SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

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

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

For the fiscal year ended December 31, 2007

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

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

Commission File Number 0-28986

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

Israel
(Jurisdiction of incorporation or organization)

12 Amal Street, Afek Park
Rosh Ha'ayin 48092, Israel
972-3-926-9700
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Ordinary Shares, par value NIS 0.5 per share
(Title of Class)

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

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

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the
period covered by the annual report:
16,003,155 Ordinary Shares, par value NIS 0.5 per share

2,936,391 Series A Convertible Preferred Shares, par value NIS 0.5 per share

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

o Yes x No

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

Yes o No x

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

Yes x No o

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

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

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

Item 17 o Item 18 x

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

o Yes x No

			Page




PART I

	Item 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	6

	Item 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	6

	Item 3.	KEY INFORMATION	6

		A. Selected Financial Data	6

		B. Capitalization and Indebtedness	8

		C. Reasons for the Offer and Use of Proceeds	8

		D. Risk Factors	8

	Item 4.	INFORMATION ON THE COMPANY	19

		A. History and Development of the Company	19

		B. Business Overview	20

		C. Organizational Structure	30

		D. Property, Plants and Equipment	30

	Item 4A.	UNRESOLVED STAFF COMMENTS	31

	Item 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	31

		A. Operating Results	31

		B. Liquidity and Capital Resources	39

		C. Research and Development, Patents and Licenses	41

		D. Trend Information	41

		E. Off-Balance Sheet Arrangements	42

		F. Tabular Disclosure of Contractual Obligations	42

	Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	43

		A. Directors and Senior Management	43

		B. Compensation	45

		C. Board Practices	45

		D. Employees	49

		E. Share Ownership	50

Item 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	51

	A. Major Shareholders	51

	B. Related Party Transactions	53

	C. Interests of Experts and Counsel	55

Item 8.	FINANCIAL INFORMATION	55

	A. Consolidated Statements and Other Financial Information	55

	B. Significant Changes	56

Item 9.	THE OFFER AND LISTING	56

	A. Offer and Listing Details	56

	B. Plan of Distribution	57

	C. Markets	57

	D. Selling Shareholders	57

	E. Dilution	57

	F. Expenses of the Issue	57

Item 10.	ADDITIONAL INFORMATION	57

	A. Share Capital	57

	B. Memorandum and Articles of Association	57

	C. Material Contracts	62

	D. Exchange Controls	62

	E. Taxation	62

	F. Dividends and Paying Agents	70

	G. Statement by Experts	70

	H. Documents on Display	70

	I. Subsidiary Information	70

Item 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70

Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	71

PART II

	Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	71

	Item 14	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	71

	Item 15.	CONTROLS AND PROCEDURES	71

	Item 16.	Reserved	72

	Item 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	72

	Item 16B.	CODE OF ETHICS	72

	Item 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	72

	Item 16D.	EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES	73

	Item 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	73

	Item 17.	FINANCIAL STATEMENTS	73

	Item 18.	FINANCIAL STATEMENTS	73

	Item 19.	EXHIBITS	73

INTRODUCTION

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

—

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

—

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

—

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

—

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

—

the "SEC" is to the United States Securities and Exchange Commission;

—

"NASDAQ" is to the NASDAQ Global Market (formerly, the Nasdaq National Market);

—

"dollars" or "$" are to United States dollars; and

—

"NIS" or "shekel" are to New Israeli Shekels.

Our consolidated financial statements are prepared in United States dollars and in accordance with generally accepted accounting principles in the United States, or GAAP. On March 28, 2008, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.519 to $1.00.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements in this annual report that are not statements of historical or current facts are “forward-looking statements” within the meaning of Private Securities Litigation Reform Act of 1995. These statements include but are not limited to statements concerning our business outlook or future economic performance; future payments under contractual obligations, anticipated revenues, expenses or other financial items; and introductions and advancements in development of products, and plans, and objectives related thereto. In some cases, you can identify forward-looking statements by our use of words such as “expect,” “anticipate,” “believe,” “intend,” “plan,” “seek” and “estimate” and similar expressions. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those in these statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under “Item 3D – Risk Factors” in this annual report as well as those discussed elsewhere in this annual report or in our reports on Form 6-K submitted to the SEC. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.

PART I

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3.

KEY INFORMATION

A. Selected Financial Data.

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

We derived the selected consolidated statements of operations data set forth below for the years ended December 31 2005, 2006 and 2007, and the selected consolidated balance sheet data as of December 31, 2006 and 2007, which have been prepared in accordance with GAAP, from our audited consolidated financial statements, which are included elsewhere in this annual report. We derived the consolidated statements of operations data for the years ended December 31, 2003 and 2004 and the selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005, which have been prepared in accordance with GAAP, from audited consolidated financial statements that are not included in this annual report.

	December 31, (dollars in thousands, except for share data)
	2003			2004			2005			2006			2007



Statement of Income Data:
Revenues:
Products	$	33,831		$	21,670		$	25,317		$	27,554		$	25,722
Services		12,036			16,128			17,909			18,560			20,195

Total revenues		45,867			37,798			43,226			46,114			45,917
Cost of revenues:
Products		29,619			16,645			13,015			14,783			12,504
Services		6,368			9,719			9,203			9,571			8,545
Impairment of capitalized software		5,864			3,597			177			-			-

Total cost of revenues		41,851			29,961			22,395			24,354			21,049

Gross profit		4,016			7,837			20,831			21,760			24,868

Operating expenses:
Research and development, net		10,318			10,744			9,136			9,578			9,433
Selling and marketing		19,465			19,220			11,977			10,214			7,857
General and administrative		6,333			6,636			6,325			6,679			6,952
Impairment of goodwill		1,052			-			-			-			-
Allowance for doubtful accounts and bad debt write-off		177			(50	)		-			-			-

Total operating expenses		37,345			36,550			27,438			26,471			24,242

Operating loss		(33,329	)		(28,713	)		(6,607	)		(4,711	)		626
Other income											150			33
Financial income, net		2,793			1,326			153			662			2,150

loss before income taxes		(30,536	)		(27,387	)		(6,454	)		(3,899	)		2,809
Income taxes (benefit)		(456	)		2,107			624			(96	)		(87	)

Net income (loss)	$	(30,080	)	$	(29,494	)		(7,078	)		(3,803	)		2,896
Deemed dividend associated with
Beneficial Conversion Feature		-			-			(1,981	)		-			-
Income attributable to preferred
shareholders		-			-			-			-			(449	)

Net income (loss) attributable to
ordinary shareholders	$	(30,080	)	$	(29,494	)		(9,059	)		(3,803	)		2,447

Net Basic and diluted income (loss)
attributable to ordinary shareholders	$	(2.53	)	$	(2.48	)		(0.72	)		(0.20	)		0.15

Weighted average number of shares used in
computing:
Basic net earnings (loss) per share
attributed to ordinary shareholders		11,872			11,873			12,577			15,076			16,001

Diluted net earnings (loss) per share
attributed to ordinary shareholders		11,872			11,873			12,577			15,076			16,124

	December 31, (dollars in thousands)
	2003		2004		2005		2006		2007



Balance Sheet Data:
Cash and cash equivalents	$	13,901	$	5,472	$	18,034	$	31,410	$	33,408
Short term bank deposits		4,365		2,372		1,973		984		98
Marketable securities		15,767		12,626		15,713		-		-
Short-term bank debt		-		967		-		-		-
Working capital		38,570		16,806		23,613		24,462		30,519
Total assets		76,606		46,497		55,851		53,585		58,594
Shareholders' equity		55,789		26,293		32,443		30,495		33,436

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

Risks Relating to Our Business and Our Industry

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

While we generated net income of $2.9 million in 2007, we incurred net losses in the preceding four years. Although we have been profitable in the past, we may not be profitable or meet the level of expectations of the investment community in the future, which could have a material adverse impact on our share price. Even if we maintain profitability, we cannot assure that future net income will offset our cumulative losses. In addition, our operating results may be adversely affected by timing of sales of our products or a shift in our mix of products and services.

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

A large portion of our revenues is derived from substantial orders placed by a relatively small number of customers. Our revenues from our five largest customers represented 47% of our total revenues in 2005, 42% of our total revenues in 2006 and 38% of our total revenues in 2007. Because of our dependence on a small number of customers and large orders, if expected orders are not received, or orders are postponed, reduced or cancelled, our revenues and profitability will be significantly reduced.

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

Spending in the global operational support system, or OSS, market in which we operate is built on the need for service providers to support new services and network equipment. In the past several years, we have identified periods of a slow-down in the OSS spending by communication service providers as well as periods in which such spending rose. Therefore, we are unable to predict these trends or the extent of the impact that they may have on our results of operations. Nevertheless, if a slow-down in capital expenditures in the OSS market resumes, it would reduce our sales and could result in pressure on the price of our products, each of which would have a material adverse effect on our operating results.

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

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

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

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

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

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

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

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

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

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

The market for our products is characterized by:

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emergence of new types of networks and services;

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changing services and technologies;

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evolving industry standards;

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changing regulatory environments; and

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rapid changes in communications service providers' requirements.

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

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enhance and improve our existing products;

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develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards, including next-generation and third-generation (3G) networks;

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address the increasingly sophisticated needs of our customers;

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incorporate new technologies and new infrastructures; and

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develop new interfaces between our products and complimentary products.

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

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

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

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

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

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

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

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

Our sales strategy includes direct sales to customers as well as sales through original equipment manufacturers, system integrators and other indirect channels for sales and support of our products. Specifically, we rely on strategic relationships with system integrators and hardware vendors, such as Nortel and Siemens, to sell our products and services and these relationships may account for a larger portion of our revenues in the future. These parties are not obligated to sell any of our products. Any failure of these relationships to market our products effectively or generate significant revenues for us, a termination of any of these relationships, or if we are unable to form additional strategic alliances in the future that will prove beneficial to us, could harm our operations and profitability.

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

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

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

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

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

Our current customers are located in about 25 countries worldwide and we are seeking to expand into other markets. We expect our revenues from international sales to continue to account for a large portion of our total revenues in the future. However, we may not be able to sustain or increase revenues derived from our international operations. In addition, as we conduct business globally, our future results could be adversely affected by a variety of uncontrollable and changing factors and inherent risks, including the following:

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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;

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the impact of possible recessionary environments in certain economies;

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

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difficulties in enforcing our rights in various jurisdictions;

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reduced protection for intellectual property rights in some countries;

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tariffs and other trade barriers;

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adverse tax consequences;

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restrictions on the conversion of currencies or the repatriation of earnings;

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exchange ratres fluctuations;

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

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economic and political instability.

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

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

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

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

We occasionally perform a large amount of our obligations to customers before receiving payment. In some instances, we incur certain expenses prior to concluding a written agreement with a customer. Because of this, we must finance the costs of performing under our customer agreements, and risk nonpayment. Although our customers are generally large companies, they may not pay our fees when due. Payment of our fees is generally not secured or guaranteed. Delayed payment or failure to receive payment may strain our finances.

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

In order to continue to sell our products in a competitive industry, we have often been required to agree to provisions in our contracts with customers that generally make it easier for customers to terminate their agreements with us at various stages of performance, with payments covering only costs actually incurred by us up to the date of termination. Our performance often largely comprises services and customized products which we cannot recover and resell. As a result, if any of our customers terminate their agreements with us, we may have difficulty recovering our costs relating to such services and customized products that were not reimbursed by our customers up to the date of any termination. In such event, we may have reduced future revenues. For example, see the discussion regarding the termination of a contract with a major customer in “Item 8A – Legal Proceedings .”

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

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

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

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providers of NMS, OSS and BSS, such as Hewlett-Packard, Infovista, IBM (Micromuse, Vallent) and Telecordia Technology;

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

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

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

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

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

Currency fluctuations could reduce our revenues and profitability.

A portion of our revenues and expenses are in currencies other than U.S. dollars, such as the NIS and the Euro. Since our financial results are measured in dollars, fluctuations in exchange rates between these currencies and the U.S. dollar could reduce our revenues and profitability. Our results could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS, Euro or other currencies. These measures, however, may not adequately protect us from future currency fluctuations.

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

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

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

Since December 2006, following the resignation of our former Chief Executive Officer, Meir Lipshes is serving again as our Chief Executive Officer. In addition, during 2006 and 2007, several other members of our senior management left the employment of the Company and as a result, we employed several new high-level officers in 2006 and 2007. The difficulties inherent in selecting a suitable Chief Executive Officer and other members of the management team, transitioning the Company under the leadership of new management, and assimilating new management personnel into the Company’s corporate culture could cause a reduction in our efficiency and profitability, may harm perceptions of us in the investment community and may cause our stock price to decline.

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

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

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

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

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

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

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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;

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

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

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

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

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

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

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

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

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

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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;

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

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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;

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any future litigation to defend us against allegations that we have infringed the rights of others could result in substantial cost to us, even if we ultimately prevail or are entitled to indemnification from third parties in connection therewith; and

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

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

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

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

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a delay in recognition or loss of revenues;

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loss of market share; and

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failure to achieve market acceptance (brand recognition).

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

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

A shareholder class action lawsuit was filed in September 2004 against us, Team Software Industries Ltd., which was then our principal shareholder, and certain of our executive officers. The lawsuit alleges that material misrepresentations and omissions concerning our operations and performance artificially inflated our stock price, causing damages to investors. In December 2007, we reached a settlement agreement with the plaintiffs, which settlement is still subject to approval of the court. Based on the settlement agreement, our directors and officers insurance carrier is supposed to pay the entire settlement amount to the plaintiffs. In the event of disapproval of the agreement by court, we may be required to pay damages and other costs in excess of the amounts covered by our insurance, in which case, this action could have a materially adverse effect on our results of operations and financial condition.

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

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

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

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

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

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

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

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

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

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

Risks Relating to Operations in Israel

Conditions in Israel could harm our results of operations.

We are incorporated under the laws of Israel, and our principal offices are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our operations. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a high level of violence and hostilities between Israel and the Palestinians, which has strained Israel’s relationship with its Arab citizens and several Arab countries. The election in 2006 of representatives of the Hamas movement to a majority of the seats in the Palestinian Legislative Council and its subsequent seizure of control of the Gaza strip have created additional unrest and uncertainty in the region. Further, since mid- 2007, Hamas and other Palestinian movements have been launching, from time to time, missile strikes from the Gaza strip into southern Israel and there have been firing of multiple rockets by Hezbollah throughout northern Israel as well as retaliatory attacks by Israel throughout Lebanon. Any armed conflicts or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, may hinder Israel’s international trade relations and may limit the geographic markets where we can sell our products. Furthermore, several countries restrict business with Israel and Israeli companies, and additional countries may restrict doing business with Israel and Israeli companies as a result of the recent increase in hostilities.

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

The rate of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation of the NIS against the U.S. dollar. Similarly, the U.S. dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the U.S. dollar.

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

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

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

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

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

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

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

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

Most of our executive officers and employees in Israel are obligated to perform annual military reserve duty. They may also be further subject to being called to active duty at any time under emergency circumstances and could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees because of military service. The full impact on our workforce or business if some of our executive officers and employees are called upon to perform military service, especially in times of national emergency, is difficult to predict. Any disruption in our operations as the result of military service by key personnel could harm our business.

It may be difficult to enforce a U.S. judgment against our officers, our directors and us or to assert U.S. securities law claims in Israel.

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

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

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

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the judgement is enforceable in the state in which it was given;

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

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

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

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

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

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

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

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

Risks Related to the Market for Our Ordinary Shares

Our share price has decreased significantly and could continue to fluctuate significantly.

The market price for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. Our share price has decreased significantly since late 2002. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly, such as:

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

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

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announcements concerning us or our competitors;

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the introduction of new telecommunications services and new industry standards;

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changes in pricing policies by us or our competitors;

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general market conditions, and changes in market conditions in our industry;

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

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political, economic and other developments in the State of Israel, the United States and worldwide.

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

If, for any taxable year, our passive income, or our assets which produce passive income, exceed specified levels, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences for our U.S. shareholders, which may include having gains realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gains income, having potentially punitive interest charges apply to those gains, and the denial of the taxation of certain dividends paid by us at the lower rates applicable to long-term capital gains. Although we do not believe that we have been a PFIC for any tax year through and including 2007, the tests for determining PFIC status are applied annually and are based in part on reference to the market value of our shares or valuing our assets, and it is difficult to make accurate determinations about these items. Accordingly, we cannot make any assurances to you about our status. U.S. shareholders are urged to consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares.

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

As of March 18, 2008, we had approximately 16.0 million ordinary shares issued and outstanding and approximately 6.6 million of additional ordinary shares which are issuable upon exercise of outstanding options and warrants or which are issuable upon conversion of outstanding Series A Preferred Shares. The issuance of a significant amount of additional ordinary shares on account of the outstanding warrants and options or Series A Preferred Shares will dilute our current shareholders’ holdings and may depress our share price. In addition, if our shareholders sell substantial amounts of our ordinary shares, including shares issued upon the conversion of outstanding Series A Preferred Shares, or upon the exercise of warrants or employee options, or if the perception exists that our shareholders may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall. Any substantial sales of our shares in the public market also might make it more difficult for us to sell equity or equity related securities in the future at a time and upon terms and conditions we deem appropriate.

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

As of March 18, 2008, Shlomo Eisenberg, the former chairman of our board of directors, beneficially owned 4,229,142 ordinary shares, which represents approximately 22.3% of our voting power. As a result, he may have an influence on the election of our directors and on decisions by our shareholders on matters submitted to shareholder vote, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares. This concentration of ownership may also adversely affect our share price.

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

In December 2004, we issued 6,636,389 Series A Preferred Shares to the investors in the private placement transaction described elsewhere in this annual report. As of March 18, 2008, 2,936,391 Series A Preferred Shares remain outstanding. The preferential rights of the Series A Preferred Shares currently include, among others:

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

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

We do not intend to pay dividends.

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

Item 4.

INFORMATION ON THE COMPANY

A. History and Development of the Company

Both our legal and commercial name is TTI Team Telecom International Ltd. We were incorporated under the laws of the State of Israel in February 1990. We are domiciled in Israel and our legal form is a company limited by shares. Our registered office is located at 12 Amal Street, Afek Park, Rosh Ha’ayin 48092, Israel, and our telephone number is +972-3-926-9700. Our address on the Internet is http://www.tti-telecom.com. The information on our website is not incorporated by reference into this annual report.

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

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

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

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

In January 2005, we completed a private placement transaction in which we issued (i) 6,636,391 Series A Preferred Shares, at a purchase price of $2.20 per share, resulting in aggregate proceeds (before expenses) of approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our ordinary shares at an exercise price of $2.50 per share, subject to adjustments.

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

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

B. Business Overview

Introduction

We are a leading global provider of Operations Support Systems (OSS) and Business Support Systems (BSS) for telecommunications service providers. With 16 years of experience delivering our products and solutions to industry leading companies in more than 25 countries, we have a proven track record managing some of the world’s largest, most complex networks.

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

We have a significant installed base of solutions with approximately 50 customers, including some of the world’s largest communications service providers, commonly referred to as Tier 1 and Tier 2 operators. We have established working relationships with a number of leading network and communications equipment providers which allow us to provide end-to-end integrated solutions as well as stand-alone modules to meet our customers’ needs. Our Netrac products are based on proven technology, which, when combined with our professional service offerings, including customization, implementation and integration expertise and post-sales customer support, make us an attractive turn-key solution provider. Our turn-key solution usually incorporates third-party software and may incorporate services performed by third-party integrators or subcontractors. Our software products are designed to work with a wide range of network equipment manufacturers and varied technologies, thus increasing the potential market for our systems.

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

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

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

Industry Background; Market Opportunity

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

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

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

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

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

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

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

Our Strategy

Our goal is to become the leading provider of innovative services assurance products and services, for next generation converged networks. Our strategy to achieve this goal contains the following key elements:

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

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

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Expand Presence in New and Existing Markets . We plan to capitalize on our global sales and marketing presence to further penetrate markets, win new customers and broaden our installed base. This includes leveraging our acquisition of Telesens in early 2008 to penetrate the CIS market and leveraging recent relationships with system integrators to extend our sales world-wide.

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Leverage Installation Base for Additional Sales. We seek to continue to solidify and improve our existing relationships with Tier 1 and Tier 2 communications service providers worldwide. We will leverage our extensive installed base and new product offerings to build on these relationships and to penetrate other large communications service providers. By offering our products to a growing number of industry-leading communications service providers, we increase acceptance and demand for our products.

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

Our Netrac Solutions

Our Netrac products, combined with our comprehensive professional service offerings, enable communications service providers to improve the quality of existing services, streamline their operations to compete cost-effectively, maximize return on their investment in network infrastructure, offer new services over complex networks and efficiently add new subscribers. Our expertise is derived from 16 years of experience in developing and implementing software solutions for diverse communications service providers around the world. We are currently leveraging this expertise and continue to develop our Next Generation OSS, or NGOSS family of products, including the NGN modules and features, to provide a comprehensive solution for next-generation architectures and managed IP services.

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

Our Netrac products provide the following advantages:

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

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

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

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

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

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

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

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

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

Products and Services

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

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

Mediation Products

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

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

Our Netrac mediation products include the following:

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

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

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Mediation Studio an integrated, user-friendly, graphically development environment for managing Mediation libraries and project layer customizations.

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

Service Assurance Products

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

Fault Management Products

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

Our Netrac fault management products include the following:

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

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

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

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

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

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

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

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

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

Performance Management Products

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

Our Netrac performance management product includes:

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

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

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CallExpert which transforms raw xDR records into information that can be used for network and service monitoring, capacity planning and marketing-related applications, providing communications service providers with the tools to perform advanced quality of service, call failure and traffic trends analysis.

Service Fulfillment Products

Our Netrac service fulfillment products, consisting of the NetSync product and service provisioning and activation products, enable network service providers to efficiently enter, manage and fulfill orders for services from their customers. Our provisioning products streamline the provisioning process end-to-end, from order intake to fulfillment. By automating time-consuming manual operations, our provisioning products allow operators to more quickly roll out services and meet customers’ demands promptly and cost-effectively.

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

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

Provisioning solution

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

Our Netrac provisioning products include the following:

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

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

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

Professional Services

We provide a broad array of professional service offerings to assist our diverse customer base. We focus on customer retention and our customers’ long-term satisfaction as key measures of the quality of these services.

We deliver the expertise necessary to customize, integrate and implement our software solutions. As of December 31, 2007, our professional services personnel consisted of 158 people operating in Israel, North America, Europe, Latin America and the Asia/Pacific region (including Australia). We provide a comprehensive series of training courses to our customers, partners and employees to provide and enhance the knowledge and skills necessary to deploy, use and maintain our software solutions. Our training courses address the technical aspects of our products while providing examples of customer best practices and operational efficiencies. We also offer “Train-the-Trainer” programs to enable our customers to conduct their own internal end-user training.

Project Installation; Maintenance and Customer Support

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

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

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

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system management;

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configuration changes;

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failure recovery;

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performance tuning;

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database administration support;

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communications administration support; and

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preventive maintenance activities.

Customers

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

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incumbent local exchange carriers, or ILECs;

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competitive local exchange carriers, or CLECs;

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long-distance carriers;

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wireless service providers and resellers; and

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managed services vendors.

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

To date, we have approximately 50 customers of our software solutions in more than 25 countries (many of them are Tier 1 and Tier 2 communication service providers).

Sales and Marketing

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

We have focused our direct sales activities on North America, Europe, Africa and the Asia Pacific region. Recently, we have completed the acquisition of our Ukrain subsidiary, Telesens LLC, through which we intend to operate in the CIS market. Additionally, we market our products to communications service providers in Western and Eastern Europe and Asia/Pacific Rim through relationships with strategic partners and agents.

Our sales and marketing efforts are managed by a small group of senior managers with substantial experience in the communications software market. The sales process for new customers generally requires a significant investment of time and expenses and typically takes six to 18 months. The process also involves system designers, sales representatives and support personnel and typically requires presentations, demonstrations, field trials, visits to reference sites and lengthy negotiations. Recently, our management decided to operate through Regional Business Units, or RBUs, including Asia & India, Western Europe, Eastern & Central Europe, Israel and Australia & New Zealand. The main objectives of this strategy is to impose end-to-end responsibility (sales to delivery) on the RBUs mainly with respect to sales, marketing and delivery of projects, and to increase the commitment of each of the RBU managers to achive our targets and goals.

To date, we have been successful in penetrating markets in North and South America, Europe, Israel, South Africa, the Asia/Pacific and Australia. We have established offices in The Netherlands, South Africa, Australia, India, Sweden, Costa Rica and several locations in the United States. In addition, we have sales representatives and sales consultants located throughout the world, including in Russia, Ukraine, Romania, Greece and Poland.

As of December 31, 2007, we employed 35 sales and marketing personnel. To date, we have established relationships with many equipment, software and service providers, such as Nortel and Siemens. Through these alliances, we deliver a joint, comprehensive solution that builds on each respective company’s strengths and jointly market our products. We intend to strengthen our existing strategic relationships, establish additional relationships and recruit additional sales representatives as a means of identifying business opportunities and entering new markets.

See also “ Item 5 – Operating and Financial review and prospects – Results of Operations ” regarding breakdown of our revenues by geographical area.

Research and Development

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

As of December 31, 2007, we employed 123 full-time employees in research and development. We have expertise derived from more than a decade of developing software adapted to a variety of network hardware and software configurations. Our core capabilities include our:

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ability to assess customers’ networks and understand their NMS, BSS and OSS requirements;

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familiarity with a wide variety of communications protocols and interfaces;

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

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

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

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

Gross research and development expenses were approximately $9.1 million, or 21.2% of our revenues, for the year ended December 31, 2005. Gross research and development expenses were approximately $9.6 million, or 20.9% of our revenues, for the year ended December 31, 2006. Gross research and development expenses were approximately $9.4 million, or 20.5% of our revenues, for the year ended December 31, 2007. We did not capitalize any amount invested for development in since 2003. We anticipate that we will continue to invest substantially amounts in research and development in future periods.

The government of Israel encourages research and development projects oriented toward producing systems and products for export. We received grants and participate in programs sponsored by the Office of the Chief Scientist of the Israel Ministry of Industry, Trade and Labor, or the Chief Scientist; the BIRD Foundation; and the European Union. We have relied on these grants for the financing of a portion of our product development expenditures. Through December 2007 we recognized grants totaling $5.5 million from the Chief Scientist and the BIRD Foundation for the development of various aspects of our products.

In 2005, we received a grant of approximately $537,000 from the Chief Scientist, part of which relates to our participation in a consortium of companies (commonly referred to as MAGNET) engaged in the development of a management system for large networks. In 2006, we received a grant of approximately $54,000 from the Chief Scientist as the last payment for our participation in the MAGNET program. We are not required to repay the MAGNET program grant nor are we required to pay any royalties in respect thereof. In 2007, we did not receive any grants from the Chief Scientist.

We did not receive any grants from the European Union since 2005 and we are not required to pay any royalties for past grants received from the European Union as part of our participation in a consortium of companies engaged in the development of a platform for the management and control of IP over optical networks (DWDM) .

As of December 31, 2007, our total contingent liability in respect of grants received from the Chief Scientist and the BIRD Foundation, net of royalties paid or accrued, was approximately $2.7 million. Although we have received grants in the past, and may continue to do so in the future, we intend to fund future research and development efforts primarily from our own funds and through fees charged for customization and enhancement of products for our customers. For additional details regarding terms and conditions relating to grants from the Chief Scientist, see “Item 5B – Grants from the Office of the Chief Scientist”.

Competition

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

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

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

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

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

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

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

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

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

Intellectual Property

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

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

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

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

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

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

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be time-consuming;

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result in costly litigation and diversion of technical and management personnel;

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cause product shipment delays;

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require us to develop non-infringing technology; or

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

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

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

C. Organizational Structure

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

D. Property, Plants and Equipment

We do not own any real property. Our principal facilities, as relocated in December 2007 and in which our corporate headquarters are located, comprise approximately 48,160 square feet of office space, and are located in Rosh Ha’ayin, Israel. The lease of such facilities is scheduled to expire in September 2014, and the annual rent is approximately $825,000.

We also lease a facility in Yokneham, Israel, used primarily as a development center, which occupies approximately 2,740 square feet. This lease is scheduled to expire in December 31, 2009.

We also lease the following facilities, used primarily as marketing and sales offices: approximately 4,135 square feet in Hoboken, New Jersey, USA; approximately 11,223 square feet in Atlanta, Georgia, USA; approximately 4,438 square feet in Lenexa, Kansas, USA; approximately 800 square feet in Sydney, Australia; approximately 1,000 square feet in San Jose, Costa Rica; approximately 1,560 square feet in South Africa and approximately 430 square feet in Sweden.

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

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

Item 4A.

UNRESOLVED STAFF COMMENTS

Not Applicable.

Item 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results.

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

Overview

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

Product revenues consist primarily of product license fees and fees for professional services required to customize our products for our customers. Service revenues consist of fees for customization, implementation, integration, development, training, consultancy, maintenance, and customer support. In some cases, we receive commissions from hardware vendors which are accounted for as product revenues. Our usual sale to a new customer ranges from $0.5 million to $6 million, depending upon the scope of the network and functionality required for a specific customer application. We believe that revenues from the license, service and support of our Netrac family of products will continue to account for most of our total revenues for the foreseeable future.

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

Generally, the time elapsed from when we receive an order for our products to the completion of installation range from six to 18 months. Under the terms of some of our contracts, we invoice our customers as we complete certain milestones, which on average occur every few months, or, in certain cases, after installation has been completed. We generally receive payment 30 to 120 days after we invoice customers. As a result, an average of five to six months passes between our performance of work and our receipt of payment.

Sales effected through our strategic relationships with partners such as Nortel and Siemens accounted for approximately 3.8% of our revenues in 2005, approximately 10.1% of our revenues in 2006 and approximately 12.6% of our revenues in 2007. The contractual terms of our arrangement with our strategic partners are similar to the terms of the arrangement with customers that are end-users (projects in which we act as the prime contractor).

Our Functional Currency

A majority of our revenues is paid to us in U.S dollars or is U.S. dollar-linked. In addition, a substantial portion of our costs is incurred in U.S. dollars. Since the U.S. dollar is the primary currency in the economic environment in which we operate, the dollar is our functional and reporting currency. Transactions and balances denominated in dollars are presented at their original amounts. Accordingly, we remeasure monetary accounts maintained in currencies other than the U.S. dollar using the foreign exchange rate at the balance sheet date in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation” (“SFAS No. 52”). We measure and record operational accounts and nonmonetary balance sheet accounts at the rate in effect at the date of the transaction. We report the effects of foreign currency remeasurement in current operations.

Because a substantial amount of our revenues is paid to us in U.S. dollars or is U.S. dollar-linked, and a substantial portion of our expenses is incurred in NIS, we are exposed to risk that the recent devaluation of the dollar against the NIS will result in an increase in the the dollar cost of our operations in Israel. While we expect to partially mitigate this exposure by monitoring our expenses, including benefiting from the relatively low labor costs of our new Ukraine subsidiary that was acquired in 2008, there is no assurance that the dollar cost of our operations in Israel will not continue to increase.

Critical Accounting Policies

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

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

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

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

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

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

According to SOP 81-1, costs that are incurred for a specific anticipated contract prior to the existence of a persuasive evidence of an agreement are deferred, subject to evaluation of their probable recoverability, and only if the costs can be directly associated with a specific anticipated contract. Such deferred costs are recorded as unbilled contract costs, in other accounts receivable and prepaid expenses. As of December 31, 2005, 2006 and 2007, we did not have such deferred costs.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined in the amount of the estimated loss on the entire contract. Since 2004, no such estimated losses were identified.

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

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

In addition, contracts executed include provisions that clearly specify the enforceable rights regarding products and services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases we expect to perform our contractual obligations under the contract and our licensees are expected to satisfy their obligations under the contract.

Tax Accounting

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

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

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

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

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

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

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

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

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

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2007, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As required by the modified prospective method results for prior periods have not been restated. The Company recognized compensation expenses for the value of these awards, which has graded vesting, based on the accelerated attribution method over the requisite service period of each of the award, net of estimated forfeiters. Estimated forfeitures were based on actual historical pre-vesting forfeitures.

Impact of recently issued accounting standards

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

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

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

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

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS 159 will have an impact on its consolidated financial statements.

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

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

Results of Operations

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






Revenues:
Product	58.6	%	59.8	%	56	%
Service	41.4		40.2		44


Total revenues	100.0		100.0		100.0
Cost of revenues:
Product	30.1		32.1		27.2
Service	21.3		20.8		18.6
Impairment of capitalized software development costs	0.4		0		0

Total cost of revenues	51.8		52.8		45.8

Gross profit	48.2		47.2		54.2
Operating expenses:
Research and development, net	21.2		20.8		20.5
Selling and marketing	27.7		22.1		17.1
General and administrative	14.6		14.5		15.1

Total operating expenses	63.5		57.4		52.7


Operating income (loss)	(15.3	)	(10.2	)	1.5
Other Income	--		0.3		0.1
Financial income, net	0.4		1.4		4.7

Income (Loss) before income taxes	(14.9	)	(8.5	)	6.3
Income taxes (benefit)	1.5		(0.2	)	(0.1	)

Net Income (Loss)	(16.4	)%	(8.2	)%	6.2	%

Deemed dividend associated with BCF	(4.6	)	-		-

Net Income (Loss) attributable to common shareholders	(21	)	(8.2	)	6.2	%

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

	Years Ended December 31,
	2005			2006			2007



Sales by Geographic Areas:
Israel		7.1	%		6.9	%		7.7	%
North America		39.4			41.0			35.1
Europe		26.7			26.7			35.5
Australia		5.7			8.1			5.7
South America		8.2			6.7			4.9
Far East		4.6			3.5			7.0
South Africa		8.3			7.0			4.1
Total		100.0	%		100.0	%		100.0	%

Comparison of 2005, 2006 and 2007

Revenues

	Year ended December 31,
($ in millions)	2005		2006		2007		% Change 2005 vs. 2006			% Change 2006 vs. 2007



Product sales	$	25.3	$	27.5	$	25.7		8.8	%		(6.5	)%

Services		17.9		18.6		20.2		3.6	%		8.6	%

Total revenues		43.2		46.1		45.9		6.7	%		(0.4	)%

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

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

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

Cost of Revenues

	Year ended December 31,
($ in millions)	2005		2006		2007		% Change 2005 vs. 2006			% Change 2006 vs. 2007



Cost of product sales	$	13.0	$	14.8	$	12.5		13.8	%		(15.5	)%

Cost of services		9.2		9.6		8.5		4.3	%		(11.5	)%

Impairment of capitalized software development costs		0.2		--		--		(100	)%		--

Total cost of revenues		22.4		24.4		21.0		8.9	%		(13.9	)%

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

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

We recorded charges during 2005 in connection with the impairment of capitalized software development costs of our Netrac 2 and ServiceView software products (we did not capitalize any amount invested for development since 2003 and since 2006 we have not recorded any costs in connection with impairment of capitalized software development costs).

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

The total cost of revenues increased from $22.4 million in 2005 to $24.4 million in 2006, primarily due to the increased sale activities associated with increased revenues in 2006 and certain projects and services that we provided during 2006 which were less profitable compared to projects performed in 2005.

Gross Profit

	Year ended December 31,
($ in millions)	2005			2006		2007		% Change 2005 vs. 2006			% Change 2006 vs. 2007



Product sales		12.3			12.8		13.2		3.8	%		3.1	%
Services		8.7			9.0		11.7		3.3	%		30.0	%
Impairment of capitalized software development
costs		(0.2	)		0		0		-			-

Total gross profit	$	20.8		$	21.8	$	24.9		4.5	%		14.2	%

Gross profit as a percentage of revenues

	Years ended December 31,
	2005			2006			2007



Product sales		48.6	%		46.3	%		51.4	%
Services		48.6	%		48.4	%		57.7	%
Total gross profit		48.2	%		47.2	%		54.2	%

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

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

Operating Expenses

	Year ended December 31,
($ in millions)	2005		2006		2007		% Change 2005 vs. 2006			% Change 2006 vs. 2007



Research and development, net	$	9.1	$	9.6	$	9.4		5.5	%		(2.1	)%
Selling and marketing		12.0		10.2		7.8		(15.0	)%		(23.5	)%
General and administrative		6.3		6.7		7.0		6.3	%		4.5	%

Total operating expenses		27.4		26.5		24.2		(3.3	)%		(8.7	)%

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

($ in millions)	Year ended December 31,
	2005		2006		2007



Total cost of research and development	$	9.2	$	9.7	$	9.4
Less grant participations		0.1		0.1		-
Research and development, net		9.1		9.6		9.4

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

Gross research and development expenditures increased 5.4% to $9.7 million in 2006, from $9.2 million in 2005. The increase in 2006 was primarily due to our investment of additional resources in improving our products, offerings and infrastructures. For further information, see below under the heading “ Research and Development .”

Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for sales and marketing personnel, as well as promotion of contract administration, traveling and entertainment expenses. Selling and marketing expenses were $7.9 million or 17.1% of total revenues in 2007, $10.2 million or 22.1% of total revenues in 2006 and $12 million or 27.8% of total revenues in 2005. The continuing decrease in selling and marketing expenses in 2007 and 2006 is primarily due to the steps taken by us , including improvements in our sales process and focusing on specific territories.

General and Administrative Expenses. General and administrative expenses consist primarily of compensation for finance, human resources, general management, networks and information systems, personnel, as well as insurance, consultancy services expenses, and other expenses. General and administrative expenses increased 6.3% to $6.7 million, or 14.5% of our total revenues in 2006, from $6.3 million, or 14.6% of total revenues in 2005. General and administrative expenses increased 4.5% to $7.0 million or 15.1% of our total revenues in 2007, from $6.7 million, or 14.5% of total revenues in 2006. The slight increase in the past three years is associated with our decision to maintain the critical mass necessary to manage and support our global business, which entailed, among others, an increase in legal expenses associated primarily with litigation as described under the heading “ Item 8A – Legal Proceedings .”

Financial Income, Net. Financial income consists primarily of interest derived from cash and cash equivalents, short-term investments and foreign currency translation adjustments, off-set by impairment of marketable securities, if any. Our financial income increased to $2.2 million in 2007 from $0.7 million in 2006 primarily due to (1) the sale of marketable securities we held during the third quarter of 2006, that were subject to impairment and therefore offseted our financial income and (2) the devaluation of the US dollar againt the Euro and the NIS. Our financial income increased to $0.7 million in 2006 from $0.2 million in 2005 due to impairment of marketable securities and the devaluation of the Euro and British Pound against the US Dollar accrued in 2005.

Research and Development

We conduct our research and development operations mainly in Israel. Our research and development efforts have been financed through internal resources and grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, the BIRD Foundation and the European Union. We did not apply for such funds in 2006 and 2007.The Chief Scientist provided grants of approximately $537,000 for the year ended December 31, 2005 and approximately $54,000 for the year ended December 31, 2006. We did not obtain any grants during 2007. Of our total research and development expenses, these grants accounted for 5.9% in 2005 and 0.6% in 2006. These grants were provided to us as part of our participation in a consortium of companies (MAGNET program) engaged in the development of a management system for large networks. We are not required to repay these MAGNET program grants, nor are we required to pay any royalties in respect thereof. See “ Item 5B – Grants from the Office of the Chief Scientist ”.

We have also received royalty-bearing grants from the BIRD Foundation to be repaid at the rate of 3.5% to 5% of sales of products developed as a result of the research projects funded by the BIRD Foundation until a maximum of 150% of the U.S. dollar amount we received, linked to the United States consumer price index, is repaid. These royalty-bearing grants received for research and development are offset against our gross research and development expenditures. We paid or accrued to the BIRD Foundation approximately $9,000 for the year ended December 31, 2005, approximately $2,000 for the year ended December 31, 2006, and approximately $560 for the year ended December 31, 2007. We have not received grants from the BIRD Foundation since 1996.

Corporate Tax Rate

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

Subject to compliance with applicable requirements, the income derived from our approved enterprise facilities will be subject through 2013 to a reduced tax rate of a maximum of 25%. The actual tax rate will depend upon the percentage of non-Israeli holders of our share capital. The above benefits are conditioned upon our fulfillment of conditions stipulated by the Investments Law, the regulations promulgated thereunder and the instruments of approval for the specific investments in approved enterprises. If we fail to comply with these conditions, our benefits may be canceled and we may be required to refund the amount of benefits received, in whole or in part. If the retained tax-exempt income were distributed, it would be taxed at the corporate tax rate applicable to such profits as if we had not chosen the alternative tax benefits (rate of 10% – 25% based on the percentage of foreign ownership) on the gross amount distributed. In addition, these dividends will be subject to a 15% withholding tax. Accordingly, no deferred income taxes have been provided on income attributable to our Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.

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

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

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

	Year Ended December 31,
	2007			2006			2005			2004			2003



Inflation (Deflation)		3.4	%		(0.1	)%		2.4	%		1.2	%		(1.9	)%
Devaluation (Revaluation)		(9.0	)%		(8.2	)%		6.8	%		(1.6	)%		(7.6	)%
Inflation (devaluation) gap		12.4	%		8.1	%		(4.4	)%		2.8	%		5.7	%

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

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

B. Liquidity and Capital Resources

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

Our operating activities provided (used) cash of $4. 7 million for the year ended December 31, 2005, $(2.6) million for the year ended December 31, 2006 and $3.7 million for the year ended December 31, 2007.

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

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

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

Management believes our cash, cash equivalents reserve, as well as cash flow from our operations in 2008 will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months.

Market Risk

For information on our market risk, see “Item 11 – Quantitative and Qualitative Disclosures About Market Risk .”

Grants from the Office of the Chief Scientist

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

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

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

The R&D Law generally requires that the product developed under a program be manufactured in Israel. However, upon a notification to the Office of the Chief Scientist a portion of up to 10% of the manufacturing volume may be performed outside of Israel. Upon the approval of the Chief Scientist, a greater portion of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The R&D Law further permits the Chief Scientist, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The R&D Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the Office of Chief Scientist whether to approve a program and the amount and other terms of benefits to be granted. The increased royalty rate and repayment amount will be required in such cases.

The R&D Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the Chief Scientist. Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to prior approval. The Chief Scientist may approve the transfer of Chief Scientist-funded know-how outside Israel in the following cases: (a) the grant recipient pays to the Chief Scientist a portion of the sale price paid in consideration for such Chief Scientist-funded know-how (according to certain formulas); or (b) the grant recipient receives know-how from a third party in exchange for its Chief Scientist-funded know-how; or (c) such transfer of Chief Scientist-funded know-how arises in connection with certain types of cooperation in research and development activities.

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

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

C. Research and Development, Patents and Licenses

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

We currently employ 123 full-time employees in research and development. Gross research and development expenses were approximately $9.2 million, or 21.2% of our revenues, for the year ended December 31, 2005. Gross research and development expenses were approximately $9.7 million, or 20.9% of our revenues, for the year ended December 31, 2006. Gross research and development expenses were approximately $9.4 million, or 20.5% of our revenues, for the year ended December 31, 2007. For information on our research and development expenditures and grants we received, see “ Item 5A – Results of Operations – Research and Development .” We anticipate that we will commit increasing amounts to research and development in future periods.

Since we received grants from the Chief Scientist, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an approval to perform any portion of them outside of Israel. Know-how from the research and development which is used to produce these products may not be transferred to third parties without the approval of the Chief Scientist. Approval is not required for the sale or export of any products resulting from the research and development based on these grants. For further information regarding the Chief Scientist, see “Item 5B – Liquidity and Capital Resources– Grants from the Office of the Chief Scientist .”

D. Trend Information

Spending in the global OSS market in which we operate is built on the need for service providers to support new services and network equipment. In the past several years, we have identified periods of a slow-down in the OSS spending by communication service providers as well as periods in which such spending rose. Therefore, we are unable to predict these trends or the extent of the impact that they may have on our results of operations. Nevertheless, if a slow-down in capital expenditures in the OSS market resumes, it would reduce our sales and could result in pressure on the price of our products, each of which would have a material adverse effect on our operating results.

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

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

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

E. Off-Balance Sheet Arrangements

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

F. Tabular Disclosure of Contractual Obligations

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

	Payment due by period (in thousands US$)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years



Long-Term Debt		1,579		206		411		411		551
Operating Lease Obligations (facilities and vehicles)		7,370		1,411		2,402		1,907		1,650
Uncertain Income Tax Positions		92		92
Accured Serverance Pay		5,651

Total		14,692		1,709		2,813		2,318		2,201

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

Additional contractual obligations relating to royalty commitments to the Chief Scientist and the BIRD Foundation are as set forth above in “ Item 5A – Operating Results – Research and Development .”

Item 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Our directors and executive officers are as follows:

Name	Age	Position




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

* Designated as an “independent director” in accordance with NASDAQ Marketplace Rules.
+External director in accordance with the Companies Law.
(1) Member of audit committee
(2) Member of nomination and compensation committee

Meir Lipshes has served as our Chief Executive Officer since December 2006 and as our Chairman of board of directors since January 2005. He has served as one of our directors since we commenced independent operations in September 1992. Mr. Lipshes also served as our Chief Executive Officer from January 1996 through September 2004 and from March 2005 through November 2005 (on an interim basis). Mr. Lipshes was one of the founders, and is a current shareholder, of Team Software, our former principal shareholder, served as Team’s President from 1972 to May 1995 and as its Chief Executive Officer from May 1995 until September 1996. Mr. Lipshes also served as acting President of Omnitek-Eichut Ltd. from November 1994 until September 1996. Mr. Lipshes has been a director of Team since 1972 and a director of Omnitek since 1979. From 1970 to 1972, he was employed in the electronics and engineering division at Motorola Israel, where he was one of the founders of the computing department. He also served as a development engineer for encoding equipment in the Signal Corps of the Israel Defense Forces. Mr. Lipshes has a degree in electronics from the Technical School of the Israeli Air Force.

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

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

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

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

Israel Ofer , Chief Financial Officer from 1996, and Chief Operational Officer from 2008, joined us in September 1996. From 1984 to September 1996, Mr. Ofer was the Chief Financial Officer and Comptroller of TAT Technologies, a group of high-technology companies based in Israel and traded on NASDAQ and the Tel Aviv Stock Exchange. From 1982 to 1984, Mr. Ofer worked as Accounting Supervisor and Administrative Manager at Amcor Ltd., an Israeli appliance manufacturer. He was previously an accountant at Maadanot and an inspector at the Israeli Income Tax Authority. Mr. Ofer earned a B.A. degree in Finance and Accountancy from Tel Aviv University. He is a certified public accountant in Israel.

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

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

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

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

Additional Information

In March 2005, Menahem Tirosh resigned from his position as our Chief Executive Officer. Meir Lipshes served as our acting Chief Executive Officer from March 2005 to November 2005. From December 2005 to November 2006, Ruben Markus served as our Chief Executive Officer until his resignation and, since December 2006, Meir Lipshes is serving again as our Chief Executive Officer. In addition, during 2006 and 2007, several other members of our senior management left the employment of the Company and as a result, we employed several new high-level officers in 2006 and 2007. In February 2008, Lior Bergman, who served as our director since December 2004, has stepped down from our board of directors.

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

B. Compensation

Compensation to Directors:

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

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

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

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

Compensation to executive officers:

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

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

For details about grant of stock options to our directors and executive officers, see also “ Item 6E – Share Ownership ” below.

C. Board Practices.

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

Board of Directors

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

Our articles of association provide for a board of directors of not less than three and not more than seven members. Each director is elected at the annual general meeting of shareholders and holds office until the election of his successor at the next annual general meeting, except for external directors (as described below).

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

Alternate Directors

Our articles of association provide that a director may appoint, by written notice to the Company, any individual who is not a member of the board of directors, to serve as an alternate director. An external director may not appoint an alternate director, except in very limited circumstances. Any alternate director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint an alternate. The alternate director may not act at any meeting at which the director appointing him or her is present and may not act as the alternate for several directors. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes and for an indefinite time, but expires upon the expiration of the appointing director’s term. Notwithstanding the foregoing, a director may serve as an alternate director on any committee of our board of directors of which he or she is not already a member. At present, there are no appointments of alternate directors.

External Directors

Qualifications of External Directors

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

—

an employment relationship;

—

business or professional relationship maintained on a regular basis;

—

control; and

—

service as an office holder.

The Companies Law defined the term “office holder” of a company to include a director, the chief executive officer, the chief business manager, a vice president and any officer that reports directly to the chief executive officer.

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

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

Election of External Directors

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

—

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

—

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

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

Any committee of the board of directors must include at least one external director and the audit committee must include all of the external directors. An external director is entitled to compensation as shall be provided in regulations under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. We do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors any benefits upon termination of their employment.

Committees of the Board

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

Audit Committee

Under the Companies Law, our board of directors is required to appoint an audit committee, comprised of at least three directors including all of the external directors, but excluding:

—

the chairman of the board of directors;

—

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

—

a controlling shareholder or its relative.

The role of the audit committee is to examine flaws in the business management of the company, in consultation with the internal auditor and the company’s independent accountants and suggest appropriate course of action and to approve certain related-party transactions.

An audit committee may not approve a related-party transaction under the Companies Law, unless at the time of approval the two external directors are serving as members of the audit committee and at least one of whom was present at the meeting in which an approval was granted. The current members of our audit committee are Julie Kunstler and Doron Zinger, our two external directors, and Meir Dvir.

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

Compensation and Nominating Committee

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

Directors’ Service Contracts

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

Internal Auditor

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

Indemnification and D&O Insurance

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

Fiduciary Duties of Office Holders

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

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

—

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

—

all other important information pertaining to these actions.

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

—

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

—

refrain from any activity that is competitive with the company;

—

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

—

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

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

Related-Party Transactions

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

—

the office holder’s relatives. Relatives are defined to include the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the these people; or

—

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

Under Israeli law, an extraordinary transaction is a transaction:

—

other than in the ordinary course of business;

—

otherwise than on market terms; or

—

that is likely to have a material impact on the company’s profitability, assets or liabilities.

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

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

D. Employees

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

Approximate numbers of employees by category of activity	Research &Development &projects	Sales and marketing	Finance and administration	Total
2007	274	35	43	352
2006	277	42	42	361
2005	287	41	46	374

Approximate numbers of employees by geographic location	Israel	North America	Europe	Asia	Africa	Australia	Total
2007	241	77	11	12	7	4	352
2006	247	87	11	5	6	5	361
2005	254	91	13	6	6	4	374

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

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

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

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

Israeli labor laws and regulations are applicable to all of our employees in Israel. The laws principally concern matters such as paid annual vacation, paid sick days, the length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law generally requires severance pay, which may be funded by manager’s insurance described below, upon the retirement or death of an employee or termination of employment without cause as defined in the law. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, such amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 17.7% of wages up to a specified amount, of which the employee contributes approximately 67.9% and the employer contributes approximately 32.1%.

We regularly contribute to a managers’ insurance fund on behalf of our Israeli employees. This fund provides employees with a lump sum payment on account of severance pay, if legally entitled, upon termination of employment. Each employee who agrees to participate in the managers’ insurance plan contributes an amount equal to 5.0% of such employee’s salary to the pension component of such fund and the employer contributes an average of approximately 5% to 6.1% of such salary. We also allocate 8.3% of the employee’s salary on account of severance pay.

E. Share Ownership

Security Ownership of Our Directors and Executive Officers

The following table details, as of March 18, 2008, the number of our ordinary shares owned (including the shares underlying options or warrants held by such person that are exercisable within 60 days) by our directors and executive officers:

Name and Address




Meir Lipshes (1) (2)	551,563	2.9	%
All other directors and executive officers, as a group (consisting of
11 persons, other than Meir Lipshes) (3)	145,334	*

*	less than 1% of our outstanding ordinary shares.

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

(2)

As of March 18, 2008, Team Computers and its wholly-owned subsidiary, Team Software Industries Ltd., beneficially owned 150,450 of our ordinary shares, representing approximately 0.8% of our outstanding share capital and voting rights. As of March 17, 2008, Meir Lipshes, the Chairman of our board of directors and our acting Chief Executive Officer, owned approximately 6.4% of Team Computers’ shares. Mr. Lipshes disclaims any beneficial interest in the ordinary shares owned by Team Software or Team Computers in us.

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

Options to Purchase Our Ordinary Shares

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

Old Plans

In November 1996, we adopted our Share Option Plan, primarily designed for employees of TTI and its subsidiaries, and, from time to time, we established and granted additional options under sub-plans. We refer to such plan and sub-plans as the Old Plans because we do not grant any additional options under such plans. As of March 18, 2008, all the granted options, 108,000 options to purchase ordinary shares at exercise prices ranging from $6.0 to $8.0 per share (the higher of $8.0 or the average of the market price in the 30 days prior to the end 12 months from the date the option was granted (i.e., the period between April 12, 2005 and May 11, 2005), are fully vested under the Old Plans.

The 2004 Plan

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

2007 Grants

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

Total Outstanding Options

The following table sets forth, as of March 30, 2008, the number of options outstanding under our Old Plans and 2004 Plan and their respective exercise prices and expiration dates:

		exercise prices (range)	Expiration Date




94,000		$6.0-$8.0 *	June 30, 2009
75,000		$3.0	October 15, 2008
180,000		$3.5	January 10, 2011
242,000		$3.9	February 13, 2011
29,000		$4.3	March 26, 2011
20,000		$3.0	November 14, 2011
50,000		$3.5	December 28, 2011
18,000		$3.0	March 27, 2012
25,000		$3.0	February 17, 2013

Total: 733,000	**

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

**	Out of which options to purchase 505,670 ordinary shares are currently exercisable.

Item 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

Set forth below is information known to us concerning our shareholders that are the beneficial owners of 5% or more of outstanding ordinary shares or preferred shares as of March 18, 2008:

Name of shareholder




Shlomo Eisenberg (1)(2)(3)	4,379,142	27.4	%	--	--		4,379,142	23.1	%

Neuberger & Berman (4)(5)	1,180,332	7.4	%	1,799,995	61.3	%	3,980,325	21.0	%

Rima Management, LLC and
Richard Mashaal (6)	1,104,705	8.3	%	227,300	7.7	%	1,332,005	7.7	%

S Squared Technology (7)	363,637	2.3	%	909,091	30.9	%	1,272,728	6.7	%

* Based on an aggregate of 16,003,155 ordinary shares outstanding as of March 18, 2008.
** Based on an aggregate of 2,936,391 preferred shares outstanding as of March 18, 2008.
*** Includes shares underlying options or warrants held by such person that are exercisable within 60 days. Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire such ordinary shares within 60 days are treated as outstanding only for purposes of determining the percent owned by such person or group.
**** Based on an aggregate of 18,939,546 ordinary and preferred shares outstanding as of March 18, 2008.

(1)

Shlomo Eisenberg holds 744,836 ordinary shares, 67,468 ordinary shares through a wholly owned corporation, and his wife, Tirza Eisenberg, holds 188,912 ordinary shares. In addition, Mr. Eisenberg, directly and indirectly (through a wholly owned corporation), owns approximately 13.3% of Team Computers and Systems Ltd. and is also a member of the controlling group of shareholders of Arad Investments and Industrial Development Ltd. Therefore, Mr. Eisenberg may be deemed to beneficially own the ordinary shares held by Arad, Team Computers and Team Software Industries Ltd. (see below). Mr. Eisenberg disclaims any such beneficial ownership.

(2)

Arad, directly and indirectly (through a wholly owned corporation), holds 3,227,476 ordinary shares. In addition, Arad owns 47.6% of Team Computers and, therefore, may be deemed to beneficially own the ordinary shares held by Team Computers and Team Software. Arad disclaims any such beneficial ownership. Arad is an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange.

(3)

Team Software holds 145,150 ordinary shares. Team Computers holds 5,300 ordinary shares. Since Team Computers holds 100% of the issued and outstanding shares of Team Software, it may be deemed to beneficially own the ordinary shares held by Team Software. Team Computers, an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange, is a large computer vendor in Israel. In addition, as of March 17, 2008, Meir Lipshes, the Chairman of our board of directors and CEO, owned approximately 6.4% of Team Computers’ shares. Mr. Lipshes disclaims any beneficial ownership. As of March 18, 2008, Meir Lipshes owned approximately 2.5% of our outstanding shares directly.

(4)

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

(5)

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

(6)

As of December 31, 2007, based on a Schedule 13G filed by Rima Management, LLC and Richard Mashaal with the SEC on February 13, 2008. The Schedule 13G indicates that Rima Management, LLC and Richard Mashaal share voting and dispositive power as to the 1,332,005 ordinary shares (comprised of 227,300 Series A Preferred Shares and 90,920 warrants to purchase ordinary shares which are exercisable within 60 days, with an exercise price of $2.5 per share) .

(7)

As of December 31, 2007, based on a Schedule 13G/A filed by S Squared Technology, LLC with the SEC on January 17, 2008. The Schedule 13G/A indicates that S Squared Technology LLC, or SST, holds a total of 991,283 ordinary shares (out of which 708,059 Series A Preferred Shares and and warrants to purchase 283,224 ordinary shares which are exercisable within 60 days, with an exercise price of $2.50 per share ) and S Squared Technology Partners , LP , or SSTP, beneficially owns 281,445 ordinary shares (out of which 201,032 Series A Preferred Shares, and warrants to purchase 80,413 ordinary shares which are exercisable within 60 days, with an exercise price of $2.50 per share). Seymour L. Goldblatt, the President of each of SST and SSTP, and Kenneth A. Goldblatt, who beneficially own a majority of the interests in SST disclaim beneficially ownership of the ordinary shares held by SST and SSTP.

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

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

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

Voting Rights

The holders of our ordinary shares and the holders of our Series A Preferred Shares each have one vote per share held. As of March 13, 2008, approximately 56% of all Series A Preferred Shares issued have been converted into ordinary shares.

Record Holders

As of March 13, 2008, there were approximately 38 record holders of our ordinary shares, of which 19 were record holders with mailing addresses in the United States owning an aggregate of approximately 76% of our outstanding ordinary shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 75% of our outstanding ordinary shares as of said date).

As of March 13, 2008, there were approximately 7 record holders of our Series A Preferred Shares, all of which were record holders with mailing addresses in the United States.

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

B. Related Party Transactions

Sale of Products; Services

Since the commencement of our operations in 1992, Team Computers, our former parent company, has from time to time paid us commissions in respect of the sale by us of certain products represented and offered by Team Computers. This relationship is reflected in an agreement between us and Team Computers dated October 1996. Team Computers generally pays us a commission at the rate of 15% of the sales price of these products, up to a maximum of 50% of the amount received by Team Computers from these sales less the cost to Team Computers. In connection with these sales, we recorded commissions of approximately $93,000 in 2005 and $502,000 in 2007. We have not recorded any commissions in 2006.

In addition, Team Computers provides us certain administrative services, including computer servicing, salary administration, automotive fleet maintenance, legal counsel and basic insurance coverage, and we reimburse Team Computers for the actual cost of such services. We recorded expenses for such services of $169,000 in 2005, $160,000 in 2006 and $164,000 in 2007. We and Team Computers have agreed to indemnify each other for liabilities resulting from the acts or omissions of our respective employees constituting intellectual property violations. The agreement is automatically renewed for successive terms of one year on each December 31, and can be terminated by either party at the end of any such term upon at least 60 days’ prior written notice.

Since 1992, we have also purchased fixed assets, such as computer hardware, from Team Computers and Omnitek-Eichut Ltd. (“Omnitek-Eichut”), a subsidiary of Team Computers. The payments made by us to Team Computers and Omnitek-Eichut in respect of such asset purchases were, in the aggregate, approximately $398,000 in 2005, $352,000 in 2006 and $437,000 in 2007. We believe that the terms of these purchases are not different in any material respect than the terms we could receive from unaffiliated third parties.

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

Registration Rights Agreement

Pursuant to a Registration Rights Agreement between us and Team Software, dated October 22, 1996, Team Software was entitled to registration rights with respect to our ordinary shares held by it. We agreed that, at the request of Team Software, but on no more than two occasions, we would file a registration statement under the Securities Act of 1933, as amended, for an offering of those shares as to which registration is requested. In addition, if we otherwise propose to register any of our ordinary shares under the Securities Act, we would include in such registration Team Software’s shares, subject to certain limitations. All fees and expenses incurred in connection with any registration would be borne by us, except that Team Software would pay all fees and expenses of its own counsel and all underwriting discounts and commissions relating to Team Software’s shares.

In June 2005, Team Software assigned its rights under the Registration Rights Agreement. At the request of Arad Investment & Industrial Development Ltd., one of the assignees, we filed a registration statement covering 4,408,123 ordinary shares owned by Arad and affiliates, which was effective until May 2007.

Leased Facilities

From February 1998 to July 2005, we leased our principal facilities in Petach Tikva, Israel from Team Computers pursuant to a lease agreement dated February 1, 1998. Aggregate payments under this lease, which amount includes rent, maintenance and additional related expenses, were approximately $1.4 million during 2005, $1.2 million during 2006 and $1.4 million during 2007. We extended the lease until December 20, 2007, when we relocated to new facilities of approximately 48,160 square feet of office space in Rosh Aaayin, Israel, which are leased from an unaffiliated party.

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

Compensation to Directors

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

C. Interests of Experts and Counsel

Not applicable.

Item 8.

FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Financial Statements

See Item 18.

Legal Proceedings

Dispute with a Former Major Customer

In November 2002, we received a letter from a major customer notifying us of the termination of its agreement with us for the supply by us of a Manager of Managers system (“MoM”), and its intention to call the performance bond issued by a bank on our behalf under the agreement. As we believed that this customer terminated the agreement unlawfully, and in violation of the termination provisions set out in the agreement, we commenced legal proceedings against this customer. In July 2007, we and the customer entered into a settlement and release agreement under which we received from the customer £1.7 million (equates to approximately $3.45 million) (without admission of liability by either party) and both parties released their claims against each other.

Putative Shareholder Class Action

A putative shareholder class action lawsuit was filed in September 2004 against the Company, Team Software Industries Ltd. and certain of the Company’s executive officers. The lawsuit purports to be a class action filed on behalf of persons who held our shares during the period between February 6, 2002 and November 14, 2002. The complaint alleges that material misrepresentations and omissions concerning the Company’s operations and performance artificially inflated the Company’s stock price, causing damages to investors. We filed a motion to dismiss the complaint which motion was granted by an opinion dated October 6, 2006. The opinion dismissed the amended and consolidated complaint but granted plaintiff the right to file a second amended and consolidated complaint. The second amended and consolidated complaint was filed on November 9, 2006. We filed a motion to dismiss the second amended and consolidated complaint on January 10, 2007 which motion was denied with respect to us by order dated May, 2007. In December 2007, we reached a settlement agreement with the plaintiffs, which settlement is still subject to approval of the court. Based on the settlement agreement, our directors and officers insurance carrier is supposed to pay the entire settlement amount to the plaintiffs. In the event of disapproval of the agreement by court , we may be required to pay damages and other costs in excess of the amounts covered by our insurance, in which case, this action could have a materially adverse effect on our results of operations and financial condition.

Reimbursement of Withholding Tax

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

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

We filed a NIS 1.6 million lawsuit against Mr. Eisenberg and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. Based on advice from Israeli counsel, we believe that we are entitled to such reimbursement. However, we cannot assure you that the court will accept our view. The trial took place in September 2007 and we are now in a process of submitting written summations.

Dispute with a Vendor

In April 2006, in connection with our cancellation of a purchase order from Embarcadero Technologies Inc., Embarcadero filed a lawsuit against us in the San Francisco Superior Court, alleging among other things, breach of contract and intentional misrepresentation. We believe that the cancellation of the purchase order and the return of Embarcadero’s software by us was made in accordance with applicable law and regulations. We answered and counterclaimed for negligent and intentional misrepresentation based on false representation made by Embarcadero’s salesperson. In April 2007, we reached a settlement and release agreement under which we paid Embarcadero $90,000 (without admission of liability) and both parties released their claims against each other.

Dividend Policy

B. Significant Changes

No significant change has occurred since December 31, 2007, except as otherwise disclosed in this annual report.

Item 9.

THE OFFER AND LISTING

A. Offer and Listing Details.

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

	High		Low




2003:
Full Year	$	6.65	$	4.05
2004:
Full Year	$	6.40	$	1.71
2005:
Full Year	$	3.58	$	1.84
2006:
Full Year	$	5.50	$	2.36

First Quarter		4.42		3.12
Second Quarter		5.50		4.00
Third Quarter		5.28		3.31
Fourth Quarter		3.60		2.36

2007:
Full Year	$	3.22	$	2.20

First Quarter		2.70		2.44
Second Quarter		3.00		2.30
Third Quarter		3.22		2.51
Fourth Quarter		2.66		2.20

Most Recent Six Months
September 2007		2.82		2.51
October 2007		2.66		2.45
November 2007		2.64		2.45
December 2007		2.45		2.20
January 2008		2.42		2.09
February 2008		2.32		2.18
March 2008 (through March 28, 2008)		2.27		1.83

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

B. Plan of Distribution

Not applicable.

C. Markets

Our ordinary shares are quoted on the NASDAQ National Market under the symbol “TTIL”.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10.

ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Our Memorandum of Association and Articles of Association were amended in October 2000, and on December 29, 2004 and our Articles of Association were further amended on December 27, 2005 and on August 10, 2006. The following is a summary description of certain provisions of our amended Memorandum of Association and Articles of Association, and certain relevant provisions of the Israel Companies Law which apply to us.

Objects and Purposes

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

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

Directors

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

Election of Directors

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

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

Remuneration of Directors

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

Powers of the Board of Directors

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

Share Capital

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

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

Ordinary Shares

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

—

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

—

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

—

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

Series A Preferred Shares

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

—

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

—

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

—

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

—

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

—

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

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

Dividends

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

Dividends may be paid in assets or shares, debentures, or debentures stock of our company or of other companies. Dividends that remain unclaimed after seven years will be forfeited and returned to our company. Unless there are shareholders with special dividend rights, any dividend declared will be distributed among our shareholders in proportion to their respective holdings of our shares for which the dividend is being declared.

Redeemable Shares

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

Changing the Rights Attached to Shares

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

Shareholders Meetings

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

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

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:

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

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

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

Exculpation, Insurance and Indemnification of Office Holders

Exculpation of Office Holders

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

Insurance of Office Holders

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

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

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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

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

Indemnification of Office Holders

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

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

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

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

Limitations on Exculpation, Insurance and Indemnification

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

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

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

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

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any fine levied against the office holder.

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

Mergers and Acquisitions under Israeli Law

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

The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to a merger have the transaction approved by its board of directors and a vote of the majority of its shares. For purposes of the shareholder vote of each party, unless a court rules otherwise, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party), vote against the merger. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (1) 50 days have passed from the time that a proposal of the merger has been filed with the Israeli Registrar of Companies by each merging company and (2) 30 days have passed since the merger was approved by the shareholders of each merging company.

The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder of the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.

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

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

C. Material Contracts

None.

D. Exchange Controls

There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding some transactions. However, legislation remains in effect under which currency controls can be imposed by administrative action at any time.

E. Taxation

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

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

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

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

Distributions on Ordinary Shares

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

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

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

Disposition of Shares

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

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

Passive Foreign Investment Companies

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

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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

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

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

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

The PFIC rules above would not apply to a U.S. holder who makes a QEF election for all taxable years that such shareholder has held the ordinary shares while we are a PFIC, provided that we comply with certain reporting requirements. Instead, each U.S. holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the Internal Revenue Service. Although we have no obligation to do so, we intend to notify U.S. holders if we believe we will be treated as a PFIC for any tax year in order to enable U.S. holders to consider whether to make a QEF election. In addition, we intend to comply with the applicable information reporting requirements for U.S. holders to make a QEF election. U.S. holders should consult with their own tax advisers regarding eligibility, manner and advisability of making the QEF election if we are treated as a PFIC.

A U.S. holder of PFIC stock which is publicly traded could elect to mark the stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the U.S. holder’s adjusted tax basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election for prior taxable years. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election.

We believe that we were not a PFIC in 2007and will not be a PFIC in 2008, The tests for determination PFIC status are applied annually. Our conclusions are based on an analysis of our financial position and future income and assets, about which it is difficult to make accurate predictions. Accordingly, there can be no assurance that we are not a PFIC. U.S. holders who hold ordinary shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. holders who made a mark-to-market or QEF election. U.S. holders are strongly urged to consult their tax advisors about the PFIC rules, including the eligibility, manner and consequences to them of making a mark-to-market or QEF election with respect to our ordinary shares in the event that we qualify as a PFIC.

Backup Withholding

A U.S. holder may be subject to backup withholding at a rate of 28% with respect to cash dividend payments and proceeds from a disposition of ordinary shares. In general, backup withholding will apply only if a U.S. holder fails to comply with certain identification procedures. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, provided that the required information is furnished to the Internal Revenue Service.

Non-U.S. holders of Ordinary Shares

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

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

In general, non-U.S. holders will not be subject to the 28% rate of backup withholding with respect to the payment of dividends on ordinary shares unless payment is made through a paying agent, or office, in the United States. After January 1, 2001, however, if payment is made in the United States or by a U.S. related person, non-U.S. holders will be subject to backup withholding. In general, if a non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption, the non-U.S. holder will not be subject to backup withholding. A U.S. related person for these purposes is a person with one or more current relationships with the United States.

Non-U.S. holders generally will be subject to backup withholding at a rate of 28% on the payment of the proceeds from the disposition of ordinary shares to or through the United States office of a broker, whether domestic or foreign, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption. Non-U.S. holders will not be subject to backup withholding with respect to the payment of proceeds from the disposition of ordinary shares by a foreign office of a broker. However, non-U.S. holders will be subject to backup withholding at a rate of 28% with respect to the payment of proceeds from the disposition of ordinary shares effected outside the United States if the broker is a U.S. related person, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption.

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

ISRAELI TAXATION

The following is a summary of the current tax structure applicable to companies incorporated in Israel, with special reference to its effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion below will be accepted by the Israel tax authorities or courts. This discussion is not intended, and should not be construed, as legal or professional tax advice, and is not exhaustive of all possible tax considerations.

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

Holders of our ordinary shares should consult his or her own tax advisors as to the particular tax consequences of an investment in the ordinary shares including the effects of applicable Israeli or foreign or other tax laws and possible changes in the tax laws.

General Corporate Tax Structure

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

Tax Benefits and Grants for Research and Development

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

Law for the Encouragement of Capital Investments, 1959

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

The Investments Law provided (prior to its amendment in 2005) that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of Israel, be designated as an approved enterprise. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized pursuant to the program.

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

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

A company owning an approved enterprise may elect to forego certain government grants extended to approved enterprises in return for an alternative package of tax benefits, which we have done. Under the alternative package, a company’s undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate under the Investments Law for the remainder of the benefits period.

Most of our production facilities in Israel have been granted “approved enterprise” status under five separate investment programs and, as such, are entitled to tax benefits, under the Investments Law. According to the law, we have elected the “alternative benefits track”, and have waived certain government grants in return for a tax exemption. Upon our initial public offering in 1996, we became a “foreign investment company” for purposes of the Investments Law. Accordingly, we are entitled to a ten year period of benefits. Income derived from our investment programs is tax-exempt for the first two to four years and is entitled to a reduced tax rate of 10% to 25%, during the remaining benefit period of six to eight years (subject to the percentage of foreign ownership in each tax year). The investments under our approved investments programs were accomplished during 1994-2005. As of December 31, 2007 the benefit periods of the first and the second programs expired. The benefit periods of the third and forth programs will expire in 2009 and 2011, respectively. The benefit period of the fifth program has not yet commenced and will end in 2013. For the years which entitled to a reduced tax rate, the period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier.

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

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

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

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

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

Amendment to the Investments Law

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

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

—

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

—

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

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

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

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

Taxation under Inflationary Conditions

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

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

The salient features of the Inflationary Adjustments Law are generally as follows:

(a)

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

(b)

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

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

Israeli Transfer Pricing Regulations

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

Law for the Encouragement of Industry (Taxes), 1969

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

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

(a)

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

(b)

Deduction over a three-year period of expenses involved with the issuance and listing of shares on a recognized stock market.

(c)

An election under certain conditions to file a consolidated tax return with additional related Israeli Industrial Companies that satisfy conditions set forth in the law.

(d)

Accelerated depreciation rates on equipment and buildings.

Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

Capital Gains Tax

Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between the real gain and the inflationary surplus. The real gain is the excess of the total capital gain over the inflationary surplus, computed on the basis of the increase in the Israel consumer price index between the date of purchase and the date of sale.

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

The tax basis of our shares acquired by individuals prior to January 1, 2003 generally will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price. Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel, that such shareholders are not subject to the Inflationary Adjustments Law and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption, if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

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

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

Tax on Dividends

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. On distributions of dividends other than bonus shares or stock dividends, income tax is withheld at the source at the rates: (i) 20%, or 25% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution; of (ii) 15% for dividends generated by an Approved or Benefited Enterprise (or Benefited Enterprise); unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.

Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of shares who is a resident of the United States is 25% or 12.5% if such U.S. resident is a corporation which holds, directly or indirectly, shares representing at least 10% or more of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year (and additional conditions under the U.S.-Israel Tax Treaty are met). However, under the U.S.-Israel Tax Treaty dividends generated by an Approved or Benefited Enterprise are taxed at the rate of 15%.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

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

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

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

I. Subsidiary Information

Not applicable.

Item 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

Item 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

Item 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

Item 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Modification of Rights

Not applicable.

Use of Proceeds

Not applicable.

Item 15.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to reasonably assure that information required to be included in our periodic reports to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s report on internal control over financial reporting

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

—

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

—

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

—

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

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

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

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

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16.

RESERVED

Item 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

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

Item 16B.

CODE OF ETHICS

In February 2004, we adopted a Code of Ethics and Business Conduct that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, a copy of which is filed as Exhibit 11 to this annual report.

Item 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to Independent Public Accountants

In the annual meeting held on December 20, 2007 our shareholders re-appointed Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst & Young, to serve as our independent registered accounting firm until the next annual meeting. The following table sets forth, for each of the years indicated, the fees paid to Ernst & Young and the percentage of each of the fees out of the total amount paid to them.

	Year Ended December 31,
	2006					2007
Services Rendered	Fees		Percentages			Fees		Percentages


Audit (1)	$	130,000		74	%	$	135,000		63	%
Audit-related (2)	$	22,000		12	%	$	20,000		9	%
Tax (3)	$	25,000		14	%	$	45,000		21	%
Other (4)		-		-		$	15,000		7	%
Total	$	177,000		100	%	$	215,000		100	%

(1)

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

(2)

Audit-related fees relate to assurance and associated services that are performed by the independent accountant, including: attest services that are not required by statute or regulation; accounting consultation; and consultation concerning financial accounting and reporting standards. In 2006 and 2007, most of these fees were for services relating to the Section 404 of the Sarbanes-Oxley Act of 2002 compliance process we have begun.

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

(4)	Other fees relate to the Teleses transaction.

Pre-approval Policies and Procedures

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

Item 16D.

EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

Item 16E.

PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

Item 17.

FINANCIAL STATEMENTS

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

Item 18.

FINANCIAL STATEMENTS

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






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

Item 19.

EXHIBITS

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Petach Tikva, Israel on the 31 day of March, 2008.

TTI TEAM TELECOM INTERNATIONAL LTD.

By: /s/ Meir Lipshes
——————————————
Meir Lipshes
Acting Chief Executive Officer

EXHIBIT INDEX

Exhibit No.

Exhibit

1.1	Second Amended and Restated Articles of Association of Registrant, as amended through December 27, 2005 (1) and Certificate of Amendment, dated August 10, 2006 (2)

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

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

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

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

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

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

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

4.14	Second Amendment to Lease Agreement dated July 14, 2005. (8)

8	Subsidiaries

10.11

Consent of Independent Auditors of the Registrant

11	Code of Ethics and Business Conduct. (9)

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

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

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

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

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

(2)	Previously filed on TTI's Form 20-F for the year ended December 31, 2006, and incorporated herein by reference.

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

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

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

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

(7)	English translation from Hebrew original previously filed as an exhibit to TTI's annual report on Form 20-F for the fiscal year ended December 31, 2002, and incorporated herein by reference.

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

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

TTI TEAM TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

IN U.S. DOLLARS

INDEX


	Page


Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3 - F-4

Consolidated Statements of Operations	F-5

Consolidated Statements of Changes in Shareholders’ Equity	F-6

Consolidated Statements of Cash Flows	F-7

Notes to Consolidated Financial Statements	F-8 - F-37

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

(ERNST & YOUNG LOGO)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

TTI TEAM TELECOM INTERNATIONAL LTD.

We have audited the accompanying consolidated balance sheets of TTI Team Telecom International Ltd. (“the Company”) and its subsidiaries as of December 31, 2006 and 2007 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditors’ Regulations (Auditor’s Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries at December 31, 2006 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles which differ in certain aspects from Israel generally accepted accounting principles, as described in Note 13 to the consolidated financial statements.

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


Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
March 31, 2008	A Member of Ernst & Young Global

F-2

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands


	December 31,

	2006		2007


ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	31,410	$	33,408
Short-term bank deposits		984		98
Trade receivables (net of allowance for doubtful accounts - $6,865 in 2006 and 0 in 2007) (Note 1b)		4,664		8,185
Unbilled receivables		2,834		3,155
Related parties (Note 10)		373		409
Other accounts receivable and prepaid expenses (Note 3)		2,265		3,192


Total current assets		42,530		48,447


LONG-TERM INVESTMENTS AND RECEIVABLES:
Long-term bank deposits		97		-
Investment in a company		165		165
Severance pay fund		3,627		3,937
Long-term trade and unbilled receivables (Note 1b)		3,324		-


Total long-term investments and receivables		7,213		4,102


PROPERTY AND EQUIPMENT, NET (Note 4)		3,842		6,045


Total assets	$	53,585	$	58,594

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

F-3

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data


	December 31,
	2006			2007

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Trade payables	$	2,508		$	2,364
Deferred revenues		8,333			4,666
Related party (Note 10)		40			3,932
Other accounts payable and accrued expenses (Note 5)		7,187			6,966


Total current liabilities		18,068			17,928

ACCRUED SEVERANCE PAY		5,022			5,651


LONG TERM LIABILITIES (Note 6a)		-			1,579


COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)

SHAREHOLDERS’ EQUITY (Note 8):
Share capital:
Ordinary shares of NIS 0.5 par value -
Authorized: 30,000,000 shares at December 31, 2006 and 2007; Issued and outstanding: 16,000,431 and 16,003,158 shares at December 31, 2006 and 2007, respectively		2,260			2,261
Preferred A shares of NIS 0.5 par value –
Authorized: 6,636,391 at December 31, 2006 and 2007; Issued and outstanding: 2,936,391 shares at December 31, 2006 and 2007: Aggregate liquidation preference of $ 6,460 at December 31, 2007		334			334
Additional paid-in capital		74,919			75,038
Accumulated deficit		(47,018	)		(44,197	)


Total shareholders’ equity		30,495			33,436


Total liabilities and shareholders’ equity	$	53,585		$	58,594

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

F-4

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except share and per share data



	Year ended December 31,

	2005			2006			2007


Revenues (Note 11):
Products	$	25,317		$	27,554		$	25,722
Services		17,909			18,560			20,195


Total revenues		43,226			46,114			45,917


Cost of revenues:
Products		13,015			14,783			12,504
Services		9,203			9,571			8,545
Impairment of capitalized software development costs		177			-			-


Total cost of revenues		22,395			24,354			21,049


Gross profit		20,831			21,760			24,868


Operating expenses:
Research and development, net (Note 12a)		9,136			9,578			9,433
Selling and marketing		11,977			10,214			7,857
General and administrative		6,325			6,679			6,952


Total operating expenses		27,438			26,471			24,242


Operating income (loss)		(6,607	)		(4,711	)		626
Other income (Note 12c)		-			150			33
Financial income, net (Note 12b)		153			662			2,150


Income (loss) before income taxes		(6,454	)		(3,899	)		2,809
Income taxes (Note 7)		624			(96	)		(87	)


Net income (loss)		(7,078	)		(3,803	)		2,896

Deemed dividend associated with beneficial conversion feature of Preferred shares		(1,981	)		-			-
Loss attributable to preferred shareholders		-			-			(449	)


Net income (loss) attributable to Ordinary shares	$	(9,059	)	$	(3,803	)	$	2,447


Income (loss) per share (Note 9):
Basic net income (loss) per share attributed to Ordinary shareholders	$	(0.72	)	$	(0.20	)	$	0.15

Diluted net income (loss) per share attributed to Ordinary shareholders	$	(0.72	)	$	(0.20	)	$	0.15

Weighted average number of shares used for computing basic net income (loss) per share attributed to Ordinary shareholders		12,577,392			15,075,881			16,001,148

Weighted average number of shares used for computing diluted net income (loss) per share attributed to Ordinary shareholders		12,577,392			15,075,881			16,121,989

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

F-5

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data


	Number of					Share capital
											Additional		Accumulated						Total			Total
	Preferred A shares			Ordinary shares		Preferred A shares			Ordinary shares		paid-in capital		other loss *)			Accumulated deficit			comprehensive income (loss)			shareholders’ equity


Balance as of January 1, 2005		-			11,872,941	$	-		$	1,794	$	58,881	$	(226	)	$	(34,156	)				$	26,293
Issuance of Convertible Preferred A shares and warrants, net		6,636,391					754			-		12,584		-			-						13,338
Deemed dividend associated with beneficial Conversion feature of Preferred A shares		-			-		-			-		1,981		-			(1,981	)					-
conversion of Convertible Preferred A shares		(2,000,000	)		2,000,000		(228	)		228		-		-			-						-
Comprehensive loss:
Other comprehensive loss - unrealized losses on available-for-sale marketable securities, net of impairment *)		-			-		-			-		-		(110	)		-		$	(110	)		(110	)
Net loss		-			-		-			-		-		-			(7,078	)		(7,078	)		(7,078	)

Total comprehensive loss																			$	(7,188	)

Balance as of December 31, 2005		4,636,391			13,872,941		526			2,022		73,446		(336	)		(43,215	)					32,443
Exercise of warrants		-			427,490		-			46		1,022		-			-						1,068
conversion of Convertible Preferred A shares		(1,700,000	)		1,700,000		(192	)		192		-		-			-						-
Share-based compensation		-			-		-			-		451		-			-						451
Comprehensive loss:
Other comprehensive loss - realized gain on available-for-sale marketable securities, net of impairment *)		-			-		-			-		-		336			-		$	336			336
Net loss		-			-		-			-		-		-			(3,803	)		(3,803	)		(3,803	)

Total comprehensive loss																			$	(3,467	)

Balance as of December 31, 2006		2,936,391			16,000,431		334			2,260		74,919		-			(47,018	)		-			30,495
Exercise of warrants		-			2,727		-			1		6		-			-			-			7
Share-based compensation		-			-		-			-		113		-			-			-			113
Cumulative effect of FIN48 adoption		-			-		-			-		-		-			(75	)		-			(75	)
Net income		-			-		-			-		-		-			2,896		$	2,896			2,896

Total comprehensive income																			$	2,896

Balance as of December 31, 2007		2,936,391			16,003,158	$	334		$	2,261	$	75,038		-		$	(44,197	)				$	33,436

*) Accumulated other comprehensive income (loss) on account of unrealized gains (losses) on available-for-sale marketable securities.

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

F-6

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands


	Year ended December 31,

	2005			2006			2007


Cash flows from operating activities:
Net income (loss)	$	(7,078	)	$	(3,803	)	$	2,896
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		2,258			2,589			1,964
Impairment of capitalized software development costs		177			-			-
Gain from sale of property and equipment		(157	)		(73	)		(221	)
Amortization of premium and accretion of accrued interest on available-for-sale marketable debt securities		411			1,305			-
Accrued interest on short-term bank deposits		27			(23	)		(4	)
Accrued severance pay, net		(142	)		513			319
Share-based compensation		-			451			113
Decrease (increase) in trade receivables, net		2,855			(764	)		(3,521	)
Decrease (increase) in unbilled receivables		527			(1,870	)		(321	)
Increase (decrease) in balance with related parties		(217	)		34			3,856
Decrease (increase) in other accounts receivable and prepaid expenses		1,047			(47	)		(927	)
Decrease (increase) in long-term trade and unbilled receivables		(669	)		613			3,324
Increase (decrease) in trade payables		(1,678	)		641			(144	)
Increase (decrease) in deferred revenues		5,584			(1,893	)		(3,667	)
Increase (decrease) in other accounts payable and accrued expenses		1,792			(276	)		(502	)
Landlord lease incentive		-			-			499


Net cash provided by (used in) operating activities		4,737			(2,603	)		3,664


Cash flows from investing activities:
Investment in short-term and long-term bank deposits		(2,487	)		(188	)		(2,000	)
Proceeds from short-term bank deposits		2,901			1,984			2,987
Investment in available-for-sale marketable securities		(19,148	)		-			-
Proceeds from sale of available-for-sale marketable securities		15,540			14,744			-
Purchase of property and equipment		(1,145	)		(1,746	)		(4,318	)
Proceeds from sale of property and equipment		293			117			372


Net cash provided by (used in) investing activities		(4,046	)		14,911			(2,959	)


Cash flows from financing activities:
Long-term debt from landlord		-			-			1,286
Short-term bank credit		(967	)		-			-
Proceeds from issuance of Convertible Preferred A shares and warrants, net		12,838			-			-
Exercise of warrants		-			1,068			7


Net cash provided by financing activities		11,871			1,068			1,293


Increase in cash and cash equivalents		12,562			13,376			1,998
Cash and cash equivalents at the beginning of the year		5,472			18,034			31,410


Cash and cash equivalents at the end of the year	$	18,034		$	31,410		$	33,408


Supplemental disclosure of cash flows information:
Cash paid during the year for:
Taxes	$	171		$	1,707		$	187


Non-cash activities:
Reclassification of receivables on account of Convertible Preferred A shares	$	500		$	-		$	-

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

F-7

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 1:-	GENERAL


	a.	TTI Team Telecom International Ltd. (“TTI” or “the Company”), an Israeli corporation, was incorporated in 1990 and commenced its operations in September 1992.

		The Company designs, develops, markets and supports network management and operations support system software for the communications industry.

		The Company’s Netrac family of products performs and manages functions critical to the operations of telecommunications service providers, such as fault management - monitoring equipment performance to detect and analyze failures, performance management - providing traffic analysis and quality of statistics service, configuration management - managing physical and logical connectivity within the network and security management - controlling and protecting access to data and applications.

		The Company has wholly-owned subsidiaries in the U.S., the Netherlands, the U.K., India, Malta, Costa-Rica, South Africa, Australia and Hong-Kong.

		As to principal markets and customers, see Note 11.

	b.	Termination of agreements:

		On November 13, 2002, the Company received a letter of termination from a major customer, regarding an agreement signed on January 30, 2002. The customer also obtained, after a court hearing, the payment of a performance bond issued by a bank on the Company’s behalf under the agreement. On January 23, 2003, the bond in the amount of approximately £ 1 million ($1.96 million) was paid to the customer.

		The Company believed that this customer terminated the agreement unlawfully, and in violation of the termination provisions set out in the agreement. Over the last couple of years the parties filed claim and counter claim against each other about the termination of this agreement.

		In July 2007, the parties signed a settlement and release agreement under which the Company received from the customer £ 1.7 million ($3.45 million) (without admission of liability) and both parties released their claims against each other.

		No gain or loss has been recorded during 2007 as a result of the settlement agreement since the company maintained the above amount in previous years on its financial statements as long term receivable.

F-8

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES


	The consolidated financial statements have been prepared according to United States generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis, as follows:

	Use of estimates:

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

	Financial statements in United States dollars:

	A majority of the revenues of the Company and its subsidiaries is generated in United States dollars (“dollar”). The Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar.

	Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”. All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.

	Principles of consolidation:

	The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.

	Cash and Cash equivalents:

	Cash and cash equivalents include short-term, highly liquid investments that are readily convertible to cash with maturities of three months or less at acquisition.

	Short-term and long-term bank deposits:

	Short-term bank deposits are deposits with maturities of more than three months but less than one year. The deposits are in U.S. dollars and bear interest at an average rate of 4.01% and 4.10% for 2006 and 2007, respectively. The short-term deposits are presented at their cost, including accrued interest.

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

F-9

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Investment in another company:

	The investment in this company is stated at cost since the Company does not have the ability to exercise significant influence over operating and financial policies of the investee.

	The Company’s investment in the other company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with Accounting Principle Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”). As of December 31, 2007, no impairment losses have been identified.

	Property and equipment:

	Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates:


			%


Computers and peripheral equipment			33
Office furniture and equipment			6 - 15
Motor vehicles			15
Leasehold improvements			Over the shorter of the term of the lease
			or useful life


	Impairment of long-lived assets:

	The long-lived assets of the Company and its subsidiaries are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment for Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During 2006 and 2007, no impairment was identified.

	Income taxes:

	The Company and its subsidiaries account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. This Statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. As of December 31, 2007, a full valuation allowance was provided by the Company. See Note 7j for the impact of adoption of FIN 48, Accounting for uncertainty in Income Taxes.

F-10

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Revenue recognition:

	The Company and its subsidiaries market their products to telecommunications service providers both directly and through alliances with leading vendors of computer hardware, telecommunications equipment, test systems, and probes. The Company’s products have been licensed to various types of telecommunications operators. The Company’s software licenses require significant customization, integration, installation and development services. The Company also generates revenues from maintenance and customer support services.

	Revenues are recognized based on Statement of Position No. 81-1, “Accounting for Performance of Construction - Type and Certain Production - Type Contracts” (“SOP 81-1”), using contract accounting using the percentage of completion method based on the relationship of actual labor days incurred to total labor days estimated to be incurred over the duration of the project to which the contract relates. In general, the Company divides each project into three distinct periods: (i) a functional specification period, (ii) an implementation period and (iii) a stabilization period. A project is considered completed when the stabilization period is over.

	The Company believes that the use of the percentage of completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement.

	In all cases the Company expects to perform its contractual obligations and its licensees are expected to satisfy their obligations under the contract.

	According to SOP 81-1, costs that are incurred for a specific anticipated contract prior to the existence of a persuasive evidence of an agreement are deferred, subject to evaluation of their probable recoverability, and only if the costs can be directly associated with a specific anticipated contract. Such deferred costs are recorded as pre-contract costs, in other accounts receivable and prepaid expenses. As of December 31, 2006 and 2007, the Company does not have such deferred costs.

	Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined in the amount of the estimated loss on the entire contract. As of December 31, 2006 and 2007, no such estimated losses were identified.

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

F-11

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis.

	Service revenues primarily consist of fees from maintenance and customer support. Revenues from maintenance and support contracts are recognized ratably over the term of the agreement, which is typically one year, or at the time when services are rendered.

	Deferred revenues are recognized for payments received under maintenance and support contracts in advance of the culmination of the earning process.

	Research and development costs:

	Research and development costs incurred in the process of developing product improvements or new products, are generally charged to expenses, as incurred.

	SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold Leased or Otherwise Marketed” (“SFAS No. 86”), requires capitalization of certain software development costs, subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. No software development costs were capitalized in 2005, 2006 and 2007.

	Royalty and non-royalty bearing grants:

	Royalty-bearing grants from the Government of Israel and others for the funding of approved research and development projects are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred and recorded as a reduction in research and development costs.

	During 2005 and 2006, the Company received non-royalty-bearing grants for its participation in the “MAGNET” project financed by the Government of Israel. In addition, in 2004 the Company received non-royalty-bearing grants from the European Union as part of participation in a consortium of companies engaged in the development of a platform for the management and control of IP over optical networks (DWDM). Grants from the European Union and “MAGNET” projects are not required to be repaid and are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred and recorded as a reduction in research and development costs.

	Concentrations of credit risk:

	Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits and trade and unbilled receivables.

F-12

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	The Company’s and its subsidiaries’ cash and cash equivalents and short-term bank deposits are mainly invested in U.S. dollar deposits with major Israeli and U.S. banks. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s and its subsidiaries’ investments are financially sound, and accordingly, minimal credit risk exists with respect to these investments.

	The Company’s revenue is generated primarily in the United States and Europe. To a lesser extent, revenue is generated in Israel, South Africa and South America. Most customers are among the largest telecommunications companies in the world. Concentration of credit risk with respect to trade and unbilled receivables is limited by ongoing credit evaluation and account monitoring procedures. The Company evaluates accounts receivable to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, such as past experience, credit quality of the customer, age of the receivable and current economic conditions that may affect a customer’s ability to pay. An allowance for doubtful accounts is determined with respect to those specific amounts that the Company and its subsidiaries have determined to be doubtful of collection.

	The Company and its subsidiaries have no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

	Basic and diluted net earning (loss) per share:

	The Company applies the two class method as required by EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”). EITF No. 03-6 requires the income (loss) per share for each class of shares (ordinary and preferred shares) to be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of shares based on their contractual rights.

	Basic net income (loss) per share is computed based on the weighted average number of shares of Ordinary Shares outstanding during each year. Diluted net income (loss) per share is computed based on the weighted-average number of shares of common stock outstanding during the period, plus dilutive potential shares considered outstanding during the period, in accordance with Statement of Financial Standard No. 128, “Earnings Per Share”.

	For the years ended December 31, 2005 and 2006 all outstanding options and warrants were excluded from the calculations of diluted net income (loss) per share, since they would have an anti-diluted effect. For the year ended December 31, 2007, all outstanding options have been excluded from the calculation of the diluted earning per share.

F-13

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Accounting for stock-based compensation:

	On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options under the Company’s stock plans based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

	SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. Prior to the adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

	No stock-based employee compensation costs were recognized in the Statement of Operations in the year ended December 31, 2005, as all options granted in that period had an exercise price equal or higher then the market value of the underlying ordinary share on the date of grant.

	The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2007 and 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As required by the modified prospective method results for prior periods have not been restated. The Company recognized compensation expenses for the value of these awards, which has graded vest on the accelerated attribution method over the requisite service period of each of the award, net of estimated forfeitures. Estimated forfeitures were based on actual historical pre-vesting forfeitures.

	The fair value for options granted in 2005, 2006 and 2007 is amortized over their vesting period and is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

F-14

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Year ended December 31,

Employee stock options	2005		2006		2007


Expected volatility	57	%	45	%	45	%
Risk-free interest	4.5	%	5	%	5	%
Dividend yield	0	%	0	%	0	%
Expected life of up to (years)	2.6		3.4		3.5


	The computation of expected volatility is based on realized historical stock price volatility of the Company. The Company used the “simplified” method to establish the expected term of the awards as allowed under SAB 107. The interest rate for period within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

	The Company recognizes these compensation costs net of a forfeiture rate for only those shares expected to vest on accelerated attribution basis over the requisite service period of the award, which is generally the option vesting term of one to three years. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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


	Year ended December 31, 2005


Net loss, as reported	$	(9,059	)
Add: Stock-based employee compensation intrinsic value		-
Deduct: Stock-based compensation expense determined under fair value method		(81	)


Pro forma net loss	$	(9,140	)


Basic and diluted net loss per share, as reported	$	(0.72	)


Basic and diluted net loss per share, pro forma	$	(0.73	)


	Fair value of financial instruments:

	The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair value disclosures for financial instruments:

	The carrying amount reported in the balance sheet for cash and cash equivalents, short-term bank credit, trade receivables, unbilled receivables, trade payables and related parties approximates their fair value due to the short-term maturities of such instruments.

F-15

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Severance pay:

	The Company’s liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its employees is fully provided by monthly deposits with insurance policies and by an accrual.

	The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits.

	Severance pay expenses for the years ended December 31, 2005, 2006 and 2007 were $961, $1,236 and $964, respectively.

	Advertising expenses:

	Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 2005, 2006 and 2007 were $64, $110 and $140, respectively.

	Comprehensive income (loss):

	The Company accounts for comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income”. This Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that their only item of comprehensive income relates to unrealized losses on available-for-sale marketable securities.

F-16

TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)


	Impact of recently issued accounting standards:

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

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

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

F-17

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

	In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS 159 will have an impact on its consolidated financial statements.

NOTE 3:-	OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


	December 31,

	2006		2007


Landlord (1)	$	-	$	1,339
Prepaid expenses		1,059		1,083
employees		313		300
Government authorities		376		-
Others		517		470


	$	2,265	$	3,192


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

F-18

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 4:-	PROPERTY AND EQUIPMENT, NET


	December 31,

	2006		2007


Cost:
Computers and peripheral equipment	$	14,224	$	15,070
Office furniture and equipment		1,439		1,721
Motor vehicles		4,422		4,237
Leasehold improvements		3,527		5,638


		23,612		26,666

Accumulated depreciation:
Computers and peripheral equipment		12,886		13,818
Office furniture and equipment		945		1,055
Motor vehicles		2,815		2,268
Leasehold improvements		3,124		3,480


		19,770		20,621


Depreciated cost	$	3,842	$	6,045


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


NOTE 5:-	OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES


	December 31,

	2006		2007


Employees and payroll accruals	$	4,621	$	4,467
Accrued expenses		1,721		1,701
Government authorities		567		494
Others		278		304


	$	7,187	$	6,966


NOTE 6:-	COMMITMENTS AND CONTINGENT LIABILITIES


	a.	Lease commitments:

		The Company and its subsidiaries rent their facilities and motor vehicles under various operating lease agreements, which expire on various dates, the latest of which is in 2014.

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

F-19

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


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


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


Year ended December 31,	Facilities		Motor vehicles		Total


2008		1,363		48		1,411
2009		1,191		26		1,217
2010		1,177		8		1,185
2011		1,082		-		1,082
2012		825		-		825


	$	5,638	$	82	$	5,720


		Facility lease expenses for the years ended December 31, 2005, 2006 and 2007 were $1,657, $1,432 and $1,409, respectively.

		Motor vehicle lease expenses for the years ended December 31, 2005, 2006 and 2007 were approximately $122, $106 and $102, respectively.

		In December 2007, the Company relocated its offices in Israel.

		The new lease term will be 7 years and the Company will have the option to extend the lease period for additional 3 years. The monthly payments will be between $32 to $36. According to the agreement the Company made leasehold improvements that were funded partly by a loan from the landlord and partly by landlord incentives. The leasehold improvements were recorded as leasehold improvement assets and they are being amortized over the shorter of their economic lives or the lease term.

		The incentives from the landlord were recorded as deferred rent and amortized as reductions to lease expense over the lease term in accordance with SFAS 13 and the response to Question 2 of FASB Technical Bulletin 88-1 (“FTB 88-1”), Issues Relating to Accounting for Leases.

		The loan from the landlord was recorded at its estimated fair value using discounted cash flow method. The loan bears no interest.

		As of December 31, 2007, the Company’s leasehold improvements assets are in an amount of $2,093 of which $498 were funded by landlord incentives and $1,286 as landlord loan.

F-20

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


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


		The loan from the landlord was recorded at its estimated fair value using discounted cash flow method Present Value in accounting measurements. As a result, the loan bears no interest. If that information is not available without undue cost and effort, an entity may use its own estimates of fair value. In this case the company took interest of 9.58% which represents the company market condition.

		As of December 31, 2007, the Company’s leasehold improvements are in an amount of $2,093 thousand of which $498 were funded by landlord incentives and $1,286 as loan.

	b.	Royalty commitments:

		Under the Company’s research and development agreements with the Office of the Chief Scientist (“OCS”) and the Binational Industrial Research and Development Foundation (“BIRD-F”), and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3%-5% of sales of products developed with funds provided by the OCS and BIRD-F, up to an amount equal to 100%-150% of the research and development grants (dollar-linked) received from the OCS and BIRD-F. The obligation to pay these royalties is contingent on actual sales of the products and, in the absence of such sales, no payment is required. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits. Royalties payable with respect to grants received from BIRD-F are linked to the Consumer Price Index in the United States.

		The Company has paid or accrued royalties relating to the repayment of such grants in the amount of $ 10, $ 2 and $0.6 for the years ended December 31, 2005, 2006 and 2007, respectively. The amounts were recorded in the cost of revenues.

		As of December 31, 2007, the Company has an outstanding contingent obligation to pay royalties in the amount of approximately $ 2,743 in respect of these grants. Management believes that none of its product sales is currently subject to OCS and BIRD-F royalties payment.

F-21

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


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


	c.	Guarantees:

		The Company has obtained performance guarantees in favor of certain customers from several banks in Israel amounting to $1,809 and $3,109 for the years ended December 31, 2006 and 2007, respectively.

		The Company has obtained other guarantees in favor of facility and car leases from bank in Israel amounting to $62 and $409 for the years ended December 31, 2006 and 2007, respectively.

	d.	Litigation:

		Securities class action:

		A shareholder’s class action lawsuit was filed in September 2004 against the Company, Team Software Industries Ltd. and certain of the Company’s executive officers. The lawsuit purports to be a class action filed on behalf of persons who held the Company’s shares during the period between February 6, 2002 and November 14, 2002. The complaint alleges that material misrepresentations and omissions concerning the Company’s operations and performance artificially inflated the Company’s stock price, causing damages to investors.

		The Company filed a motion to dismiss the complaint which motion was granted by an opinion dated October 6, 2006. The opinion dismissed the amended and consolidated complaint but granted plaintiff the right to file a second amended and consolidated complaint. The second amended and consolidated complaint was filed in November 9, 2006. The Company filed a motion to dismiss the second amended and consolidated complaint in January 10, 2007, which motion was denied with respect to the Company by order dated May 2007. The Company filed an answer to the second amended and consolidated complaint which denied its material allegations. A mediation to explore the possibility of resolving this matter was held in November 2007. An agreement in principle was reached and memorandum of understanding outlining such agreement was executed in December 2007. The Company is now in the process of preparing the documents and seeking approval of the court necessary to finalize the settlement, which is being paid by the Company’s directors and officer’s insurance carrier.

	e.	In April 2006, in connection with the Company’s cancellation of a purchase order from Embarcadero Technologies Inc (Embarco). Embarcadero filed a lawsuit against the Company in the San Francisco Superior Court, alleging among other things, breach of contract and intentional misrepresentation. The Company answered and counterclaimed for negligent and intentional misrepresentation based on false representation made by Embarcadero’s salesperson. Mediation of this case during January 2007 did not resolve the dispute. In April 2007, the parties signed a settlement and release agreement under which the Company paid Embarcadero $90 (without admission of liability) and both parties releases their claims against each other.

	f.	Dispute with respect to balance with related party shareholder, See Note 10b.

F-22

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 7:-	INCOME TAXES


	a.	Measurement of taxable income:

		Under the Income Tax (Inflationary Adjustments) Law, 1985 (“the Israeli law”), results for tax purposes in Israel are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2006, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in taxable year 2007, the Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986.

	b.	Corporate tax rates:

		Taxable income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.

	c.	Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the law”):

		Most of the Company’s production facilities in Israel have been granted “approved enterprise” status under five separate investment programs and, as such, are entitled to tax benefits, under the above law. According to the law, the Company has elected the “alternative benefits track”, and has waived Government grants, in return for a tax exemption.

		Upon the Company’s Initial Public Offering that occurred in 1996, the Company became a “foreign investment Company” for the purposes of the aforementioned law. Accordingly, the Company is entitled to up to 10-year period of benefits. Income derived from the Company’s investment programs, is tax-exempt for the first two to four years and is entitled to a reduced tax rate of 10% to 25%, during the remaining benefit period of five to eight years (subject to the percentage of foreign ownership in each tax year).

		The investments under the Company’s five approved investments programs were incurred since 1992.

		As of December 31, 2007 the benefit periods of the first and the second programs were expired. The benefit periods of the third and forth programs will expire in 2009 and 2011 respectively. The benefit period of the fifth program has not yet commenced and will end in 2013.

		The period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier.

F-23

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 7:-	INCOME TAXES (Cont.)


		The entitlement to the above benefits is conditional upon the Company’s fulfilling the conditions stipulated by the above law, regulations published hereunder and the instruments of approval for the specific investments in the “approved enterprise”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2007, management believes that the Company is meeting all of the aforementioned conditions.

		Income from sources other than the “approved enterprise” will be subject to the statutory Israeli corporate tax rate. If the retained tax-exempt income were distributed, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not chosen the alternative tax benefits (rate of 10% - 25% based on the percentage of foreign ownership in the Company’s shares) on the gross amount distributed. In addition, these dividends will be subject to a 15% withholding tax. The Company’s Board of Directors has determined that such tax-exempted income will not be distributed as dividends. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration. The Company intends to reinvest its tax exempt income and not to distribute such income as a dividend.

		On April 1, 2005, an amendment to the Investment Law came into effect (“the Amendment”) and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the law by setting criteria for the approval of a facility as a beneficiary enterprise, such as provisions generally requiring that at least 25% of the beneficiary enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.

		However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company’s existing “approved enterprise” will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the new law, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income.

	d.	Tax loss carryforwards:

		Net operating loss carryforwards as of December 31, 2007 are standing In Israel, the U.S. and the U.K amount to $ 34,140, $ 11,348 and $ 11,508, respectively. Other jurisdiction in which the Company operates has immaterial effect.

		Net operating losses in Israel, and the UK may be carried forward indefinitely. Net operating losses in the U.S. may be carried forward through periods which will expire in the years 2023-2027.

F-24

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 7:-	INCOME TAXES (Cont.)


		Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

	e.	Deferred tax assets:

		Deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax assets are as follows:


	December 31,

	2006		2007


Reserves and allowances	$	6,178	$	5,733
Net operating loss carryforward - foreign		8,357		7,791
Net operating loss carryforward - domestic		7,541		8,535


Total deferred tax assets before valuation allowance		22,076		22,059
Valuation allowance		22,076		22,059


Deferred tax asset	$	-	$	-


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


	f.	Reconciliation of the theoretical tax expenses:
		A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory rate applicable in Israel to income of the Company and the actual income tax as reported in the statements of operations, is as follows:

F-25

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 7:-	INCOME TAXES (Cont.)


	Year ended December 31,

	2005			2006			2007


Income (loss) before taxes, as reported in the consolidated statements of operations	$	(6,454	)	$	(3,899	)	$	2,809


Statutory tax rate		34	%		31	%		29	%



Theoretical tax benefit on the above amount at the Israeli statutory tax rate:	$	(2,194	)	$	(1,209	)	$	815
Tax adjustment in respect of foreign subsidiaries different tax rates		123			(84	)		69
Deferred taxes on losses for which a valuation allowance was provided		1,855			1,066			598

Temporary Differences		-			590			(1,573	)
Taxes in respect of prior years		448			(333	)		-
Tax withholdings and credits		176			18			(274	)
Other		216			(144	)		278


Income taxes (tax benefit), as reported in the statements of operations	$	624		$	(96	)	$	(87	)


	g.	In October 2006, the Company has signed a settlement agreement with the Israeli Tax Authority (“ITA”) under which the company will pay to the ITA an amount $780 with regard to the corporate tax assessment for the years 2000 – 2002. This agreement is final and concluded the ITA tax assessments for these years. The Company paid an amount of $780 during December 2006. The remaining tax accrual previously recorded was reversed against income from taxes.
	h.	Taxes on income are comprised as follows:


	Year ended December 31,

	2005			2006			2007


Current taxes	$	-		$	219		$	(87	)
Taxes in respect of prior years		624			(315	)		-


	$	624		$	(96	)	$	(87	)


Domestic	$	754		$	(248	)	$	(274	)
Foreign		(130	)		152			187


	$	624		$	(96	)	$	(87	)

F-26

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 7:-	INCOME TAXES (Cont.)


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


	Year ended December 31,

	2005			2006			2007


Domestic	$	(6,914	)	$	(1,319	)	$	4,877
Foreign		460			(2,580	)		(2,068	)


	$	(6,454	)	$	(3,899	)	$	2,809


	j.	In July 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. The recently issued literature also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any income tax uncertainties.

		FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.

		The Company adopted the provisions of FIN 48 as of January 1, 2007. The impact of adopting FIN 48 was insignificant impact on the Company’s consolidated financial statements in the total estimated amount of $75. The effect of the adoption after January 1, 2007 has increased the income tax expense in the total estimated amount of $17.

		Interest associated with uncertain income tax positions and penalties expense are classified as income tax expenses. The Company has not recorded any material interest or penalties during any of the years presented.

		A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:


Gross unrecognized tax benefits at January 1, 2007	$	75
Increases in tax positions for current year		17


Gross unrecognized tax benefits at December 31, 2007	$	92

F-27

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 8:-	SHAREHOLDERS’ EQUITY


a.	The Company’s Ordinary shares have been listed for trade on the NASDAQ National Market since TTI’s initial public offering (“IPO”) on December 4, 1996, under the symbol TTIL.

	In 1999 and 2000, the Company effected two additional secondary offerings.

	The Ordinary shares confer upon their holders the right to receive notice to participate and vote in the Company’s general meeting and the right to receive dividends, if declared.

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

	The rights of the holders of the Preferred shares include, among other things, the following rights that are subject to certain limitations as described in the TTI’s articles:

	1)	Standard anti dilution provisions;

	2)	Preference in the event of liquidation of the Company;

	3)	Veto rights over certain material actions by the Company;

	4)	The right to nominate one member of the Company’s Board of Directors.

	As part of the agreement, the Company issued warrants to purchase up to 2,654,556 of its ordinary shares. The warrants are exercisable for a period of six years, at an exercise price of $2.5 per share. Through December 31, 2007 430,217 warrants were converted into the same number of the Company’s ordinary shares.

	In addition, as part of the Agreement, the placement agent of the investment was granted warrants exercisable for the purchase of up to 371,678 of the Company’s Ordinary shares. The placement agent’s warrants are exercisable at a price per Ordinary share of $2.64, at any time until January 2009. As of December 31, 2007, none of these warrants were converted into the Company’s Ordinary shares.

	In connection with the issuance of the Preferred shares and the Warrants, the Company has applied EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” (“EITF 00-27”) which resulted in the recognition of $1,981 related to the beneficial conversion feature on the Preferred shares. The Company accounted for the beneficial conversion feature as a deemed dividend to the preferred shareholders of $1,981 and was credited to additional paid-in capital.

F-28

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 8:-	SHAREHOLDERS’ EQUITY (Cont.)


		According to the Agreements, the investors have the right to receive payment for liquidated damages if a registration statement on Form F-3 is not declared effective within 90 days (or 120 days in the event the U.S. Securities and Exchange Commission conducts a review) following the closing of the private placement transaction. The Company obtained effectiveness of the registration statement on May 24, 2005. Therefore, since May 4, 2005, the Company has been accruing liquidated damages at a rate equal to 2% of each investor’s investment in the Company for each 30 day period, or pro rata for any portion thereof, during the period for which the registration statement was not declared effective. The Company paid liquidated damages at a total amount of $194, which were recorded in the second quarter of 2005 as general and administrative expenses.

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

	c.	Share options:

		Employee Share Option Plans:

		In 1996, the Board of Directors of the Company adopted share option plans (as amended “the Old Plans”). As of December 31, 2007 108,000 options are outstanding and exercisable under the Old Plan. At the Company’s annual general shareholders’ meeting in December 2004, it was decided that there was no intention to grant any more options from the Old Plan and it was resolved to approve the 2004 share option plan (“the New Plan”), pursuant to which 1,000,000 Ordinary shares were reserved for issuance. In August 2006, an additional amount of 500,000 shares were reserved for issuance under the New Plan.

		The Board of Directors is empowered, among other things, to designate the options, dates of grant and the exercise price of options. Unless otherwise decided by the Board, the options will vest over a period of one to three years of employment, and will be non-assignable.

		Pursuant to the New Plan, as of December 31, 2007, an aggregate of 867,333 options of the Company are still available for future grant.

		Each option granted under the Plans to employees expires no later than five years from the date of the grant. Any options which are canceled or forfeited before expiration become available for future grants.

F-29

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 8:-	SHAREHOLDERS’ EQUITY (Cont.)


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


	Year ended December 31, 2005					Year ended December 31, 2006					Year ended December 31, 2007

	Amount of options			Weighted average exercise price		Amount Of options			Weighted average exercise price		Amount of options			Weighted average exercise price		Weighted average remaining contractual term		Aggregate intrinsic value


Outstanding at beginning of year		374,133		$	10.13		390,333		$	4.55		1,049,000		$	3.97			$	-
Granted		200,000		$	3.50		755,500		$	3.78		18,000		$	3.00			$	-
Exercised		-		$	-		-		$	-		-		$	-			$	-
Forfeited		(82,000	)	$	7.00		(93,500	)	$	4.23		(185,004	)	$	3.71			$	-
Expired		(101,800	)	$	21.02		(3,333	)	$	20		(141,329	)	$	3.63			$	-


Outstanding at end of year		390,333		$	4.55		1,049,000		$	3.97		740,667		$	4.03		2.76	$	-


Options exercisable at end of year		113,499		$	5.05		266,330		$	4.78		375,336		$	4.51		2.23	$	-


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

F-30

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 8:-	SHAREHOLDERS’ EQUITY (Cont.)


		The weighted-average grant-date fair value of options granted during the years 2005, 2006 and 2007 was $0, $1.45 and $1.13.

		Compensation expenses (income) related to options granted to employees were recorded to research and development expenses, sales and marketing and general and administrative expenses, as follows:


	Year ended December 31,

		2006		2007


Cost of sales	$	229	$	54
Research and development expenses		102		29
Sales and marketing		84		17
General and administrative expenses		36		13


	$	451	$	113


		As of December 31, 2007, there was $146 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.16 years.

		The options outstanding as of December 31, 2007 have been separated into exercise prices, as follows:


Exercise price	Options outstanding as of December 31, 2007		Weighted average remaining contractual life		Weighted average exercise price		Options exercisable as of December 31, 2007		Weighted average exercise price of exercisable options

			years


$ 3.0		115,000		1.92	$	3.0		83,666
$ 3.5		240,000		3.22	$	3.5		86,666
$ 3.9		248,667		3.12	$	3.9		87,336
$ 4.3		29,000		3.25	$	4.3		9,668
$ 6.0-8.0		108,000		1.5	$	7.0		108,000


		740,667		2.76	$	4.03		375,336	$	4.51


	d.	Dividends:

		In the event that cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency subject to any statutory limitations.

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

F-31

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 9:-	EARNINGS PER SHARE


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


	Years ended December 31,

	2005			2006			2007


Net income (loss) attributable to Ordinary shares	$	(9,059	)	$	(3,803	)	$	2,447

Weighted average number of shares used for computing basic net income (loss) per share attributed to Ordinary shareholders		12,577,392			15,075,881			16,001,148


Dilutive affect:
Employee stock options		*)-			*)-			120,841
Preferred shares as converted		*)-			*)-			*)-


Weighted average number of shares used for computing diluted net income (loss) per share attributed to Ordinary shareholders		12,577,392			15,075,881			16,121,989


	*)	Anti dilutive


NOTE 10:-	RELATED PARTIES TRANSACTIONS AND BALANCES

	Composition:


	December 31,

	2006			2007


Balances between Team and the Company (see a below)	$	(40	)	$	(3,932	)


Balance with related party shareholder (see b below)	$	373		$	409


	a.	Transactions and with Team:

		Transactions between Team and its affiliates and the Company:


	Year ended December 31,

	2005		2006		2007


Revenues:
Commissions on product sales and payment for services	$	93	$	-	$	502


General and administrative expenses:
Rent and maintenance	$	1,379	$	1,160	$	1,402


Administrative and management services	$	169	$	160	$	164


Purchase of equipment	$	398	$	352	$	437

F-32

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


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


		On April 19, 2005, Team Software Industries Ltd., a wholly-owned subsidiary of Team Computers and System Ltd. (“Team”), a public company listed for trade on the Tel-Aviv Stock exchange, has distributed to its shareholders Ordinary shares of the Company that it owned, such that immediately following the distribution, Team held approximately 4.6% of the Company’s outstanding share capital.

		As of December 31, 2007, Team holds 0.79% of the Company’s outstanding share capital.

		Since the commencement of the Company’s operations in 1992, Team has, from time to time, paid the Company commissions in respect of sales by the Company of certain products represented and sold by Team. This relationship is reflected in an agreement between the Company and Team dated October 1996 (“the Agreement”). Team generally pays the Company a commission at the rate of 15% of the sales price of these products, up to a maximum of 50% of the amount received by Team from these sales less the cost to Team.

		Since 1992, the Company has also purchased property and equipment, such as computer hardware, from Team and Omnitek-Eichut Ltd. (“Omnitek-Eichut”), a subsidiary of Team. The Company pays Team and Omnitek-Eichut prices for these assets that are no less favorable to the Company than those it could obtain from unrelated third parties.

		In addition, Team supplies the Company with hardware, related software and support services for such hardware for the Company’s projects, in accordance with the agreement referred to above. Under the agreement between the Company and Team, the Company is required to pay for such hardware, related software and support services when it receives payment from its customers.

	b.	Balance with related party shareholder:

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

		At the end of 2005, the Company underwent a tax deductions audit by the Israeli Tax Authority (“ITA”). As a result of such audit, the ITA assessed an additional NIS 1.5 million ($390 as of December 31, 2007) in withholding taxes with respect to income derived by Mr. Eisenberg from the exercise of the Options. Following consultation with the Company’s tax advisors, the Company paid the additional withholding tax amount assessed in the audit. The Company was informed that it is required to collect such additional tax from Mr. Eisenberg otherwise such additional amount will be viewed as a benefit received by Mr. Eisenberg from the Company, resulting in additional withholding tax being charged to the Company as a result of the grant of such benefit.

F-33

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


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


		The Company filed a NIS 1.6 million ($416 as of December 31, 2007) lawsuit and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. Based on an advice from Israeli council, the Company believes that it is entitled to such reimbursement. However, the Company cannot assure that the court will accept such view if this matter were brought before it. The trial took place in September 2007 and the Company is now in a process of submitting written summations.

NOTE 11:-	GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA

	a.	Summary information about geographic areas:

		The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The following data is presented in accordance with Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The total revenues are attributed to geographic areas based on the location of the end customer.

		The following presents total revenues and long-lived assets as of and for the years ended December 31, 2005, 2006 and 2007:


	Year ended December 31,

	2005				2006				2007

	Total revenues		Long-lived assets		Total revenues		Long-lived assets		Total revenues		Long-lived assets


Israel	$	3,065	$	4,249	$	3,199	$	3,217	$	3,516	$	5,596
North America		17,004		453		18,929		600		16,118		397
Europe		11,536		4		12,331		4		16,320		2
Australia		2,466		23		3,724		20		2,598		35
South America		3,551		-		3,085		-		2,251		14
Far East		1,999		-		1,626		1		3,217		1
South Africa		3,605		-		3,220		-		1,897		-


	$	43,226	$	4,729	$	46,114	$	3,842	$	45,917	$	6,045


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


	Year ended December 31,

	2005		2006		2007


Customer A	14	%	13	%	15	%
Customer B	2	%	5	%	7	%
Customer C	0	%	1	%	6	%
Customer D	4	%	5	%	6	%

F-34

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 12:-	SELECTED STATEMENTS OF OPERATIONS DATA

	a.	Research and development, net:


	Year ended December 31,

	2005		2006		2007


Total cost	$	9,166	$	9,632	$	9,433
Less - grants and participations		30		54		-


Research and development, net	$	9,136	$	9,578	$	9,433


	b.	Financial income:


	Year ended December 31,

	2005			2006			2007


Financial income, net
Foreign currency translation adjustments	$	(646	)	$	41		$	985
Loss from sale of marketable securities		-			(838	)		-
Other than temporary decline in fair value of marketable securities		(301	)		(329	)		-
Interest and other		1,100			1,788			1,165


Financial income, net	$	153		$	662		$	2,150


	c.	Other income:

		The Company filed a claim against Ness Technologies Ltd. (“Ness”) regarding a Purchase Order from the ministry of defense for IDF. The Company claimed that it has a valid agreement with Ness to perform this project jointly and that Ness unlawfully decided to perform the said project without the Company. The Company did not record a provision for this claim.

		In November 2006, the Company has signed a settlement agreement with Ness according to which Ness will pay the Company a sum of $150 in 3 equal installments, to be received up until December 31, 2007 as a full and final settlement including the dismissal of the claim filed by Ness.

F-35

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


NOTE 13:-	RECONCILIATION TO ISRAELI GAAP


	The consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. Had the consolidated financial statements been prepared in accordance with Israeli GAAP, the effects on the financial statements would have been as follows:

	a.	Effect on the statement of operations:


	Year ended December 31, 2006

	As reported			Adjustments			*As per Israeli GAAP )**


Net loss	$	(3,803	)	$	(2,204	)	$	(6,007	)


Basic and diluted net loss attributed to shareholders	$	(0.20	)	$	(0.18	)	$	(0.38	)


	Year ended December 31, 2007

	As reported		Adjustments			*As per Israeli GAAP )**


Net income (loss)	$	2,896	$	(5,774	)	$	(2,878	)


Basic and diluted net loss attributed to shareholders	$	0.15	$	(0.30	)	$	(0.15	)


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

b.	Effect on the balance sheet:


	Year ended December 31, 2006

	As reported		Adjustments		*As per Israeli GAAP )**


Total equity	$	30,495	$	272	$	30,767


	Year ended December 31, 2007

	As reported		Adjustments		*As per Israeli GAAP )**


Total equity	$	33,436	$	699	$	34,135

Amounts in NIS presented in accordance with Israeli GAAP were translated into U.S. dollars according to the exchange rate at the end of the corresponding period.

F-36

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data


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


	c.	Material adjustments:

		The abovementioned adjustments result primarily from the differences between U.S. GAAP and Israeli GAAP, as follows:

		1.	According to US GAAP, the net income used to compute the net income per share is the net income attributed to Ordinary shareholders after deducting the deemed dividend associated with the beneficial conversion feature of the Preferred shares. According to Israeli GAAP, the net loss used to compute the net loss per share is not affected by the deemed dividend and the Preferred shares are included in the computation of the basic net loss per share.

		2.	According to U.S. GAAP, the Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”. All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. In Israel, no directives were determined for reporting based on functional currency. Since the Company does not comply with Section 29a to Opinion 36 of the Institute of Certified Public Accountants in Israel, the Company reports according to Standard 12 and 13 of the Israel Accounting Standards Board in reported NIS.

NOTE 14:-	SUBSEQUENT EVENTS

		In 2007 the Company signed a definitive agreement to acquire Telesens LLC, a software house headquartered in Ukraine. Telesens has been developing, implementing and promoting software solutions and related professional services for the telecommunications market since 1998. The agreement closed in the beginning of January 2008.

		Under the terms of the agreement, the aggregate purchase price will be up to $2.7 million, subject to downward adjustments related to amongst other, actual 2007 annual turnover and certain other performance parameters based on 2008 and 2009 operations. The consideration will be paid in cash over a three-year period.

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

F-37

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TTIL Tti Team Telecom International Ltd. (MM)

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 20-F

TABLE OF CONTENTS

INTRODUCTION

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

PART I

Risks Relating to Our Business and Our Industry

Risks Relating to Operations in Israel

Risks Related to the Market for Our Ordinary Shares

Introduction

Industry Background; Market Opportunity

Our Netrac Solutions

Products and Services

Professional Services

Project Installation; Maintenance and Customer Support

Customers

Sales and Marketing

Research and Development

Competition

Intellectual Property

Overview

Our Functional Currency

Critical Accounting Policies

Results of Operations

Comparison of 2005, 2006 and 2007

Research and Development

Corporate Tax Rate

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

Market Risk

Grants from the Office of the Chief Scientist

Board of Directors

Alternate Directors

External Directors

Committees of the Board

Directors’ Service Contracts

Internal Auditor

Indemnification and D&O Insurance

Fiduciary Duties of Office Holders

Related-Party Transactions

Security Ownership of Our Directors and Executive Officers

Options to Purchase Our Ordinary Shares

Voting Rights

Record Holders

Sale of Products; Services

Registration Rights Agreement

Leased Facilities

Compensation to Directors

Financial Statements

Legal Proceedings

Dividend Policy

Objects and Purposes

Directors

Election of Directors

Remuneration of Directors

Powers of the Board of Directors

Share Capital

Ordinary Shares

Series A Preferred Shares

Dividends

Redeemable Shares

Changing the Rights Attached to Shares

Shareholders Meetings

Duties of Shareholders

Exculpation of Office Holders

Insurance of Office Holders

Indemnification of Office Holders

Mergers and Acquisitions under Israeli Law

Distributions on Ordinary Shares

Disposition of Shares

Passive Foreign Investment Companies

Backup Withholding

Non-U.S. holders of Ordinary Shares

ISRAELI TAXATION

General Corporate Tax Structure

Tax Benefits and Grants for Research and Development

Law for the Encouragement of Capital Investments, 1959

Taxation under Inflationary Conditions

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549