                                                  |  |  |  | 21.05                                                                                                                     |  |  |  | 168,178                                                                                                                                              |  |  |  | 21.25                                                                                                                                                           | 
| | 30                                           |  | 17,667                                                                                                                |  |       |  | 2.86                                                                                                                                  |  |  |  | 30.00                                                                                                                     |  |  |  | 11,778                                                                                                                                               |  |  |  | 30.00                                                                                                                                                           | 
| |                                              |  |                                                                                                                       |  |       |  |                                                                                                                                       |  |  |  |                                                                                                                          
| |                                              |  |                                                                                                                       |  |       |  |                                                                                                                                       |  |  |  |                                                                                                                           |  |  |  |                                                                                                                                                      |  |  |  |                                                                                                                                                                 | 
| |                                              |  | 612,426                                                                                                               |  |       |  | 1.93                                                                                                                                  |  |  |  | 17.76                                                                                                                     |  |  |  | 445,648                                                                                                                                              |  |  |  | 16.61                                                                                                                                                           | 
| |                                              |  |                                                                                                                       |  |       |  |                                                                                                                                       |  |  |  |                                                                                                                          

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

| |                                                                                            |  | Year ended December 31, |      
| | ------------------------------------------------------------------------------------------ |  | ----------------------- | -----
| |                                                                                            |  |                         |      
| |                                                                                            |  |                         | 2000 
| |                                                                                            |  |                         |      
| | Weighted-average fair value on date of grant

       of options at an exercise price that: |  |                         |      
| |                                                                                            |  |                         |      
| | Equal to that fair value of the shares at the

             date of grant                  |  | $                       | 9.58 
| |                                                                                            |  |                         |      
| | Exceed the fair value of the shares at the

             date of grant                     |  | $                       | -    
| |                                                                                            |  |                         |      
| | Weighted-average exercise price of options

      granted at an exercise price that:       |  |                         |      
| |                                                                                            |  |                         |      
| | Equal to the fair value of the shares at the

             date of grant                   |  | $                       | 20.34
| |                                                                                            |  |                         |      
| | Exceed the fair value of the shares at the

             date of grant                     |  | $                       | -    
| |                                                                                            |  |                         |      
| |                                                                                            |  |                         |      

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

F-32

---

---

|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands. except share data              

|NOTE 12:- | NET EARNINGS (LOSS) PER SHARE DATA                                                                
|--------- | --------------------------------------------------------------------------------------------------
|          |                                                                                                   
|          | The following table sets forth the computation of basic and diluted net earnings (loss) per
share.
|          |                                                                                                   
|          | a.                                                                                                

| |                                                                                                                                            |                          |  | Year ended December 31,
| | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ |  | -----------------------
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  | 2000                   
| |                                                                                                                                            |                          |  |                        
|
| | Net income (loss) to shareholders of

     Ordinary shares                                                                                 |                          |  | $                      
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | Numerator for basic and diluted net

     earnings (loss) per share - income (loss)     available to shareholders of Ordinary

     shares |                          |  | $                      
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | b.                                                                                                                                         | Denominator:             |  |                        
| |                                                                                                                                            |                          |  |                        
| | Denominator for basic net earnings (loss)

     per share - weighted average of shares                                                     |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | Effect of dilutive securities:                                                                                                             |                          |  |                        
| | Employee stock options                                                                                                                     |                          |  |                        
| | Options issued to consultants                                                                                                              |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | Dilutive potential Ordinary shares                                                                                                         |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | Denominator for diluted net earnings (loss)

      per share - weighted average shares and     assumed exercise of options                 |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | c.                                                                                                                                         | Basic net                |  |                        
|
| | Basic net earnings (loss) per share                                                                                                        |                          |  | $                      
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| | Diluted net earnings (loss) per share                                                                                                      |                          |  | $                      
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            |                          |  |                        
| |                                                                                                                                            | *)        Anti-dilutive. |  |                        
| |                                                                                                                                            |                          |  |                        

F-33

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|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands                                 

|NOTE 13:- | RELATED PARTY TRANSACTIONS AND BALANCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | Since the commencement of the Companys operations in 1992, Team has, from time to
time, paid the Company commissions in respect of sales by the Company of certain products represented and sold by Team. This
relationship is reflected in an agreement between the Company and Team dated October 1996 (the Agreement). Team generally
pays the Company a commission at the rate of 15% of the sales price of these products, up to a maximum of 50% of the amount received
by Team from these sales less the cost to Team.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | In addition, Team provides to the Company certain administrative services, including
computer servicing, salary administration, automotive fleet maintenance, legal counsel and basic insurance coverage, and the Company
reimburses Team for the actual cost of such services. The Company and Team have agreed to indemnify each other for liabilities
resulting from acts or omissions of their respective employees constituting intellectual property violations. The Agreement is
automatically renewed for a successive terms of one year on each December 31, and can be terminated by either party at the end of any
such term upon at least 60 days prior written notice. Regarding the rent commitment with Team, see also Note 9a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | Since 1992, the Company has also purchased fixed assets, 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. The payments made by
the Company to Team and Omnitek-Eichut in respect of such asset purchases were, in the aggregate $ 1,091, $ 2,014 and
$ 884 for the years ended December 31, 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | 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. A disagreement arose between the Company and Team regarding whether the Company is required to pay Team
for hardware and related software that it supplied to three of the Companys major customers as part of projects for which the
Company receives payments based on milestones which do not allocate specific amounts for hardware and related software. Following
negotiations
to achieve a compromise with Team on this issue, the Company agreed to pay Team the amount of $ 1,047 in respect of hardware and
related software supplied by Team as part of the Companys projects for these customers. When the Company will receive
additional payments for these projects, it is required to pay Team an additional payment based on Teams pro rata share of the
project. The aggregate additional amount that the Company may have to pay to Team for all of these projects is $ 563.

F-34

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|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands                                 

|NOTE 13:- | RELATED PARTY TRANSACTIONS AND BALANCES (cont.)              
|--------- | -------------------------------------------------------------
|          |                                                              
|          | Transactions between Team and its affiliates and the Company:

| |                                                                  |  |  | Year ended December 31, |      
| | ---------------------------------------------------------------- |  |  | ----------------------- | -----
| |                                                                  |  |  |                         |      
| |                                                                  |  |  | 2000                    |      
| |                                                                  |  |  |                         |      
| |                                                                  |  |  |                         |      
| | Revenues:                                                        |  |  |                         |      
|
| | Commissions on product sales and payment for

          services |  |  | $                       | 311  
| |                                                                  |  |  |                         |      
| | General and administrative expenses:                             |  |  |                         |      
| |                                                                  |  |  |                         |      
| | Rent and maintenance                                             |  |  | $                       | 1,292
| | Administrative and management services                           |  |  | $                       | 589  
| | Purchase of equipment                                            |  |  | $                       | 1,091
| |                                                                  |  |  |                         |      

| | Balances between Team and the Company: |  |  |  |  |      |             
| | -------------------------------------- |  |  |  |  | ---- | ------------
| |                                        |  |  |  |  |      | December 31,
| |                                        |  |  |  |  |      |             
| |                                        |  |  |  |  | 2001 |             
| |                                        |  |  |  |  |      |             
| | Current liabilities                    |  |  |  |  | $    | 2,655       
| |                                        |  |  |  |  |      |             

|NOTE 14:- | CUSTOMERS AND GEOGRAPHIC INFORMATION
|--------- | ------------------------------------
|          |                                     
|          | a.                                  
|          |                                     
|          |                                     
|          |                                     
|          |                                     
|          |                                     
|          |                                     

| |               |  | 2000             |        | 2001                |  | 2002            
| | ------------- |  | ---------------- | ------ | ------------------- |  | ----------------
| |               |  |                  |        |                     |  |                 
| |               |  | Total

 revenues |        | Long-lived

 assets |  | Total

 revenues
| |               |  |                  |        |                     |  |                 
| |               |  |                  |        |                     |  |                 
| | Israel        |  | $                | 4,810  |                     |  | $               
| | United States |  |                  | 22,315 |                     |  |                 
| | Europe        |  |                  | 10,208 |                     |  |                 
| | Australia     |  |                  | 848    |                     |  |                 
| | South America |  |                  | 4,279  |                     |  |                 
| | Far East      |  |                  | -      |                     |  |                 
| | South Africa  |  |                  | 370    |                     |  |                 
| |               |  |                  |        |                     |  |                 
| |               |  | $                | 42,830 |                     |  | $               
| |               |  |                  |        |                     |  |                 

F-35

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---

|TTI TEAM TELECOM INTERNATIONAL LTD.

 AND ITS SUBSIDIARIES
|----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands                                 

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

| |  |            |                                                                                                   |  |  | Year ended December 31, | 
| |  | ---------- | ------------------------------------------------------------------------------------------------- |  |  | ----------------------- | 
| |  |            |                                                                                                   |  |  |                         | 
| |  |            |                                                                                                   |  |  | 2000                    | 
| |  |            |                                                                                                   |  |  |                         | 
| |  |            |                                                                                                   |  |  |                         | 
| |  | Customer A |                                                                                                   |  |  | 4%                      | 
| |  | Customer B |                                                                                                   |  |  | -                       | 
| |  | Customer C |                                                                                                   |  |  | -                       | 
| |  | Customer D |                                                                                                   |  |  | 12%                     | 
| |  | Customer E |                                                                                                   |  |  | 10%                     | 
| |  | Customer F |                                                                                                   |  |  | -                       | 
| |  |            |                                                                                                   |  |  |                         | 
| |  | *)         | In 2002, the Company also recorded revenues of 7% and 6% each, from two affiliates of
Customer F.
| |  |            |                                                                                                   |  |  |                         | 

|NOTE 15:- | SELECTED STATEMENTS OF OPERATIONS DATA
|--------- | --------------------------------------
|          |                                       
|          | a.                                    

| |                                                     |                                                                    |  | Year ended December 31,
| | --------------------------------------------------- | ------------------------------------------------------------------ |  | -----------------------
| |                                                     |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| | Total cost                                          |                                                                    |  | $                      
| | Less - grants and participations                    |                                                                    |  |                        
| | Less - capitalization of software development costs |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| | Research and development, net                       |                                                                    |  | $                      
| |                                                     |                                                                    |  |                        
| | b.                                                  | Financial income, net:                                             |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     | Financial expenses:                                                |  |                        
| |                                                     | Foreign currency translation adjustments                           |  |                        
| |                                                     | Impairment of available-for-sale

           marketable securities |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     | Financial income:                                                  |  |                        
| |                                                     | Foreign currency translation adjustments                           |  |                        
| |                                                     | Interest and other                                                 |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     |                                                                    |  |                        
| |                                                     | Financial income, net                                              |  |                        
| |                                                     |                                                                    |  |                        

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

F-36

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